ABM Industries Incorporated — Q2 2015 Form 10-Q
Reporting period: Three and six months ended April 30, 2015; fiscal year ends October 31. Amounts are in millions except per-share data. ABM provides integrated facility services, including janitorial, facility maintenance, parking, security, energy solutions and aviation support.
Financial performance
| Metric | Three months 2015 | Three months 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1,270.1 | $1,231.3 | $2,559.5 | $2,457.8 |
| Operating profit | $30.8 | $27.9 | $50.0 | $51.8 |
| Net income | $18.3 | $15.2 | $36.0 | $28.3 |
| Diluted EPS | $0.32 | $0.27 | $0.63 | $0.50 |
| Gross margin | 10.3% | 10.4% | 10.1% | 10.0% |
- Second-quarter revenue rose 3.2%, primarily from acquisitions and organic growth. Six-month revenue rose 4.1%, including $46.9 million of acquisition growth.
- Second-quarter operating profit increased 10.4%; six-month operating profit declined 3.5%, as higher corporate costs outweighed segment gains.
- Six-month net income increased 27.2%, helped by a lower effective tax rate: 25.8% versus 42.4%. The 2015 rate benefited from $4.8 million of retroactive federal Work Opportunity Tax Credits and $2.5 million of state employment-based credits.
- Net cash from operations was $39.0, compared with $37.7 a year earlier. Investing used $13.9 (prior year: $30.8); financing used $31.4 (prior year: $1.8). Cash declined $6.3 to $30.4.
- At April 30, line-of-credit borrowings were $307.0; standby letters of credit were $116.1. Available borrowing capacity was $376.9, subject to covenants. ABM reported covenant compliance. Total assets were $2,205.6 and total liabilities $1,205.4.
- Dividends paid during the first half were $17.9; dividends declared were $0.32 per share. ABM reported $10.0 of 2015 share repurchases, with $20.0 remaining under the authorization.
Changes, outlook and notable items
- In the second quarter, Janitorial, Facility Services, Parking, Security and Other increased operating profit; Building & Energy Solutions declined. For the first half, Building & Energy Solutions operating profit fell 29.0% to $4.4 despite 9.2% revenue growth, reflecting client operational issues, higher selling costs and a customer-dispute settlement. Security revenue declined 2.5%.
- Quarterly operating profit benefited from acquisitions and organic growth, favorable effects of prior risk-management improvements, the absence of a prior-year $3.4 arbitration accrual, and a $1.4 property-sale gain. Results were partly offset by higher payroll costs and a $3.0 increase in medical and dental reserves following actuarial evaluation. Former CEO/CFO departures also contributed to higher severance expense.
- Management estimated the fiscal 2015 annual effective tax rate at 32%–36%, assuming Congress would not reenact the federal tax credit for calendar 2015 before October 31. It also expected $15–$20 of 2015 cash tax savings related to coverage provided by its newly formed captive insurer.
- Management said operating cash flow, cash, available credit and capital-market access should fund requirements for the next 12 months, while cautioning that cash generation, sales growth, borrowing availability and market access are not assured. No full-year revenue or earnings guidance is provided in the filing text.
- Management expected updated actuarial reviews of significant casualty insurance programs in the third and fourth quarters. Unfavorable developments in certain pre-2014 claims could increase reserves and reduce earnings.
- On May 1, 2015, ABM acquired certain assets and liabilities of CTS Services/Facility Support Services for $20.0, subject to adjustments and up to $3.8 in contingent consideration; purchase accounting was incomplete.
Risks and contingencies
- Insurance claim reserves totaled $343.9; ABM retains the initial $1.0 per claim for most major insurance programs. Medical and dental reserve increases and forthcoming actuarial reviews create potential earnings variability.
- Probable litigation losses accrued were $3.5, including $2.3 for a wage-and-hour settlement. Management estimated reasonably possible losses of $0–$8.1, but noted this does not represent maximum possible exposure.
- In the Augustus rest-break class action, a California appeals court had reversed an approximately $89.7 judgment and related attorneys’ fees; the California Supreme Court granted plaintiffs’ review petition on April 29, 2015. The outcome remains pending. ABM also disclosed other employment litigation and an ongoing government inquiry related to a Foreign Corrupt Practices Act investigation; potential liability for the latter could not be estimated.
- Other exposures include $26.0 of guaranteed energy savings, joint-and-several guarantees of certain joint-venture contract performance, and auction-rate securities valued at $12.9 that ABM did not expect to liquidate within 12 months.
- Key stated business risks include labor and wage pressures, client retention and contract profitability, acquisition integration, government-contract delays, self-insurance volatility, litigation, economic conditions and access to cash and credit.
Important facts for investors to verify
- Whether the expected insurance actuarial reviews result in further reserve increases.
- Whether Building & Energy Solutions margins recover and whether the reported client issues and dispute settlement recur.
- Whether the lower first-half tax rate is sustainable; distinguish the reported 25.8% rate from management’s 32%–36% full-year estimate.
- Developments in the Augustus case, other litigation, and the FCPA-related government inquiry.
- Integration, performance and contingent consideration for the CTS acquisition, alongside leverage, credit availability and cash generation.