ABM Industries Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2013; comparisons are with the periods ended July 31, 2012. Financial amounts below are in millions unless otherwise noted.
Business context and reporting period
ABM provides facility services, including janitorial, engineering and maintenance, parking, security, and building and energy solutions, primarily in the United States. In fiscal 2013, it reorganized operations and reporting segments around an onsite, mobile, and on-demand structure. Prior-period segment results were restated.
Three businesses acquired November 1, 2012—Air Serv, HHA, and Calvert-Jones—expanded the company’s airport and healthcare service offerings. Air Serv is reported in the new Other segment.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,216.8 | $1,079.2 | $3,572.5 | $3,210.3 |
| Operating profit | $28.7 | $23.2 | $81.6 | $59.8 |
| Net income | $16.1 | $12.6 | $48.7 | $34.9 |
| Diluted earnings per share | $0.29 | $0.23 | $0.87 | $0.64 |
| Operating cash flow | Not separately presented | Not separately presented | $84.3 | $83.8 |
- Revenue increased 12.7% in Q3 and 11.3% for the nine months. The November acquisitions contributed $105.7 million and $303.8 million, respectively; organic growth in Janitorial, Facility Services, and Security also contributed.
- Operating profit rose 23.8% in Q3 and 36.4% for the nine months. Gross margin was 9.9% in Q3 versus 10.0%; for the nine months it was 10.1% in both years. SG&A was 7.0% of revenue in Q3 versus 7.3%, and 7.2% for the nine months versus 7.7%.
- Cash and cash equivalents were $38.7 million at July 31, 2013, down from $43.5 million at October 31, 2012. Working capital was $344.1 million, up $50.6 million, primarily reflecting acquired receivables and accrued liabilities.
- Cash used in investing activities was $206.6 million, primarily reflecting $191.3 million paid net of cash acquired for the November acquisitions. Financing activities provided $117.5 million, including increased net borrowings.
- Line-of-credit borrowings were $348.5 million under a $650 million facility; standby letters of credit were $103.9 million and reported remaining borrowing capacity was $197.6 million. The facility matures in September 2016. ABM reported compliance with its financial covenants.
- Interest expense rose to $3.3 million in Q3 and $9.7 million for the nine months, mainly due to higher average borrowings used to fund acquisitions. ABM had $180 million of interest-rate swaps outstanding to hedge variable-rate debt.
- The nine-month effective tax rate was 35.8% versus 38.8%, reflecting a $2.9 million benefit from reinstated federal employment-based tax credits; management estimated a 39.4% 2013 annual rate excluding discrete items. Quarterly tax rates were 40.4% and 41.3%.
- Dividends declared were $0.15 per share in Q3 and $0.45 per share for the nine months.
Material changes versus the prior comparable period
- Acquisitions were the largest source of revenue growth. Air Serv contributed $250.6 million of nine-month revenue and $8.7 million of operating profit; HHA and Calvert-Jones contributed $53.2 million of combined revenue and $1.3 million of operating profit to Building & Energy Solutions.
- Building & Energy Solutions revenue excluding HHA and Calvert-Jones declined $28.5 million for the nine months, chiefly due to the timing and mix of U.S. Government contracts, partly offset by new commercial service and maintenance work.
- Security, Facility Services, and Building & Energy Solutions improved operating profit. Janitorial’s Q3 operating profit declined 1.3% despite revenue growth; Parking revenue declined 0.9% for the nine months while operating profit increased 2.4%.
- Higher initial labor costs on new contracts weighed on short-term margins. For the nine months, one fewer working day, contract mix and cost controls partly offset that pressure.
- Interest expense increased as acquisition-related borrowing rose. Goodwill and intangible assets also increased following acquisitions.
Outlook, commentary, risks, and unusual items
- Management’s strategy is to expand vertical-market expertise through acquisitions and organic growth, while pursuing an integrated end-to-end service model. The operational realignment was expected to continue through 2013 and 2014, with the aim of improving growth prospects and creating higher-margin opportunities. The filing does not provide specific earnings or revenue guidance.
- Management believed operating cash flow, cash, available credit, and capital-market access were sufficient for the next 12 months, while cautioning that cash generation, expected growth and improvements, and future borrowing availability were not assured.
- Actuarial reviews led to a $9.9 million increase in insurance expense for prior-year claims during the nine months, primarily involving general liability, automobile liability, and workers’ compensation claims, including adverse development in California and New York. Further assessments in the fourth quarter could result in additional expense.
- ABM accrued $1.6 million for probable litigation losses. It estimated reasonably possible losses at up to $96.1 million, including $94.2 million related to the Augustus case; this estimate is not a maximum exposure. The company appealed a 2012 judgment of approximately $89.7 million and related attorneys’ fee rulings, and stated that it strongly disagreed with the decisions.
- The company was cooperating with U.S. authorities following a voluntary disclosure concerning a former joint-venture-affiliated foreign entity and possible Foreign Corrupt Practices Act issues. It said it could not reasonably estimate potential liability.
- Other risks include short-notice contract cancellations, labor and insurance costs, government contract and procurement risks, client retention, economic conditions, and litigation. ABM added a risk concerning liability and reputational harm from an accident or other incident involving airport operations.
- Subsequent to quarter-end, ABM acquired airport staffing and marketing assets in the UK and Europe for $5.3 million and an electrical testing business for $4.0 million, subject to adjustments.
Important facts for investors to verify
- How much future growth and profit depends on acquisitions versus organic growth, and whether the new business integration delivers the anticipated benefits.
- Whether new-contract startup and labor costs ease, and whether Building & Energy Solutions’ underlying government-contract revenue stabilizes.
- Developments in insurance claim estimates, particularly any further fourth-quarter reserve adjustments and their effect on margins and cash flow.
- The outcome and potential financial impact of the Augustus appeal and other litigation, and any developments in the government investigation.
- Receivables collection, cash conversion, borrowing capacity, interest expense, and ongoing compliance with credit-facility covenants.