ABM INDUSTRIES INCORPORATED 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 onOctober 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 inthe United States , and in 2021 ourU.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. 22 --------------------------------------------------------------------------------
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 theWorld Health Organization , theCenters for Disease Control and Prevention , theOccupational Safety and Health Administration , and theU.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. InApril 2020 , we announced our EnhancedCleanTM 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. 23 -------------------------------------------------------------------------------- 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 onJune 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") onMarch 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 throughDecember 31, 2020 , to future years (with 50% of the deferred amount due byDecember 31, 2021 , and the remaining 50% due byDecember 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 ofOctober 31, 2021 . Additionally, we received grants under theUnited Kingdom's job retention scheme to reimburse us for a portion of certain furloughed employees' salaries fromMarch 2020 throughSeptember 2021 . As a result of the actions taken above, we were able to strengthen our cash flow in fiscal 2021. As ofOctober 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 actuarywho 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 . 24 -------------------------------------------------------------------------------- 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. •AtOctober 31, 2021 , total outstanding borrowings under our credit facility were$888.8 million , and we had up to$875.0 million of borrowing capacity. 25 --------------------------------------------------------------------------------
Results of Operations
Consolidated
Years Ended October 31, 2021 vs. 2020
($ 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
27
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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
29-------------------------------------------------------------------------------- The Year EndedOctober 31, 2021 Compared with the Year EndedOctober 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 ourU.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$84.1 million , or 33.1%, during 2021, as compared to 2020. Operating profit margin increased by 206 bps to 10.1% in 2021 from 8.0% in 2020. The increase in operating profit margin was primarily associated with higher margins on certain accounts in both ourU.S. andU.K. businesses and an increase in work orders, which have higher margins. Operating margin was also positively impacted by lower insurance expense related to our self-insurance program and a decrease in bad debt expense as higher reserves were recorded in the prior year, mainly associated with increasing credit risk resulting from the Pandemic. Technology & Manufacturing Years Ended October 31, ($ 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$99.3 million . Additionally, operating margin was positively impacted by higher margin work orders, a decrease in bad debt expense, driven by net recoveries of certain previously reserved receivables, and lower amortization of intangible assets. The increase in operating margin, excluding the impact of prior year impairment, was mostly offset by the increase in direct labor and related costs as schools reopened. 30 --------------------------------------------------------------------------------
Aviation
Years Ended October 31,
($ 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 .
32
--------------------------------------------------------------------------------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 throughDecember 31, 2020 , which the CARES Act requires to be remitted byDecember 31, 2021 , andDecember 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 OnSeptember 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 onSeptember 1, 2018 . OnMay 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. OnJune 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 toJune 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 33 -------------------------------------------------------------------------------- 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 andU.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. AtOctober 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. AtOctober 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. AtOctober 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. AtOctober 31, 2021 , we had up to$875.0 million of borrowing capacity. OnMarch 5, 2021 , theUnited Kingdom's Financial Conduct Authority , the regulator of LIBOR, announced that the USD LIBOR rates will no longer be published afterJune 30, 2023 . While we expect LIBOR to be available in substantially its current form until at least the end ofJune 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 ourInternational 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 beforeJune 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 tothe United States . WhileU.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 inthe United States , along with our Amended Credit Facility and future domestic cash flows, are sufficient to satisfy our domestic liquidity requirements. Share Repurchases EffectiveDecember 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 inMarch 2020 and did not repurchase any shares of our outstanding common stock during fiscal year 2021. AtOctober 31, 2021 , authorization for$144.9 million of repurchases remained under the 2019 Share Repurchase Program. 34 -------------------------------------------------------------------------------- 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 2019Net cash provided by operating activities of continuing operations
$ 314.3
- 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. 35 -------------------------------------------------------------------------------- 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 OnDecember 15, 2021 , we announced a quarterly cash dividend of$0.195 per share on our common stock, payable onFebruary 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. 36 --------------------------------------------------------------------------------
Material Cash Requirements from Contractual and Other Obligations
As of
•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 lease 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
•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 atOctober 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. AtOctober 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. 37 -------------------------------------------------------------------------------- •Unrecognized Tax Benefits - AtOctober 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 ofOctober 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. 38 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance withUnited 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 endedOctober 31, 2021 . We believe the following critical accounting policies govern the more significant judgments and estimates used in the preparation of our Financial Statements. Effect if Actual Results Differ from Description Judgments and Uncertainties
Assumptions
Customer Relationships Future revenue growth, future We
have not made any changes in the
operating performance margin as accounting methodology used to determine the
When we acquire a company, a percentage of revenues, fair value of customer relationships during
we determine the fair value customer attrition rate, and the last three years.
