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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________

FORM 10-Q

(Mark One)



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-8929

https://cdn.kscope.io/ea847c0d333c5438fe3de0dbf73d288a-abmbuildingvalue.jpg

ABM INDUSTRIES INCORPORATED

(Exact name of registrant as specified in its charter)



Delaware		94-1369354
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

__________________________

One Liberty Plaza, 7^th Floor

New York, New York 10006

(Address of principal executive offices)

(212) 297-0200

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

__________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value	ABM	New York Stock Exchange

Number of shares of the registrant’s common stock outstanding as of September 3, 2019: 66,415,504

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS



FORWARD-LOOKING STATEMENTS	1
PART I. FINANCIAL INFORMATION	3
Item 1. Consolidated Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	50
Item 4. Controls and Procedures	50
PART II. OTHER INFORMATION	50
Item 1. Legal Proceedings	50
Item 1A. Risk Factors	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3. Defaults Upon Senior Securities	50
Item 4. Mine Safety Disclosures	50
Item 5. Other Information	50
Item 6. Exhibits	51
SIGNATURES	52

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains both historical and forward-looking statements regarding ABM Industries Incorporated (“ABM”) and its subsidiaries (collectively referred to as “ABM,” “we,” “us,” “our,” or the “Company”). 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. Particular risks and uncertainties that could cause our actual results to be materially different from those expressed in our forward-looking statements include those listed below.


•	We may not realize the full extent of growth opportunities or potential synergies anticipated from the acquisition of GCA Services Group (“GCA”).

•

We incurred a substantial amount of debt to complete the acquisition of GCA. To service our debt we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. We also depend on the profitability of our subsidiaries to satisfy our cash needs. If we cannot generate the required cash, we may not be able to make the necessary payments required to service our indebtedness or we may be required to suspend certain discretionary payments, including our dividend.


•	Changes to our businesses, operating structure, financial reporting structure, or personnel relating to the implementation of our 2020 Vision strategic transformation initiative, together with process and technology initiatives following the acquisition of GCA, may not have the desired effects on our financial condition and results of operations.


•	Our success depends on our ability to gain profitable business despite competitive pressures and on our ability to preserve long-term client relationships.


•	Our business success depends on our ability to attract and retain qualified personnel and senior management.


•	Our use of subcontractors or joint venture partners to perform work under customer contracts exposes us to liability and financial risk.


•	Our international business involves risks different from those we face in the United States that could have an effect on our results of operations and financial condition.


•	Unfavorable developments in our class and representative actions and other lawsuits alleging various claims could cause us to incur substantial liabilities.


•	We insure our insurable risks through a combination of insurance and self-insurance, and we retain a substantial portion of the risk associated with expected losses under these programs, which exposes us to volatility associated with those risks, including the possibility that changes in estimates of ultimate insurance losses could result in material charges against our earnings.


•	Our risk management and safety programs may not have the intended effect of reducing our liability for personal injury or property loss.


•	Impairment of goodwill and long-lived assets could have a material adverse effect on our financial condition and results of operations.


•	Changes in general economic conditions, including changes in energy prices, government regulations, and changing consumer preferences, could reduce the demand for facility services and, as a result, reduce our earnings and adversely affect our financial condition.


•	Our business may be materially affected by changes to fiscal and tax policies. Negative or unexpected tax consequences could adversely affect our results of operations.


•	We may experience breaches of, or disruptions to, our information technology systems or those of our third-party providers or clients, or other compromises of our data that could adversely affect our business.


•	A significant number of our employees are covered by collective bargaining agreements that could expose us to potential liabilities in relationship to our participation in multiemployer pension plans, requirements to make contributions to other benefit plans, and the potential for strikes, work slowdowns or similar activities, and union-organizing drives.


•	If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be negatively impacted, which could harm our operating results and investor perceptions of our Company and as a result may have a material adverse effect on the value of our common stock.


•	Our business may be negatively impacted by adverse weather conditions.


•	Catastrophic events, disasters, and terrorist attacks could disrupt our services.


•	Actions of activist investors could disrupt our business.

The list of factors above is illustrative and by no means exhaustive. Additional information regarding these and other risks and uncertainties we face is contained in our Annual Report on Form 10-K for the year ended October 31, 2018 and in other reports we file from time to time with the Securities and Exchange Commission (including all amendments to those reports).

We urge readers to consider these risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



