ABM Industries Incorporated — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014; financial statements are unaudited. ABM provides integrated facility services, including janitorial, facility maintenance, parking, security, and building and energy solutions.
Financial performance and position
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $1,226.5 million | $1,182.1 million |
| Operating profit | $23.9 million | $19.3 million |
| Income before taxes | $22.7 million | $17.2 million |
| Income tax provision / effective rate | $9.6 million / 42.5% | $3.8 million / 22.2% |
| Net income | $13.1 million | $13.4 million |
| Diluted earnings per share | $0.23 | $0.24 |
| Declared dividend per share | $0.155 | $0.150 |
Revenue rose 3.8%; operating profit rose 24.0%. Gross margin slipped to 9.6% from 9.7%, while SG&A declined to 7.1% of revenue from 7.4%. Higher operating profit was offset at the net-income level primarily by the higher effective tax rate.
Cash flow: Operating activities used $38.9 million, versus $11.5 million used a year earlier, mainly because of the timing of client receivable collections. Investing activities used $9.5 million, compared with $191.8 million, which included substantial acquisition spending in the prior-year quarter. Financing activities provided $49.9 million. Cash ended the quarter at $34.2 million.
Balance sheet and liquidity: At January 31, 2014, total assets were $2.165 billion and total liabilities were $1.237 billion. Line-of-credit borrowings were $367.0 million, up from $314.9 million at October 31, 2013. The $800 million revolving facility had $327.4 million of borrowing capacity available; $105.6 million of standby letters of credit were also outstanding. ABM reported compliance with its credit covenants. Management said cash, operating cash flow, available borrowing capacity, and capital-market access were expected to meet requirements for the next 12 months, subject to stated uncertainties.
Material changes and operating commentary
- Revenue growth was primarily organic, led by Janitorial and Building & Energy Solutions. Janitorial revenue increased 4.6%; Building & Energy Solutions revenue rose 16.0% and returned to operating profit of $2.7 million from a small loss. Security operating profit rose 55.5%, and Parking operating profit increased 17.1% despite slightly lower revenue.
- Facility Services revenue fell 3.0% and operating profit fell 10.2%, reflecting contract losses and the timing of a performance-based award. Janitorial operating profit declined 1.0%, affected by weak performance in one region of a large multi-regional contract. ABM said it had taken steps to improve that region’s profitability effective March 1, 2014.
- Management attributed operating-profit improvement in part to new Building & Energy Solutions contracts and savings from realigning and streamlining onsite operations. The realignment was continuing through 2014.
- ABM amended its revolving credit facility in December 2013, increasing it from $650 million to $800 million and extending maturity to December 11, 2018. The facility may be increased to $1 billion, subject to lender commitments.
Outlook, risks, and unusual items
- Management expected positive operating cash flow for fiscal 2014, while noting first-quarter operating cash flow is typically lower than in later quarters. No full-year revenue or earnings guidance is provided in the filing.
- If the Work Opportunity Tax Credit is not retroactively reenacted by October 31, 2014, ABM estimated its annual effective tax rate would be 40%–42%, about 5–7 percentage points above fiscal 2013’s 35.2% rate.
- Legal contingencies include the Augustus rest-break class action. A judgment of approximately $89.7 million and related fee amounts are under appeal; the filing cites a possible $94.2 million impact and estimates reasonably possible losses across matters at $1.0 million–$98.1 million. Accrued probable litigation losses were $2.3 million. Management stated it believed the matters would not have a material adverse effect, but litigation outcomes are uncertain.
- Insurance claim reserves were $357.6 million. Updated actuarial reports could result in earnings adjustments in the third or fourth quarter of 2014. ABM also disclosed $33.7 million of guarantees, with no material liability recorded, and an ongoing government investigation related to Foreign Corrupt Practices Act compliance for which potential liability could not be reasonably estimated.
- Variable-rate debt is a market risk: a hypothetical 1% interest-rate increase would have added approximately $0.4 million of quarterly interest expense, net of swaps. Auction-rate securities of $13.0 million remained illiquid; auctions had not occurred since August 2007.
- After quarter-end, ABM acquired Alpha Mechanical for $12.3 million in cash; purchase accounting was incomplete when the filing was issued.
Key facts for investors to verify
- Whether Janitorial contract performance improved as management anticipated, and whether margin pressure persisted.
- Whether the higher tax rate and possible renewal of the Work Opportunity Tax Credit affected subsequent results.
- Whether receivable collections and operating cash flow improved over the remainder of fiscal 2014.
- Developments in the Augustus appeal and other litigation, including potential exposure beyond recorded accruals.
- Credit-facility borrowing levels, covenant headroom, and the effect of variable interest rates.
- Integration and financial contribution of Alpha Mechanical and other acquired businesses.