on the acquisition date of discount rate applied are the
assets acquired and significant estimates used in If the subsequent actual results and updated
liabilities assumed. the excess earnings method to projections of the underlying business
determine the fair value of activity change compared with the assumptions
We anticipate that for most customer relationships. These and projections used to develop the values of
acquisitions, we will estimates are influenced by the identifiable intangible assets, then we
exercise significant many factors, including could record material impairment losses. judgment in estimating the historical financial fair value of intangible information, estimated
With other assumptions held constant, a 10%
assets. retention rates, and increase in the calculated fair value of the
management's expectations for Able customer relationships would increase
In a typical acquisition, future customer growth as a the annual amortization expense by $2.8
customer relationships are combined company. million in 2022.
our most significant
definite-lived intangible Another estimate that impacts See the "Valuation of Long-Lived Assets"
asset. In valuing these the valuation is the critical accounting policy for information
relationships, we engage a contributory charge for the about impairment evaluations.
third-party valuation acquired workforce, which
expert to fair value these involves management assumptions
assets using a version of based on historical experience,
the income approach known including interview time and
as the "excess earnings new hire productivity.
method."
The estimated life is
This method uses a determined by calculating the
discounted cash flow number of years necessary to
approach that is derived obtain 90% of the value of the
from historical discounted cash flows of the
information, future revenue relationships and is directly
and operating profit tied to the accuracy of the
margins, contributory asset above assumptions.
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.
39
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Effect if Actual Results Differ from
Description Judgments and Uncertainties Assumptions
Valuation of Long-Lived Assets Our impairment evaluations
During the last three years, we have not made
require us to apply judgment in any changes in the accounting methodology used
We evaluate our fixed assets and determining whether a triggering to evaluate the impairment of long-lived
amortizable intangible assets event has occurred, including assets or to estimate the useful lives of our
for impairment whenever events the evaluation of whether it is long-lived assets. Additionally, we have not
or changes in circumstances more- likely-than-not that a made any changes in the accounting methodology
indicate that the carrying long-lived asset will be used to evaluate impairment of goodwill during
amount of such assets may not be disposed of significantly before the last three years. recoverable. These events and the end of its previously circumstances include, but are estimated useful life. Incorrect
At October 31, 2021 , we had $2.2 billion of
not limited to: higher than estimation of useful lives may goodwill. Our goodwill is included in the
expected attrition for customer result in inaccurate following segments:
relationships; a current depreciation and amortization
expectation that a long-lived charges over future periods
$1.1 billion - B&I (includes$554.0 million asset will be disposed of leading, to future impairment. related to the Able Acquisition on September significantly before the end of
30, 2021) its previously estimated useful Our impairment loss calculations life, such as when we classify a contain uncertainties because
$407.2 million - T&M business as held for sale; a they require management to make significant adverse change in assumptions and to apply
flows and asset fair values,
lives of the assets and
selecting the discount rate that
Undiscounted cash flow analyses reflects the risk inherent in
A goodwill impairment analysis was performed are used to determine if future cash flows. for each of our reporting units on August 1, impairment exists; if impairment 2021. Based on these studies, the implied fair is determined to exist, the loss We estimate the fair value of value of each of our reporting units was is calculated based on estimated each reporting unit using a substantially in excess of its carrying value. fair value. combination of the income
Therefore, we concluded there were no
approach and the market indicators of impairment. A 10% decrease in
Goodwill is not amortized but approach. the estimated fair value of any of our
rather tested at least annually reporting units would not have resulted in a
for impairment or more often if The income approach incorporates different conclusion.