(in millions, except share and per share amounts)	July 31, 2019			October 31, 2018
ASSETS
Current assets
Cash and cash equivalents	$	60.5		$	39.1
Trade accounts receivable, net of allowances of $22.6 and $19.2 at July 31, 2019 and October 31, 2018, respectively	1,061.3			1,014.1
Costs incurred in excess of amounts billed	68.4			—
Prepaid expenses	75.5			80.8
Other current assets	53.5			37.0
Total current assets	1,319.2			1,171.0
Other investments	15.1			16.3
Property, plant and equipment, net of accumulated depreciation of $188.7 and $153.9 at July 31, 2019 and October 31, 2018, respectively	147.1			140.1
Other intangible assets, net of accumulated amortization of $294.7 and $250.4 at July 31, 2019 and October 31, 2018, respectively	310.4			355.7
Goodwill	1,832.0			1,834.8
Other noncurrent assets	120.2			109.6
Total assets	$	3,744.0		$	3,627.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt, net	$	52.2		$	37.0
Trade accounts payable	249.0			221.9
Accrued compensation	165.7			172.1
Accrued taxes—other than income	83.6			56.0
Insurance claims	150.9			149.5
Income taxes payable	9.6			3.2
Other accrued liabilities	166.4			152.7
Total current liabilities	877.4			792.5
Long-term debt, net	872.2			902.0
Deferred income tax liability, net	31.6			37.8
Noncurrent insurance claims	368.0			360.8
Other noncurrent liabilities	75.6			62.9
Noncurrent income taxes payable	15.6			16.9
Total liabilities	2,240.4			2,172.9
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value; 500,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 66,392,045 and 66,004,361 shares issued and outstanding at July 31, 2019 and October 31, 2018, respectively	0.7			0.7
Additional paid-in capital	706.9			691.8
Accumulated other comprehensive loss, net of taxes	(24.4		)	(9.0		)
Retained earnings	820.5			771.2
Total stockholders’ equity	1,503.6			1,454.6
Total liabilities and stockholders’ equity	$	3,744.0		$	3,627.5

See accompanying notes to unaudited consolidated financial statements.

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months Ended July 31,						Nine Months Ended July 31,
(in millions, except per share amounts)	2019			2018			2019			2018
Revenues	$	1,647.9		$	1,624.3		$	4,850.6		$	4,793.5
Operating expenses	1,454.1			1,446.7			4,314.2			4,281.8
Selling, general and administrative expenses	119.8			110.0			340.9			326.8
Restructuring and related expenses	2.0			2.9			8.5			22.5
Amortization of intangible assets	14.9			16.6			44.9			49.5
Operating profit	57.3			48.1			142.1			112.9
Income from unconsolidated affiliates	0.7			1.0			2.4			2.5
Interest expense	(12.9		)	(12.9		)	(39.2		)	(41.0		)
Income from continuing operations before income taxes	45.0			36.1			105.3			74.4
Income tax (provision) benefit	(8.5		)	(2.4		)	(25.8		)	12.7
Income from continuing operations	36.5			33.7			79.4			87.1
Income (loss) from discontinued operations, net of taxes	0.2			(0.1		)	—			1.0
Net income	36.8			33.6			79.4			88.1
Other comprehensive income (loss)
Interest rate swaps	(5.7		)	(1.2		)	(17.9		)	22.0
Foreign currency translation	(4.6		)	(6.5		)	(2.4		)	(1.5		)
Income tax benefit (provision)	1.6			0.3			4.9			(5.9		)
Comprehensive income	$	28.0		$	26.2		$	64.0		$	102.6
Net income per common share — Basic
Income from continuing operations	$	0.55		$	0.51		$	1.19		$	1.32
Income from discontinued operations	—			—			—			0.02
Net income	$	0.55		$	0.51		$	1.19		$	1.33
Net income per common share — Diluted
Income from continuing operations	$	0.55		$	0.51		$	1.19		$	1.31
Income from discontinued operations	—			—			—			0.02
Net income	$	0.55		$	0.51		$	1.19		$	1.33
Weighted-average common and common equivalent shares outstanding
Basic	66.6			66.1			66.5			66.0
Diluted	67.0			66.3			66.8			66.3

See accompanying notes to unaudited consolidated financial statements.

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)



	Three Months Ended July 31,								Nine Months Ended July 31,
	2019				2018				2019				2018
(in millions, except per share amounts)	Shares	Amount			Shares	Amount			Shares	Amount			Shares	Amount
Common Stock
Balance, beginning of period	66.3	$	0.7		65.7	$	0.7		66.0	$	0.7		65.5	$	0.7
Stock issued under employee stock purchase and share-based compensation plans	0.1	—			0.1	—			0.4	—			0.3	—
Balance, end of period	66.4	0.7			65.8	0.7			66.4	0.7			65.8	0.7
Additional Paid-in Capital
Balance, beginning of period		700.6				683.1				691.8				675.2
Stock issued under employee stock purchase and share-based compensation plans, net		1.5				0.5				1.5				0.2
Share-based compensation expense		4.8				4.8				13.6				13.1
Balance, end of period		706.9				688.3				706.9				688.3
Accumulated Other Comprehensive (Loss) Income, Net of Taxes
Balance, beginning of period		(15.7		)		1.6				(9.0		)		(20.3		)
Other comprehensive (loss) income		(8.7		)		(7.4		)		(15.4		)		14.6
Balance, end of period		(24.4		)		(5.7		)		(24.4		)		(5.7		)
Retained Earnings
Balance, beginning of period		795.9				751.2				771.2				720.1
Net income		36.8				33.6				79.4				88.1
Dividends
Common stock ($0.180, $0.175, $0.540, and $0.525 per share)		(11.9		)		(11.5		)		(35.8		)		(34.5		)
Stock issued under share-based compensation plans		(0.1		)		(0.1		)		(0.8		)		(0.5		)
Cumulative effect adjustment for adoption of Accounting Standards Update 2014-09		—				—				6.5				—
Balance, end of period		820.5				773.2				820.5				773.2
Total Stockholders’ Equity		$	1,503.6			$	1,456.4			$	1,503.6			$	1,456.4

See accompanying notes to unaudited consolidated financial statements.

