ABM Industries Incorporated — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended July 31, 2015. Amounts are in millions except per-share data. ABM provides integrated facility services, including janitorial, facility maintenance, parking, security, building and energy solutions, and aviation support.
Financial results
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $1,348.8 | $1,276.1 | $3,908.3 | $3,733.9 |
| Operating profit (loss) | $(7.3) | $33.7 | $42.7 | $85.5 |
| Net income | $1.5 | $19.4 | $37.5 | $47.7 |
| Diluted EPS | $0.03 | $0.34 | $0.65 | $0.84 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $101.4 | $57.0 |
- Revenue grew 5.7% in Q3 and 4.7% year to date. Management attributed growth to acquisitions and organic new business; nine-month acquisition revenue was $84.3.
- Q3 operating expenses rose 9.3%, outpacing revenue growth. Gross margin fell to 7.3% from 10.3%; nine-month gross margin fell to 9.1% from 10.1%.
- Q3 operating results swung to a loss, while nine-month operating profit declined 50.1%. Nine-month net income fell 21.4%, notwithstanding a substantially lower effective tax rate.
- Cash from operations rose $44.4 year over year for the nine-month period. Investing used $35.9; financing used $51.0. Cash increased to $51.2 from $36.7 at the fiscal-year start.
- At July 31, cash was $51.2, current assets $999.6 and current liabilities $555.4. Line-of-credit borrowings were $305.1; ABM reported $378.8 of borrowing capacity, subject to covenants. Total liabilities were $1,277.6.
- Dividends declared were $0.16 per share in Q3 and $0.48 year to date. ABM paid $27.0 in dividends and repurchased $20.0 of shares during the nine months.
Material changes and segment performance
- The central year-over-year deterioration was a $46.5 increase in casualty insurance reserves: $7.0 related to 2015 claims, allocated to operating segments, and $39.5 for prior-year claims, recorded in Corporate. Causes included adverse claim severity and frequency trends, bodily-injury and premises claims, California workers’ compensation developments, and large auto claims. The actuarial review of claims from certain acquired businesses remained incomplete.
- Q3 Corporate expense increased $28.5 year over year, primarily reflecting a $29.0 increase in self-insurance expense related to prior-year claims. Segment operating profit fell in Janitorial, Facility Services, Parking, and Security; Building & Energy Solutions improved, while Other was flat.
- For the first nine months, revenue rose in Janitorial, Parking, Building & Energy Solutions, and Other, but was slightly lower in Facility Services and Security. Building & Energy Solutions operating profit declined despite revenue growth, partly due to client operational issues and insurance costs.
- The effective tax rate for the nine months was 9.4% versus 41.6% a year earlier, primarily due to tax credits and benefits, including $4.8 of retroactive Work Opportunity Tax Credits, $3.4 from expiring statutes, $2.5 of state employment-based credits, and $1.8 related to energy-efficient government buildings.
Outlook, management plans and risks
- Management estimated a FY2015 annual effective tax rate of 22%–26%, assuming Congress would not renew the Work Opportunity Tax Credit for calendar 2015 before October 31, 2015.
- On September 2, after quarter-end, ABM announced a transformation strategy focused on profitable growth in five verticals, organizational realignment, operating consistency, cost optimization, talent development, and capital allocation. Most organizational changes were expected by the end of Q2 FY2016.
- Management forecast $45–$60 of pre-tax restructuring charges, primarily through Q3 FY2016, and expected $40–$50 of annualized operational benefits once implementation was complete by the second half of FY2017. These are forward-looking targets, not reported results.
- ABM began exploring strategic alternatives for its Security business, which could include a partnership, sale, or other transaction; no outcome was assured. The Board also authorized a new $200 share repurchase program, replacing the prior $50 program.
- Management said operating cash flow, cash, borrowing capacity, and capital-market access should fund requirements for the next 12 months, while noting there is no assurance of sufficient cash generation or future facility availability. The company reported compliance with credit covenants at July 31. A September 2 credit amendment allowed specified EBITDA add-backs, capped at $75 in aggregate, and adjusted certain repurchase and disposition restrictions.
- Key exposures include self-insured casualty claims, high deductibles, labor and employment litigation, client and contract risks, and execution costs or disruption from the transformation. ABM accrued $5.8 for probable litigation losses and estimated reasonably possible losses of $0–$6.4, but said these do not represent maximum exposure. The Augustus rest-break case was before the California Supreme Court; the company also could not reasonably estimate potential liability related to its ongoing FCPA investigation.
- Energy-savings guarantees totaled $91.2, extending through 2030. Auction-rate securities of $13.0 were classified as noncurrent; auctions had not occurred since 2007.
Important facts for investors to verify
- Whether subsequent actuarial reviews, including the pending acquired-business claims review, require further reserve increases.
- Whether underlying segment margins and operating performance recover after the insurance adjustments, and how much of revenue growth is organic versus acquisition-driven.
- Actual restructuring charges, timing and realized savings against management’s $45–$60 cost and $40–$50 annualized-benefit estimates; also the outcome and costs of the Security-business review.
- Cash conversion and working-capital trends, ongoing share repurchases and dividends, and covenant headroom under the amended credit agreement.
- Developments in material litigation and the FCPA investigation, whose potential exposure ABM said it could not estimate.