events or changes in the use of a discounted cash
circumstances indicate it is flow method in which the During the third quarter of 2021, we
more-likely-than-not that the estimated future cash flows and recognized a non-cash impairment charge
carrying amount of the asset may terminal value are calculated totaling $9.1 million in our Corporate segment
not be recoverable. Goodwill is for each reporting unit and then for previously capitalized internal-use
tested for impairment at the discounted to present value software related to our ERP system
reporting unit level, which using an appropriate discount implementation. The Company determined that
represents an operating segment rate. certain components that were previously
or a component of an operating developed would no longer be integrated into
segment. Goodwill is tested for The valuation of our reporting the new ERP system. The impairment charge
impairment by either performing units requires significant reduced the carrying value to zero for those
a qualitative evaluation or a judgment in evaluation of recent components.
quantitative test. The indicators of market activity
qualitative evaluation is an and estimated future cash flows, During the second quarter of 2020, given the
assessment of factors to discount rates, and other general deterioration in economic and market
determine whether it is factors. Our impairment analyses conditions arising from the Pandemic, we
more-likely-than-not that the contain inherent uncertainties identified a triggering event indicating
fair value of a reporting unit due to uncontrollable events possible impairment of goodwill and intangible
is less than its carrying that could positively or assets. For the three goodwill reporting units
amount, including goodwill. We negatively impact anticipated tested quantitatively, we estimated the fair
may elect not to perform the future economic and operating value using a weighting of fair values derived
qualitative assessment for some conditions. from an income approach and a market approach.
or all of our reporting units Based on the evaluation performed, we
and instead perform a In making these estimates, the determined that goodwill was impaired for each
quantitative impairment test. weighted-average cost of capital of the three goodwill reporting units
is utilized to calculate the evaluated and recognized a non-cash impairment
present value of future cash charge totaling $163.8 million ($99.3 million
flows and terminal value. Many related to Education, $55.5 million related to
variables go into estimating Aviation, and $9.0 million related to our U.K.
future cash flows, including Technical Solutions business). We also
estimates of our future revenue recognized intangible asset impairment charges
growth and operating results. of $5.6 million related to Aviation and $3.4
When estimating our projected million related to our U.K. Technical
revenue growth and future Solutions business. We performed our annual
operating results, we consider goodwill impairment analysis on August 1,
industry trends, economic data, 2020, using a qualitative approach since there
and our competitive advantage. were no indicators of impairment subsequent to
our quantitative analysis performed in the
The market approach estimates second quarter of 2020 as discussed above. As
fair value of a reporting unit a result of the qualitative analysis, we
by using market comparables for concluded that there were no further
reasonably similar public impairments.
companies.
40
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Effect if Actual Results Differ from
Description Judgments and Uncertainties Assumptions
Insurance Reserves We use a combination of insured Our self-insurance liabilities We have not made any changes in the and self-insurance programs to contain uncertainties due to accounting methodology used to establish cover workers' compensation, assumptions required and our self-insurance liabilities during the general liability, automobile judgment used. past three years. liability, property damage, and other insurable risks. Costs to settle our obligations,
After analyzing recent loss development
including legal and healthcare patterns, comparing the loss development
Insurance claim liabilities costs, could fluctuate and cause patterns against benchmarks, and applying
represent our estimate of retained estimates of our self-insurance actuarial projection methods to estimate
risks without regard to insurance liabilities to change. the ultimate losses, we decreased our
coverage. We retain a substantial total reserves related to prior years
portion of the risk related to Incident rates, including known claims as well as our estimate of
certain workers' compensation and frequency and severity, could the loss amounts associated with IBNR
medical claims. Liabilities fluctuate and cause the claims during 2021 by $36.0 million . In
associated with these losses estimates in our self-insurance 2020, we decreased our total reserves
include estimates of both claims liabilities to change. related to prior years claims by $30.2
filed and IBNR Claims. million.
These estimates are subject to:
With the assistance of third-party changes in the regulatory
It is possible that actual results could
actuaries, we periodically review environment; fluctuations in differ from recorded self-insurance
our estimate of ultimate losses projected exposures, including liabilities. A 10% change in our
for IBNR Claims and adjust our payroll, revenues, and the projected ultimate losses would have
required self-insurance reserves number of vehicle units; and the affected net income by approximately
as appropriate. As part of this frequency, lag, and severity of $37.3 million for 2021.
evaluation, we review the status claims.
of existing and new claim reserves The full extent of certain
as established by our third-party claims, especially workers'
claims administrators. compensation and general
liability claims, may not be
The third-party claims fully determined for several
administrators establish the case years.
reserves based upon known factors
related to the type and severity In addition, if the reserves
of the claims, demographic data, related to self-insurance or
legislative matters, and case law, high deductible programs from
as appropriate. acquired businesses are not
adequate to cover damages
We compare actual trends to resulting from future accidents
expected trends and monitor claims or other incidents, we may be development.
exposed to substantial losses
arising from future claim
The specific case reserves developments.