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Nine Months Ended July 31,
(in millions)	2019			2018
Cash flows from operating activities
Net income	$	79.4		$	88.1
Income from discontinued operations, net of taxes	—			(1.0		)
Income from continuing operations	79.4			87.1
Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations
Depreciation and amortization	81.4			86.1
Proceeds from termination of interest rate swaps	—			25.9
Deferred income taxes	(3.8		)	(19.5		)
Share-based compensation expense	13.6			13.1
Provision for bad debt	5.0			4.5
Discount accretion on insurance claims	0.6			0.6
(Gain) loss on sale of assets	(0.1		)	0.5
Income from unconsolidated affiliates	(2.4		)	(2.5		)
Distributions from unconsolidated affiliates	3.6			0.1
Changes in operating assets and liabilities, net of effects of acquisitions
Trade accounts receivable and costs incurred in excess of amounts billed	(120.6		)	(12.6		)
Prepaid expenses and other current assets	(16.1		)	(7.1		)
Other noncurrent assets	6.7			14.5
Trade accounts payable and other accrued liabilities	36.7			9.0
Insurance claims	8.0			12.7
Income taxes payable	13.7			(5.0		)
Other noncurrent liabilities	8.3			(1.0		)
Total adjustments	34.6			119.3
Net cash provided by operating activities of continuing operations	114.0			206.4
Net cash provided by operating activities of discontinued operations	—			1.0
Net cash provided by operating activities	114.0			207.4
Cash flows from investing activities
Additions to property, plant and equipment	(44.4		)	(37.3		)
Proceeds from sale of assets	0.3			0.7
Adjustments to purchase and sale of business	—			(1.9		)
Proceeds from redemption of auction rate security	—			2.9
Investments in unconsolidated affiliates	—			(0.6		)
Net cash used in investing activities	(44.1		)	(36.3		)
Cash flows from financing activities
Proceeds and (taxes withheld) from issuance of share-based compensation awards, net	0.7			(0.3		)
Dividends paid	(35.8		)	(34.5		)
Deferred financing costs paid	—			(0.1		)
Borrowings from credit facility	1,219.9			887.0
Repayment of borrowings from credit facility	(1,236.8		)	(1,042.1		)
Changes in book cash overdrafts	3.4			1.1
Financing of energy savings performance contracts	4.9			3.5
Repayment of capital lease obligations	(2.7		)	(2.3		)
Net cash used in financing activities	(46.4		)	(187.7		)
Effect of exchange rate changes on cash and cash equivalents	(2.1		)	(0.2		)
Net increase (decrease) in cash and cash equivalents	21.5			(16.8		)
Cash and cash equivalents at beginning of year	39.1			62.8
Cash and cash equivalents at end of period	$	60.5		$	46.0

See accompanying notes to unaudited consolidated financial statements.

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. THE COMPANY AND NATURE OF OPERATIONS

ABM Industries Incorporated, which operates through its subsidiaries (collectively referred to as “ABM,” “we,” “us,” “our,” or the “Company”), is a leading provider of integrated facility services with a mission to make a difference, every person, every day. We are organized into four industry groups and one Technical Solutions segment:

https://cdn.kscope.io/ea847c0d333c5438fe3de0dbf73d288a-igicons2019.jpg

Through these groups, we offer janitorial, facilities engineering, parking, and specialized mechanical and electrical technical solutions, on a standalone basis or in combination with other services.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with (i) United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and (ii) the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of our management, our unaudited consolidated financial statements and accompanying notes (the “Financial Statements”) include all normal recurring adjustments that are necessary for the fair statement of the interim periods presented. Interim results of operations are not necessarily indicative of results for the full year. The Financial Statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) in our Annual Report on Form 10-K for the year ended October 31, 2018 (“Annual Report”). Unless otherwise indicated, all references to years are to our fiscal year, which ends on October 31.

Prior Year Reclassifications

Effective November 1, 2018, we have modified the presentation of inter-segment revenues, which are recorded at cost with no associated intercompany profit or loss and are eliminated in consolidation. Additionally, during the third quarter of 2019, we made changes to our operating structure to better align the services and expertise of our Healthcare business with our other industry groups, allowing us to leverage our existing branch network to support the long-term growth of this business. As a result, our former Healthcare portfolio is now included primarily in our Business & Industry segment. Our prior period segment data in Note 11, “Segment Information,” has been reclassified to conform with our current period presentation. These changes had no impact on our previously reported consolidated financial statements.

Rounding

We round amounts in the Financial Statements to millions and calculate all percentages and per-share data from the underlying whole-dollar amounts. Thus, certain amounts may not foot, crossfoot, or recalculate based on reported numbers due to rounding.

Discontinued Operations

Following the sale of our Security business in 2015, we record all costs associated with this former business in discontinued operations. Such costs generally relate to litigation we retained and insurance reserves.

