ABM Industries Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 31, 2016; balance-sheet figures are as of January 31, 2016, compared with October 31, 2015. ABM provides integrated facility services. Results reflect the sale of its Security business in October 2015, which is reported as discontinued operations.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $1,268.4 million | $1,194.5 million |
| Operating profit | $13.6 million | $16.8 million |
| Income from continuing operations | $13.6 million | $14.3 million |
| Net income | $14.0 million | $17.7 million |
| Diluted EPS | $0.24 | $0.31 |
| Gross margin | 9.6% | 10.2% |
| Operating cash flow, continuing operations | $(8.2) million | $(26.7) million |
- Revenue grew 6.2% year over year, including 3.7% organic growth and $29.3 million of incremental revenue from acquisitions. Parking managed-location reimbursements are reported in equal amounts as revenue and expense ($80.1 million in the quarter).
- Operating profit fell 19.0%; management cited higher insurance costs and $7.2 million in 2020 Vision restructuring charges, partly offset by organic growth, acquisitions, and improved contract mix. Net income also reflects lower discontinued-operations income: $0.4 million versus $3.4 million.
- Segment revenue and operating profit: Janitorial $685.7 million / $33.7 million; Facility Services $158.5 million / $5.1 million; Parking $162.0 million / $5.0 million; Building & Energy Solutions $149.8 million / $6.5 million; Other $112.4 million / $1.7 million. Building & Energy Solutions revenue rose 25.5%, largely from acquisitions, and operating profit improved to $6.5 million from $1.2 million.
Cash, debt and liquidity
- Cash and cash equivalents were $55.9 million, versus $55.5 million at October 31, 2015. Current assets were $953.0 million and current liabilities $565.2 million.
- Total cash used in operating activities was $31.4 million, including $23.2 million for discontinued operations, primarily $20.6 million of taxes paid on the Security sale. Investing activities used $87.6 million, largely for the Westway acquisition; financing provided $119.4 million.
- Line-of-credit borrowings were $286.7 million, up from $158.0 million; standby letters of credit were $128.8 million. Reported available borrowing capacity was $384.5 million, subject to covenants. ABM reported covenant compliance.
- ABM paid $9.2 million in dividends and repurchased $11.3 million of stock; the declared dividend was $0.165 per share.
Outlook, developments and risks
- Management expected positive operating cash flow for FY2016 and said cash, operating flows, and available credit were expected to cover requirements for the next 12 months, while noting there is no assurance those resources or expected improvements will materialize.
- For 2020 Vision, ABM anticipated total restructuring and related charges of $45–$60 million, mostly through the end of 2016; it expected most organizational benefits by the end of 2017 and annualized operational benefits of $40–$50 million. Severance-related annualized savings were estimated at $10.6 million.
- ABM acquired UK technical engineering provider Westway for $81.0 million, funded in part by increased credit-line borrowings. Preliminary acquisition accounting included $45.0 million of goodwill; the purchase-price allocation was not complete.
- Actuarial review increased reserves for prior-period insurance claims by $6.0 million. Total insurance claim reserves were $392.7 million. Management expected further actuarial reviews and warned that subsequent developments could require additional earnings adjustments.
- The effective tax rate on continuing operations was 2.3%, benefiting from $5.0 million of Work Opportunity Tax Credits. Management expected approximately $7 million of 2016 WOTC-related tax reductions for continuing operations.
- Probable litigation losses accrued were $11.5 million; management estimated reasonably possible losses of $0–$11 million, excluding the Augustus and Bucio cases. The Augustus case was before the California Supreme Court; ABM said it could not reasonably estimate potential liability related to a separate FCPA investigation.
- Other disclosed risks include competition, labor and employment matters, client retention and credit, high insurance deductibles and reserve volatility, multiemployer pension exposure, debt and interest-rate risks, and execution of the 2020 Vision. Management reported no material change in risk factors or market-risk disclosures from its latest Form 10-K.
Important facts for investors to verify
- Whether insurance claim trends stabilize and whether upcoming actuarial reviews require further reserve increases.
- Actual timing and amount of 2020 Vision charges, savings, and targeted operational benefits.
- Westway’s subsequent performance, final purchase-price allocation, and contribution to Building & Energy Solutions.
- Cash conversion through the remainder of FY2016, including collections, discontinued-operation payments, and use of credit capacity.
- Developments in material litigation and the FCPA investigation, including exposures not currently estimable.