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.
41
--------------------------------------------------------------------------------
Effect if Actual Results Differ from
Description Judgments and Uncertainties Assumptions
Contingencies and Litigation We are a party to a number of Litigation outcomes are difficult We have not made any changes in the lawsuits, claims, and to predict and are often resolved accounting methodology used to establish proceedings incident to the over long periods of time. our loss contingencies during the past operation of our business,
three years. including those pertaining to Estimating probable and reasonably labor and employment,
possible losses requires the Our management currently estimates the
contracts, personal injury, and analysis of multiple possible range of loss for all reasonably possible
other matters, some of which outcomes that often depend on losses for which a reasonable estimate of
allege substantial monetary judgments about potential actions the loss can be made is between zero and
damages. Some of these actions by third parties, such as future $6 million . Factors underlying this
may be brought as class actions changes in facts and estimated range of loss may change from
on behalf of a class or circumstances, differing time to time, and actual results may vary
purported class of employees. interpretations of the law, significantly from this estimate.
assessments of the amount of
We accrue for loss damages, and other factors beyond
contingencies when losses our control. There is the
become probable and are potential for a material adversereasonably estimable. If the effect on our Financial Statements reasonable estimate of the loss if one or more matters are is a range and no amount within resolved in a particular period in the range is a better estimate, an amount materially in excess of the minimum amount of the range what we anticipated. is recorded as a liability.
In addition, in some cases,
We do not accrue for contingent although a loss is probable or
losses that, in our judgment, reasonably possible, we cannot
are considered to be reasonably reasonably estimate the maximum
possible but not probable. 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.
42--------------------------------------------------------------------------------
Recent Accounting Pronouncements
Effective Date/
Accounting Standard Updates Topic Summary Method of Adoption
2021-01 Reference Rate Reform ThisAccounting Standard Update ("ASU"), This update was effective
(Topic 848): Scope issued in January 2021, clarifies that upon issuance and can be
derivatives affected by the discounting applied to hedging
transition are explicitly eligible for relationships
certain optional expedients and exceptions retrospectively or
under Topic 848. prospectively through
December 31, 2022.
Whilewe are currently evaluating the
impact of implementing this guidance on our
financial statements, we do not expect
adoption to have a material impact.
2020-04 Reference Rate Reform This
ASU, issued in
(Topic 848): Facilitation optional expedients to assist with the upon issuance and can be
of the Effects of Reference discontinuance of LIBOR. The expedients applied prospectively to
Rate Reform on Financial allow companies to ease the potential contract modifications
Reporting accounting burden when modifying contracts made and hedging
and hedging relationships that use LIBOR as relationships entered into
a reference rate, if certain criteria are or evaluated through
met. December 31, 2022 .
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.
2020-01 Investments-Equity This ASU, issued in January 2020, clarifies November 1, 2021
Securities (Topic 321), the interaction between Topic 321, Topic
Investments-Equity Method 323, and Topic 815. The new guidance, among This update will be
and Joint Ventures (Topic other things, states that a company should applied prospectively.
323), and Derivatives and consider observable transactions that
Hedging (Topic 815): require it to either apply or discontinue
Clarifying the Interactions the equity method of accounting for the
between Topic 321, Topic purposes of applying the fair value
323, and Topic 815 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.
2019-12 Income Taxes (Topic 740): This ASU, issued in December 2019, removes November 1, 2021
Simplifying the Accounting certain exceptions related to the approach
for Income Taxes for intraperiod tax allocation, the The amendments have
methodology for calculating income taxes in differing adoption
an interim period, and the recognition of methods, including
deferred tax liabilities for outside basis retrospectively,
differences. This ASU also amends other prospectively, and/or on a
aspects of the guidance to help simplify modified retrospective
and promote consistent application of Topic basis.
740.
We are currently evaluating the impact of
implementing this guidance on our financial
statements.
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