Management Reimbursement Revenue by Segment

We operate certain parking facilities under managed location arrangements. Under these arrangements, we manage the parking facility for a management fee and pass through the revenue and expenses associated with the facility to the owner. See Note 3, “Revenue,” for further details regarding managed location arrangement considerations under the new revenue standards. These revenues and expenses are reported in equal amounts as costs reimbursed from our managed locations:



	Three Months Ended July 31,				Nine Months Ended July 31,
(in millions)	2019		2018		2019		2018
Business & Industry	$	70.9	$	69.7	$	211.2	$	206.1
Aviation	24.4		23.8		72.0		76.9
Total	$	95.3	$	93.5	$	283.2	$	282.9

Recently Adopted Accounting Standards

Our significant accounting policies are described in Note 2, “Basis of Presentation and Significant Accounting Policies,” in our Annual Report. There have been no material changes to our significant accounting policies during the nine months ended July 31, 2019, other than those described below.

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequently issued several ASUs further updating Topic 606.

Additionally, in May 2017, the FASB issued ASU 2017-10, Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services, to clarify how operating entities should determine the customer of operation services for transactions within the scope of this guidance, which U.S. GAAP did not address prior to this ASU. The amendment eliminates diversity in practice by clarifying that the grantor is the customer of the operation services in all cases for those arrangements. We determined that revenue we generate from service concession arrangements, primarily from certain parking arrangements, will be accounted for under this guidance. We adopted the amendments in this update in conjunction with the adoption of Topic 606, as discussed below.

Collectively these ASUs introduce a new principles-based framework for revenue recognition and disclosure. The core principle of the standard is when an entity transfers goods or services to customers it will recognize revenue in an amount that reflects the consideration it expects to be entitled to for those goods or services. The standard also expands the required disclosures to include the disaggregation of revenue from contracts with customers into categories that depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors.

We adopted Topic 606 and Topic 853 on November 1, 2018 using a modified retrospective approach with a cumulative-effect adjustment to retained earnings as of the beginning of 2019; prior period financial statements are not adjusted. We applied the standards to contracts that had not been completed at November 1, 2018 and did not apply them to contracts that were modified before the beginning of the earliest reporting period presented. See Note 3, “Revenue,” for further details.

Other Recently Adopted Accounting Standards

During the first quarter of 2019, we adopted the following ASUs with no material impact on our consolidated financial statements:



ASU	Topic	Method of Adoption
2016-01	Financial Instruments	Modified retrospective
2016-15	Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments	Retrospective
2016-16	Income Taxes — Intra-Entity Transfers of Assets Other Than Inventory	Modified retrospective
2016-18	Statement of Cash Flows — Restricted Cash	Retrospective
2017-07	Compensation — Retirement Benefits	Retrospective
2017-09	Compensation — Stock Compensation	Prospective
2018-02	Income Statement — Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	Early adopted; we elected not to reclassify any stranded tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) due to the insignificance of the amount remaining in accumulated other comprehensive income (“AOCI”).
2018-04	Investments — Debt Securities	Adopted in conjunction with ASU 2016-01

Additionally, in August 2018, the U.S. Securities and Exchange Commission (the “SEC”) published Release No. 33-10532, Disclosure Update and Simplification, which adopted amendments to certain disclosure requirements that had become redundant, duplicative, overlapping, outdated, or superseded in light of other SEC disclosure requirements, U.S. GAAP, or changes in the information environment, effective for all filings of periods beginning after November 5, 2018. This release was subsequently codified in July 2019 as part of ASU 2019-07, Codification Updates to SEC Sections—Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, “Disclosure Update and Simplification,” and Nos. 33-10231 and 33-10442, “Investment Company Reporting Modernization,” and Miscellaneous Updates. While most of the amendments in this release eliminate outdated or duplicative disclosure requirements, the final rule amends the interim financial statement requirements to include a reconciliation of changes in stockholders’ equity in the notes to the financial statements or as a separate statement for each period for which an income statement is required to be filed. We have provided this required information herein as a separate statement. The eliminated or amended disclosures did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which replaces existing lease accounting guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will require us to continue to classify leases as either operating or financing, with classification affecting the pattern of expense recognition in the statement of comprehensive income. The FASB issued several updates to ASU 2016-02, including: ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional transition method to adopt Topic 842; and ASU 2019-01, Leases (Topic 842): Codification Improvements, which addresses, among other issues, determination of the fair value of the underlying asset by lessors that are not manufacturers or dealers and clarifies interim period transition disclosure requirements.

We have established an implementation team to comprehensively evaluate the impact of adopting this guidance, which includes: reviewing our lease portfolio; implementing new system tools to help us meet reporting requirements; and assessing the impact to business processes, internal control over financial reporting, and the related disclosure requirements. While our evaluation is ongoing, we believe the adoption of this standard will have a significant impact on our consolidated balance sheets due to the recognition of right-of-use assets and corresponding lease liabilities. Refer to Note 14, “Commitments and Contingencies,” in our 2018 Annual Report for information about our lease obligations. This standard will become effective for us on November 1, 2019. We plan to adopt this standard using a modified retrospective transition approach for leases that exist in the period of adoption, and therefore we will not restate the prior comparative periods. No other recently issued standards are expected to have a significant impact on our fiscal 2020 consolidated financial statements.

