ABM Industries Incorporated — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2012. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise. The quarter’s comparable period is the three months ended April 30, 2011.
Business context and performance
ABM provides integrated facilities services, including janitorial, facility solutions, parking and security. Management cited economic weakness, contract price compression and client losses, higher unemployment insurance costs, and uncertainty around U.S. government contracting. Facility Solutions includes the business acquired from The Linc Group in December 2010.
Financial results
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $1,057.2 | $1,060.1 | $2,131.0 | $2,089.3 |
| Operating profit | $18.9 | $26.5 | $36.7 | $43.4 |
| Income from continuing operations | $11.7 | $14.2 | $22.4 | $22.6 |
| Net income | $11.7 | $14.2 | $22.3 | $22.6 |
| Diluted EPS | $0.21 | $0.26 | $0.41 | $0.42 |
Quarterly revenue declined 0.3%; six-month revenue rose 2.0%, primarily from Linc. Operating profit fell 28.8% for the quarter and 15.6% for the half. Gross margin was 10.3% for the quarter versus 10.9%, and 10.2% for the half versus 10.6%. Quarterly net income was reduced by $5.1 million of legal settlement expense, higher payroll-related costs, investigation costs and branding expense. Lower interest expense and taxes partially offset these pressures.
- Segments: For the quarter, Janitorial revenue was broadly flat while operating profit fell 4.1%; Facility Solutions revenue fell 2.9% and operating profit fell 6.7%; Parking revenue fell 2.2% but operating profit rose 24.5%; Security revenue rose 5.6% and operating profit rose 12.8%. For the six months, Facility Solutions revenue increased 8.2%, largely reflecting Linc, while its operating profit declined 10.8%.
- Cash flow: Six-month operating cash flow was $55.5 million, versus $33.2 million; continuing-operations operating cash flow was $54.4 million. Investing used $15.1 million, compared with $297.7 million, which included the prior-year Linc acquisition. Financing used $41.5 million, versus $248.4 million provided in the prior-year period. Cash ended at $25.4 million.
- Liquidity and debt: Working capital was $293.5 million, up $3.0 million from October 31, 2011. Line-of-credit borrowings were $266.0 million, down from $300.0 million; the $650 million facility had $287.3 million of available credit. ABM reported compliance with its financial covenants and expected to remain compliant. Interest expense fell 36.9% for the half, mainly due to lower average borrowings and rates.
- Other items: ABM recorded a $0.3 million auction-rate-security credit impairment in Q2. The securities’ fair value was $18.0 million, based on Level 3 valuation inputs, and auctions had not occurred since 2007. The six-month effective tax rate was 37.3%, versus 38.4%. Unrecognized tax benefits were $97.1 million.
Outlook, risks and contingencies
ABM gave no quantified earnings or revenue guidance. Management expects growth from organic activity and acquisitions, and says future results depend on retaining clients at acceptable margins, controlling costs, and executing acquisitions while maintaining its target leverage. Management said cash from operations and facility availability should fund foreseeable needs. It also noted active government bid activity but possible delays in awards and contract starts, as well as potential early terminations. The filing states interim results are not necessarily indicative of full-year results.
- Litigation: Probable litigation losses accrued were $10.6 million; management estimated reasonably possible losses of $0–$2.3 million where estimable, excluding matters whose potential losses could not be reasonably estimated. In the Augustus class action, plaintiffs sought $103 million; ABM said it could not estimate potential exposure and was defending the case. Separate settlements included approximately $3.1 million in the Diaz matter and $1.8 million and $1.2 million in the Khadera and Simpson matters, subject to approvals as described in the filing. A jury awarded approximately $0.8 million in the Bojorquez case; ABM intended to appeal.
- Foreign-corruption investigation: ABM voluntarily disclosed an internal investigation concerning services by a foreign entity affiliated with a former Linc joint-venture partner to the DOJ and SEC. ABM said it could not estimate potential liability but did not believe, based on facts then known, the matter would materially adversely affect the company.
- Insurance and operating risks: ABM became self-insured for certain employee medical and dental programs on January 1, 2012; actuarial work was expected to lead to reserve adjustments in Q3 and Q4. The filing highlights risks from labor and insurance costs, contract cancellations, economic weakness, government budgets, client concentration or financial distress, competition, acquisitions, and interest rates. A hypothetical 1% rate increase would have added $1.4 million of interest expense for the six-month period, net of swaps.
- Subsequent event: On May 1, 2012, ABM acquired TEGG and CurrentSAFE for approximately $6.2 million cash, subject to post-closing adjustments. Purchase accounting was incomplete at filing.
Important facts for investors to verify
- Whether operating margins recover from price compression, payroll inflation and contract losses, particularly in Janitorial and Facility Solutions.
- Developments in the Augustus litigation and other employment-related cases, including any amounts beyond current accruals.
- Any consequences or costs arising from the DOJ/SEC matter and the status of the investigation.
- Future actuarial adjustments to self-insurance reserves and the effect of newly self-insured medical and dental programs.
- Cash conversion, receivable collections, borrowing availability and covenant headroom, especially if government-contract payments or awards are delayed.
- The final purchase-price allocation and operating contribution from TEGG and CurrentSAFE.