ABM Industries Incorporated — Q1 FY2012 Form 10-Q
Reporting period: Three months ended January 31, 2012; comparison is with the three months ended January 31, 2011. Balance-sheet comparisons are with October 31, 2011. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Business context and financial performance
ABM provides integrated facilities-management services. Its four reportable segments are Janitorial, Facility Solutions (formerly Engineering), Parking and Security. The Facility Solutions name change reflects the range of services offered.
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,073.8 million | $1,029.2 million | Up 4.3% |
| Operating profit | $17.8 million | $16.9 million | Up 5.2% |
| Income from continuing operations | $10.6 million | $8.4 million | Up 26.6% |
| Net income | $10.6 million | $8.4 million | Up 26.7% |
| Diluted EPS | $0.20 | $0.16 | Up $0.04 |
| Operating margin | About 1.7% | About 1.6% | Slightly higher |
Gross margin was approximately 10.0%, versus 10.2% a year earlier. The effective tax rate increased to 41.2% from 38.5%, primarily because employment-based tax credits expired. Dividends declared were $0.145 per share, compared with $0.140.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $12.0 million, compared with $1.3 million; continuing-operations operating cash flow was $11.8 million. Management attributed the improvement primarily to the timing of client collections.
- Investing activities used $11.2 million, mainly reflecting $11.9 million of property and equipment additions. The prior-year quarter used $298.0 million, largely for the Linc acquisition.
- Financing activities used $9.6 million. Cash declined $8.8 million from October 31 to $17.7 million.
- Working capital was $295.2 million, up $4.6 million from October 31. Outstanding line-of-credit borrowings were $293.0 million; up to $260.3 million of credit was available. The $650 million facility expires in September 2016. ABM reported compliance with its financial covenants.
- All reported debt was variable-rate. A hypothetical 1% rate increase would have added about $0.7 million of interest expense for the quarter, net of swaps.
Material changes and management commentary
Revenue growth was primarily acquisition-related: Linc contributed approximately $36.1 million of year-over-year revenue growth. Facility Solutions revenue rose 21.3%, while Janitorial was essentially flat; Parking rose 0.4% and Security 3.6%. Facility Solutions operating profit fell 14.6%, mainly due to the mix and timing of completed government projects. Security operating profit fell 35.0%, while Janitorial operating profit rose 2.2%.
Management cited price compression, particularly in Janitorial, higher unemployment-insurance costs, and delays in government contract awards or start dates as pressures on results. Profit benefited from lower Linc transaction costs, a $2.7 million sales-allowance reserve reduction, higher income from unconsolidated affiliates (including a property-sale gain), and lower interest expense. Partly offsetting these benefits were higher payroll costs, $1.9 million of internal-investigation legal and other costs, $0.7 million in branding costs, and higher income taxes.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance was provided. ABM expects operating cash generation and available facility capacity to fund operations and cash needs for the foreseeable future. Its strategy is to pursue organic growth and domestic and international acquisitions while controlling costs and maintaining target leverage.
- Government spending and contract timing, economic conditions, office occupancy, client retention, price competition, labor costs, and the ability to pass cost increases to clients are key business risks. Many service contracts may be canceled on 30 to 90 days’ notice.
- Effective January 1, 2012, ABM became self-insured for certain employee medical and dental programs. Actuarial reviews could lead to earnings adjustments in the third or fourth quarter; reserve estimates may create earnings volatility.
- Litigation accruals for probable losses totaled $5.4 million. Management estimated up to $13.2 million of exposure for probable and reasonably possible matters that could be estimated; this is not a maximum exposure and excludes cases whose potential loss cannot be reasonably estimated. In the Augustus meal/rest-break case, plaintiffs sought $103.0 million in damages; ABM said it could not estimate potential exposure and was defending the case.
- In the Diaz matter, a proposed settlement had a maximum claimant payment of $4.7 million, with an anticipated payment of about $2.9 million, which ABM had accrued. The final approval hearing was scheduled for May 21, 2012.
- ABM voluntarily disclosed to the DOJ and SEC an internal investigation concerning possible FCPA and policy compliance issues involving a foreign entity affiliated with a Linc joint-venture partner. ABM terminated the arrangement, said it could not estimate potential liability, and did not then believe the matter would have a material adverse effect.
- Auction-rate securities were valued at $18.1 million, against $20.0 million original principal; auctions had not occurred since August 2007. They were classified as long-term, and the quarter included a $2.5 million unrealized fair-value gain. The filing notes that further fair-value declines could occur.
Important facts for investors to verify
- Whether operating cash flow and receivable collections remain strong, given the timing-driven improvement this quarter.
- Whether Facility Solutions and government-contract profitability recover, and whether government award delays or budget changes persist.
- The assumptions and remaining liquidity risk in the auction-rate securities valuation.
- Developments in the Augustus litigation and other cases, including the difference between accrued losses and potentially unestimable exposure.
- Updates on the FCPA-related investigation and any resulting costs, liabilities or disclosures.
- The impact of new medical and dental self-insurance and subsequent actuarial reserve adjustments.