3. REVENUE

Impact of Adopting Topic 606 and Topic 853 on the Consolidated Financial Statements

On November 1, 2018, we recorded a pre-tax increase of $9.1 million to our opening retained earnings as a result of adopting Topic 606. These changes primarily related to: (i) the capitalization of certain commission costs that were previously expensed as incurred; (ii) the deferral of revenue, and the associated margin, on uninstalled materials associated with certain project type contracts that will now be recognized when installation is substantially complete; and (iii) the deferral of initial franchise license fees that were previously recognized when the franchise license term began but will now be recognized over the term of the initial franchise arrangement. Changes to our consolidated balance sheets include the separate presentation of costs incurred in excess of amounts billed, which were previously included in trade accounts receivable, net. Additionally, in accordance with Topic 853, rent expense related to service concession arrangements, which was previously classified as an operating expense, is now classified as a reduction of revenues.



(in millions)	Balance at October 31, 2018		Adjustments Due to Adoption of Topic 606			Balance at November 1, 2018
ASSETS
Current assets
Trade accounts receivable, net	$	1,014.1	$	(40.1	)	$	974.0
Costs incurred in excess of amounts billed	—		40.1			40.1
Other current assets	37.0		3.6			40.6
Other noncurrent assets	109.6		11.5			121.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Other accrued liabilities	$	152.7	$	6.0		$	158.9
Deferred income tax liability, net	37.8		2.6			40.3
Retained earnings	771.2		6.5			777.6

The impact of adopting Topic 606 on our unaudited consolidated balance sheet as of July 31, 2019 was as follows:



	As of July 31, 2019
(in millions)	Under Historical Guidance		Effect of Adoption		As Reported
ASSETS
Current assets
Other current assets	$	44.0	$	9.5	$	53.5
Other noncurrent assets	108.0		12.2		120.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Other accrued liabilities	$	159.9	$	6.6	$	166.4
Deferred income tax liability, net	30.7		0.9		31.6
Retained earnings	806.2		14.3		820.5

The impacts of adopting Topic 606 and Topic 853 on our unaudited consolidated statements of comprehensive income for the three and nine months ended July 31, 2019 were as follows:



	Three Months Ended July 31, 2019							Nine Months Ended July 31, 2019
(in millions, except per share amounts)	Under Historical Guidance		Effect of Adoption			As Reported		Under Historical Guidance		Effect of Adoption			As Reported
Revenues	$	1,661.0	$	(13.1	)	$	1,647.9	$	4,887.1	$	(36.5	)	$	4,850.6
Operating expenses	1,466.6		(12.5		)	1,454.1		4,350.3		(36.1		)	4,314.2
Selling, general and administrative expenses	121.9		(2.2		)	119.8		347.5		(6.6		)	340.9
Income tax provision	8.1		0.4			8.5		24.2		1.6			25.8
Net income	35.6		1.2			36.8		74.8		4.6			79.4

Net income per common share — Basic	$	0.53	$	0.02		$	0.55	$	1.13	$	0.07		$	1.19
Net income per common share — Diluted	$	0.53	$	0.02		$	0.55	$	1.12	$	0.07		$	1.19

There were no significant impacts on our consolidated statements of cash flows other than offsetting shifts in net cash provided by operating activities between net income and various changes in working capital line items.

Disaggregation of Revenue

We generate revenues under several types of contracts, as further explained below. Generally, the type of contract is determined by the nature of the services provided by each of our major service lines throughout our reportable segments; therefore, we disaggregate revenue from contracts with customers into major service lines. We have determined that disaggregating revenue into these categories best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Our reportable segments are Business & Industry (“B&I”), Aviation, Technology and Manufacturing (“T&M”), Education, and Technical Solutions, as described in Note 11, “Segment Information.”



	Three Months Ended July 31, 2019
(in millions)	B&I		Aviation		T&M		Education		Technical Solutions		Total
Major Service Line
Janitorial⁽¹⁾	$	576.9	$	32.4	$	184.2	$	191.4	$	—	$	985.0
Parking⁽²⁾	129.5		83.6		6.3		0.7		—		220.1
Facility Services⁽³⁾	101.4		18.5		36.5		23.3		—		179.6
Building & Energy Solutions⁽⁴⁾	—		—		—		—		165.7		165.7
Airline Services⁽⁵⁾	0.1		128.8		—		—		—		128.9
	$	807.9	$	263.3	$	226.9	$	215.4	$	165.7	$	1,679.3
Elimination of inter-segment revenues											(31.3		)
Total											$	1,647.9



	Nine Months Ended July 31, 2019
(in millions)	B&I		Aviation		T&M		Education		Technical Solutions		Total
Major Service Line
Janitorial⁽¹⁾	$	1,738.2	$	94.0	$	554.4	$	566.8	$	—	$	2,953.4
Parking⁽²⁾	383.3		253.7		19.6		2.3		—		658.8
Facility Services⁽³⁾	322.5		54.5		113.2		64.6		—		554.7
Building & Energy Solutions⁽⁴⁾	—		—		—		—		417.7		417.7
Airline Services⁽⁵⁾	0.5		363.7		0.1		—		—		364.2
	$	2,444.5	$	765.8	$	687.3	$	633.6	$	417.7	$	4,948.9
Elimination of inter-segment revenues											(98.3		)
Total											$	4,850.6

⁽¹⁾Janitorial arrangements provide a wide range of essential cleaning services for commercial office buildings, airports and other transportation centers, educational institutions, government buildings, health facilities, industrial buildings, retail stores, and stadiums and arenas.

