ABM

ABM Industries Inc. - 10-Q Summary (Period Ended July 31, 2009)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended July 31, 2009, and the nine-month period ended on the same date. ABM Industries Inc. provides janitorial, parking, security, and engineering services primarily in the United States. The company operates four reportable segments: Janitorial, Parking, Security, and Engineering. The Lighting division was sold in October 2008 and is reported as discontinued operations.

Key Financial Metrics

Note: Gross margin for the nine months ended July 31, 2009, was 10.6%.

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 5.7% in the quarter and 3.8% for the nine months compared to the prior year periods. This was driven by a weak economic climate, contract price compression, and reduced "tag work" (extra services) due to lower customer discretionary spending.
• Net Income Volatility: Net income decreased 25.2% in the quarter to $12.3 million but increased 16.0% for the nine months to $39.3 million. The nine-month increase was aided by a $9.6 million legal settlement and lower interest expenses, partially offset by higher insurance reserves.
• Insurance Reserves: Actuarial evaluations resulted in a $3.5 million increase in self-insurance reserves for the nine months ended July 31, 2009, compared to a $14.8 million decrease in the prior year period. This negatively impacted operating profit.
• Investment Impairment: The company recognized a $1.6 million credit loss in earnings related to an other-than-temporary impairment of auction rate securities.
• Interest Expense: Interest expense decreased significantly (55.9% in the quarter, 62.7% for nine months) due to lower average outstanding balances on the line of credit.

Guidance, Outlook, and Risks

• Outlook: Management expects to realize approximately $46.0 million in synergies from the OneSource acquisition for the full fiscal year 2009. The company anticipates continued pressure from the economic environment, including reductions in service levels and price compression.
• Strategic Actions: ABM is proactively managing customer contracts, eliminating low-margin contracts, and focusing on higher-margin work. Growth is expected through strategic acquisitions and international expansion.
• Liquidity: The company maintains a $450 million line of credit with $135.4 million available as of July 31, 2009. Management believes cash from operations and available credit are sufficient for long-term needs.
• Risks:
  • Auction Rate Securities: Continued illiquidity and potential further impairment of $19.7 million in auction rate securities.
  • Legal Proceedings: Several class-action lawsuits regarding wage-and-hour laws are pending; the company has accrued $4.9 million for probable losses.
  • Insurance Claims: Subjectivity in estimating self-insurance reserves could lead to future adjustments.
  • IT Transition: Risks associated with transitioning IT services from IBM and migrating to new financial/payroll systems.

Investor Verification Checklist

• Verify the status and potential recovery value of the $19.7 million investment in auction rate securities, specifically the security downgraded to below investment grade.
• Monitor the self-insurance reserve estimates and the impact of future actuarial evaluations on operating expenses.
• Review the progress of IT system migrations and the transition of services from IBM to ensure no material disruptions or cost overruns.
• Assess the outcome of pending wage-and-hour class action lawsuits and whether the $4.9 million accrual remains sufficient.
• Track the realization of synergies from the OneSource acquisition against the $46.0 million full-year target.