ABM Industries Incorporated — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended April 30, 2014. The quarter’s results are compared with the three months ended April 30, 2013; year-to-date results are compared with the six months ended April 30, 2013. ABM provides integrated facility services, including janitorial, facilities maintenance, parking, security, and building and energy solutions.
Financial results and liquidity
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $1,231.3 million | $1,173.6 million | $2,457.8 million | $2,355.7 million |
| Operating profit | $27.9 million | $33.6 million | $51.8 million | $52.9 million |
| Net income | $15.2 million | $19.3 million | $28.3 million | $32.7 million |
| Diluted EPS | $0.27 | $0.35 | $0.50 | $0.59 |
| Gross margin | 10.4% | 10.7% | 10.0% | 10.2% |
- Revenue rose 4.9% in the quarter and 4.3% year to date, primarily from organic growth and net new business. Operating profit fell 17.0% in the quarter and 2.1% year to date.
- Net cash from operations was $37.7 million for the six months, nearly unchanged from $37.8 million. Capital expenditures were $19.3 million; cash used in investing was $30.8 million. Dividends paid were $17.3 million.
- At April 30, cash was $37.7 million, current assets were $911.8 million, and current liabilities were $504.3 million. Line-of-credit borrowings were $327.2 million, versus $314.9 million at October 31, 2013. ABM reported $358.1 million of available borrowing capacity and compliance with credit covenants.
- Total assets were $2,155.5 million and total liabilities were $1,214.7 million at April 30, 2014.
Material changes and management commentary
- Higher revenue did not translate into higher operating profit: new business carried higher initial costs and lower margins until operations normalize; unfavorable weather also weighed on margins. A large multi-regional janitorial contract had a loss-making region, and ABM said it took steps to improve profitability there effective March 1.
- Corporate costs increased, including a $3.4 million accrual tied to an unfavorable arbitration decision, higher compensation and legal expenses, and rebranding costs. Savings from operational realignment partly offset these pressures.
- Building & Energy Solutions was a growth contributor: Q2 revenue increased 26.2% and operating profit rose to $3.5 million from $1.7 million. Facility Services and Janitorial operating profit declined in the quarter.
- ABM acquired Alpha Mechanical for $12.3 million in cash, effective March 1, 2014; its HVAC, plumbing, retrofit, and controls operations joined Building & Energy Solutions.
- The effective tax rate was 42.4% in both the quarter and first half, up from 39.1% and 33.1%, respectively. ABM attributed the increase primarily to expiration of the Work Opportunity Tax Credit. If the credit was not retroactively reenacted before October 31, 2014, management estimated a full-year effective tax rate of 40%–42%.
- Management said operating cash flows, cash, borrowing capacity, and capital-market access should be sufficient for requirements over the next 12 months, while cautioning that cash generation, expected growth, borrowing availability, and capital-market access are not assured. Its strategy emphasizes integrated facility solutions, organic growth, acquisitions, and continued operational realignment.
Risks, contingencies, and unusual items
- Probable litigation losses accrued were $5.3 million, including the $3.4 million arbitration accrual. Management estimated reasonably possible losses at $0–$95.0 million, including a possible $94.2 million impact from the Augustus rest-break class action; the company disputed the decisions and had appealed. The stated range excludes matters whose potential losses cannot reasonably be estimated.
- Insurance claim reserves totaled $357.1 million. ABM said actuarial reviews expected in the third and fourth quarters could lead to earnings adjustments.
- Energy-savings and other guarantees totaled $43.5 million, extending through 2029. ABM stated it had not historically incurred losses on these guarantees.
- ABM continued to cooperate with the DOJ and SEC regarding a voluntary disclosure and investigation involving a foreign entity formerly affiliated with a joint-venture partner; it said potential liability could not be reasonably estimated.
- Management cited possible effects from federal budget timing and sequestration, including delays, reductions, terminations, or reversals of government contract awards. Other disclosed risks include labor and employment claims, client retention, competition, self-insurance exposure, and acquisition and integration execution.
- The company said there were no material changes in market-risk disclosures or risk factors other than its updated sequestration discussion. Disclosure controls were reported effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether new-business contracts and the affected janitorial region achieve normalized costs and improved margins, and whether realignment savings continue.
- Developments in the Augustus appeal and other litigation, including the potential exposure above amounts accrued.
- Tax-credit legislation and the resulting full-year effective tax rate.
- Collections, operating cash flow, capital spending, and borrowing capacity under the credit agreement and its covenants.
- Actuarial reserve updates and any related earnings adjustments, as well as the integration and performance of Alpha Mechanical.