⁽²⁾ Parking arrangements provide parking and transportation services for clients at various locations, including airports and other transportation centers, commercial office buildings, educational institutions, health facilities, hotels, and stadiums and arenas. Certain of our management reimbursement, leased, and allowance location arrangements are considered service concession agreements and are accounted for under the guidance of Topic 853. For the three and nine months ended July 31, 2019, rent expense related to service concession arrangements, previously recorded within operating expenses, has been recorded as a reduction of the related parking service revenues.

⁽³⁾ Facility Services arrangements provide onsite mechanical engineering and technical services and solutions relating to a broad range of facilities and infrastructure systems that are designed to extend the useful life of facility fixed assets, improve equipment operating efficiencies, reduce energy consumption, lower overall operational costs for clients, and enhance the sustainability of client locations.

⁽⁴⁾ Building & Energy Solutions arrangements provide custom energy solutions, electrical, HVAC, lighting, and other general maintenance and repair services for clients in the public and private sectors. We also franchise certain operations under franchise agreements relating to our Linc Network and TEGG brands.

⁽⁵⁾ Airline Services arrangements support airlines and airports with services such as passenger assistance, catering logistics, and airplane cabin maintenance.

Contracts with Customers

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Once a contract is identified, we evaluate whether it is a combined or single contract and whether it should be accounted for as more than one performance obligation. Generally, most of our contracts are cancelable by either party without a substantive penalty, and the majority have a notification period of 30 to 60 days. If a contract includes a cancellation clause, the remaining contract term is limited to the required termination notice period.

At contract inception, we assess the services promised to our customers and identify a performance obligation for each promise to transfer to the customer a service, or a bundle of services, that is distinct. To identify the performance obligation, we consider all of our services promised in the contract, regardless of whether they are explicitly stated or are implied by customary business practices.

The majority of our contracts contain multiple promises that represent an integrated bundle of services comprised of activities that may vary over time; however, these activities fulfill a single integrated performance obligation since we perform a continuous service that is substantially the same and has the same pattern of transfer to the customer. Our performance obligations are primarily satisfied over time as we provide the related services. We allocate the contract transaction price to this single performance obligation and recognize revenue as the services are performed, as further described in “Contract Types” below.

Certain arrangements involve variable consideration (primarily per transaction fees, reimbursable expenses, and sales-based royalties). We do not estimate the variable consideration for these arrangements; rather, we recognize these variable fees in the period they are earned. Some of our contracts, often related to Airline Services, may also include performance incentives based on variable performance measures that are ascertained exclusively by future performance and therefore cannot be estimated at contract inception and are recognized as revenue once known and mutually agreed upon. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current, and forecasted) that is reasonably available to us.

We primarily account for our performance obligations under the series guidance, using the as-invoiced practical expedient when applicable. We apply the as-invoiced practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contracts. Under this practical expedient, we recognize revenue in an amount that corresponds directly with the value to the customer of our performance completed to date and for which we have the right to invoice the customer.

We typically bill customers on a monthly basis and have the right to consideration from customers in an amount that corresponds directly with the performance obligation satisfied to date. The time between completion of the performance obligation and collection of cash is generally 30 to 60 days. Sales-based taxes are excluded from revenue.

Contracts generally can be modified to account for changes in specifications and requirements. We consider contract modifications to exist when the modification either changes the consideration, creates new performance obligations, or changes the existing scope of the contract and related performance obligations. Historically, contract modifications have been for services that are not distinct from the existing contract, since we are providing a bundle of services that are highly inter-related and are therefore treated as if they were part of that existing contract. Such modifications are generally accounted for prospectively as part of the existing contract.

Contract Types

We have arrangements under various contract types within our major service lines, as explained below.

Monthly Fixed-Price

Monthly fixed-price arrangements are contracts in which the client agrees to pay a fixed fee every month over a specified contract term. We measure progress toward satisfaction of the performance obligation as the services are provided, and revenue is recognized at the agreed-upon contractual amount over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. Certain Janitorial, Facilities Services, and Airline Services contracts are structured pursuant to this type of arrangement.

Square-Foot

Monthly square-foot arrangements are contracts in which the client agrees to pay a fixed fee every month based on the actual square footage serviced over a specified contract term. We measure progress toward satisfaction of the performance obligation as the services are provided, and revenue is recognized at the agreed-upon contractual amount over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. Certain Janitorial contracts are structured pursuant to this type of arrangement.

Cost-Plus

Cost-plus arrangements are contracts in which the clients reimburse us for the agreed-upon amount of wages and benefits, payroll taxes, insurance charges, and other expenses associated with the contracted work, plus a profit margin. We measure progress toward satisfaction of the performance obligation as the services are provided, and revenue is recognized at the agreed-upon contractual amount over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. Certain Janitorial, Facilities Services, and Airline Services contracts are structured pursuant to this type of arrangement.

Tag Services

Tag work generally consists of supplemental services requested by clients outside of the standard service specification and includes cleanup after tenant moves, construction cleanup, flood cleanup, and snow removal. Because the nature of these short-term contracts involves performing one-off type services, revenue is recognized at the agreed-upon contractual amount over time as the services are provided, because the customer simultaneously receives and consumes the benefits of the services as they are performed. Certain Janitorial and Facilities Services contracts are often structured under this type of arrangement.

Transaction-Price

Transaction-price contracts are arrangements in which customers are billed a fixed price for each transaction performed on a monthly basis (e.g., wheelchair passengers served, airplane cabins cleaned). We measure progress toward satisfaction of the performance obligation as the services are provided, and revenue is recognized at the agreed-upon contractual amount over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. Certain Airline Services contracts are structured under this type of arrangement.

Hourly

Hourly arrangements are contracts in which the client is billed a fixed hourly rate for each labor hour provided. We measure progress toward satisfaction of the performance obligation as the services are provided, and revenue is recognized at the agreed-upon contractual amount over time because the customer simultaneously receives and consumes the benefits of the services as they are performed. Certain Airline Services contracts are structured under this type of arrangement.

Management Reimbursement

Under management reimbursement arrangements, within our Parking service line, we manage a parking facility for a management fee and pass through the revenue and expenses associated with the facility to the owner. We measure progress toward satisfaction of the performance obligation over time as the services are provided. Under these contracts we recognize both revenues and expenses, in equal amounts, that are directly reimbursed from the property owner for operating expenses, as such expenses are incurred. Such revenues do not include gross customer collections at the managed locations because they belong to the property owners. We have determined we are the principal in these transactions, because the nature of our performance obligation is for us to provide the services on behalf of the customer and we have control of the promised services before they are transferred to the customer.

Leased Location

Under leased location parking arrangements, within our Parking service line, we pay a fixed amount of rent, plus a percentage of revenues derived from monthly and transient parkers, to the property owner. We retain all revenues and we are responsible for most operating expenses incurred. We measure progress toward satisfaction of the performance obligation as the services are provided, and revenue is recognized over time because the customer simultaneously receives and consumes the benefits of the services as they are performed.

As described above and in Note 2, “Basis of Presentation and Significant Accounting Policies,” and in accordance with Topic 853, rental expense and certain other expenses under contracts that meet the definition of service concession arrangements are now recorded as a reduction of revenue.

Allowance

Under allowance parking arrangements, within our Parking service line, we are paid a fixed amount or hourly rate to provide parking services, and we are responsible for certain operating expenses that are specified in the contract. We measure progress toward satisfaction of the performance obligation as the services are provided, and revenue is recognized at the agreed-upon contractual rate over time because the customer simultaneously receives and consumes the benefits of the services as they are performed.

Energy Savings Contracts and Fixed-Price Repair and Refurbishment

Under energy savings contracts and fixed-price repair and refurbishment arrangements, within our Building & Energy Solutions service line, we agree to develop, design, engineer, and construct a project. Additionally, as part of bundled energy solutions arrangements, we guarantee the project will satisfy agreed-upon performance standards.

We use the cost-to-cost method, which compares the actual costs incurred to date with the current estimate of total costs to complete in order to measure the satisfaction of the performance obligation and recognize revenue as work progresses and we incur costs on our contracts; we believe this method best reflects the transfer of control to the customer. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments and judgments. Equipment purchased for these projects is project-specific and considered a value-added element to our work. Equipment costs are incurred when title is transferred to us, typically upon delivery to the work site. Revenue for uninstalled equipment is recognized at cost and the associated margin is deferred until installation is substantially complete.

We recognize revenue over time for all of our services as we perform them, because (i) control continuously transfers to the customer as work progresses or (ii) we have the right to bill the customer as costs are incurred. The customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to us.

Certain project contracts include a schedule of billings or invoices to the customer based on our job-to-date percentage of completion of specific tasks inherent in the fulfillment of our performance obligation(s) or in accordance with a fixed billing schedule. Fixed billing schedules may not precisely match the actual costs incurred. Therefore, revenue recognized may differ from amounts that can be billed or invoiced to the customer at any point during the contract, resulting in balances that are considered revenue recognized in excess of cumulative billings or cumulative billings in excess of revenue recognized. Advanced payments from our customers generally do not represent a significant financing component as the payments are used to meet working capital demands that can be higher in the early stages of a contract, as well as to protect us from our customer failing to meet its obligations under the contract.

Certain projects include service maintenance agreements under which existing systems are repaired and maintained for a specific period of time. We generally recognize revenue under these arrangements over time. Our service maintenance agreements are generally one-year renewable agreements.

Franchise

We franchise certain engineering services through individual and area franchises under the Linc Service and TEGG brands, which are part of ABM Technical Solutions and are included in our Building & Energy Solutions service line. Initial franchise fees result from the sale of a franchise license and include the use of the name, trademarks, and proprietary methods. The franchise license is considered symbolic intellectual property, and revenue related to the sale of this right is recognized at the agreed-upon contractual amount over the term of the initial franchise agreement.

Royalty fee revenue consists of sales-based royalties received as part of the consideration for the franchise right, which is calculated as a percentage of the franchisees’ revenue. We recognize royalty fee revenue at the agreed-upon contractual rates over time as the customer revenue is generated by the franchisees. A receivable is recognized for an estimate of the unreported royalty fees, which are reported and remitted to us in arrears.

Remaining Performance Obligations

At July 31, 2019, we had $261.8 million related to performance obligations that were unsatisfied or partially unsatisfied for which we expect to recognize revenue. We expect to recognize revenue on approximately 82% of the remaining performance obligations over the next 12 months, with the remaining recognized thereafter.

These amounts exclude variable consideration primarily related to: (i) contracts where we have determined that the contract consists of a series of distinct service periods and revenues are based on future performance that cannot be estimated at contract inception; (ii) parking contracts where we and the customer share the gross revenues or operating profit for the location; and (iii) contracts where transaction prices include performance incentives that are based on future performance and therefore cannot be estimated at contract inception. We apply the practical expedient that permits exclusion of information about the remaining performance obligations with original expected durations of one year or less.

Costs to Obtain a Contract With a Customer

We capitalize the incremental costs of obtaining a contract with a customer, primarily commissions, as contract assets and recognize the expense on a straight-line basis over a weighted average expected customer relationship period. Upon adoption of Topic 606 on November 1, 2018, we capitalized $15.1 million of commissions related to contracts that were not completed at that date. Capitalized commissions are classified as current or noncurrent based on the timing of when we expect to recognize the expense.

Contract Balances

The timing of revenue recognition, billings, and cash collections results in contract assets and contract liabilities, as further explained below. The timing of revenue recognition may differ from the timing of invoicing to customers. If a contract includes a cancellation clause that allows for the termination of the contract by either party without a substantive penalty, the contract term is limited to the termination notice period.

Contract assets consist of billed trade receivables, unbilled trade receivables, and costs incurred in excess of amounts billed. Billed and unbilled trade receivables represent amounts from work completed in which we have an unconditional right to bill our customer. Costs incurred in excess of amounts billed typically arise when the revenue recognized on projects exceeds the amount billed to the customer. These amounts are transferred to billed trade receivables when the rights become unconditional. Contract liabilities consist of deferred revenue and advance payments and billings in excess of revenue recognized. We generally classify contract liabilities as current since the related contracts are generally for a period of one year or less. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation.

The following tables present the balances in our contract assets and contract liabilities:



(in millions)	July 31, 2019		November 1, 2018
Contract assets
Billed trade receivables⁽¹⁾	$	1,018.0	$	918.9
Unbilled trade receivables⁽¹⁾	65.9		74.3
Costs incurred in excess of amounts billed⁽²⁾	68.4		40.1
Capitalized commissions⁽³⁾	21.8		15.1

⁽¹⁾Included in trade accounts receivable, net, on the consolidated balance sheets. The fluctuation correlates directly to the execution of new customer contracts and to invoicing and collections from customers in the normal course of business.

⁽²⁾Increase is primarily due to the timing of payments on our contracts measured using the cost-to-cost method of revenue recognition.

⁽³⁾Included in other current assets and other noncurrent assets on the consolidated balance sheets. During the nine months ended July 31, 2019, we capitalized $13.0 million of new costs and amortized $6.3 million of previously capitalized costs. There was no impairment loss recorded on the costs capitalized.



(in millions)	Nine Months Ended July 31, 2019
Contract liabilities⁽¹⁾
Balance at beginning of period	$	41.7
Additional contract liabilities	294.9
Recognition of deferred revenue	(294.4		)
Balance at end of period	$	42.3

⁽¹⁾ Included in other accrued liabilities on the consolidated balance sheets.

4. RESTRUCTURING AND RELATED COSTS

We may periodically engage in various restructuring activities intended to drive long-term profitable growth and increase operational efficiency, which can include streamlining and realigning our overall organizational structure and reallocating resources. These activities may result in restructuring costs related to employee severance, other project fees, external support fees, lease exit costs, and asset impairment charges. Recently, our significant restructuring activities have primarily related to integrating our acquisition of GCA Services Group (“GCA”) and implementing our 2020 Vision initiative, as described below.

GCA and Other Restructuring

During the first quarter of 2018, we initiated a restructuring program to achieve cost synergies following the acquisition of GCA. We incurred the majority of our severance expense associated with this restructuring program in the first half of 2018. During 2019, we incurred an immaterial amount of severance and other expenses associated with our Healthcare reorganization. Additionally, we continue standardizing our financial systems and streamlining our operations by migrating and upgrading several key management platforms, including our human resources information systems, enterprise resource planning system, and labor management system. We also continue consolidating our real estate leases. As we continue to further integrate and consolidate our operational and financial processes to support the growth and capabilities of our shared services and operations, we expect to incur additional restructuring charges, primarily related to other project fees.

2020 Vision Restructuring

During the fourth quarter of 2015, our Board of Directors approved a comprehensive strategy intended to have a positive transformative effect on ABM (the “2020 Vision”). As part of the 2020 Vision, we identified key priorities to differentiate ABM in the marketplace, accelerate revenue growth for certain industry groups, and improve our margin profile. We do not expect to incur significant 2020 Vision restructuring and related expenses in the future.

Rollforward of Restructuring and Related Liabilities



(in millions)	Balance, October 31, 2018		Costs Recognized⁽¹⁾		Payments			Balance, July 31, 2019
Employee severance	$	3.8	$	3.4	$	(4.2	)	$	3.0
Lease exit costs and asset impairment	3.1		0.7		(0.7		)	3.0
Other project fees