ABM Industries Inc. — Q3 FY2011 Form 10-Q
Business and period: ABM provides janitorial, engineering, parking, and security services. This unaudited filing covers the quarter and nine months ended July 31, 2011; comparisons are with the corresponding 2010 periods. Results include acquisitions, notably The Linc Group, acquired December 1, 2010.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,076.2 million | $869.0 million | $3,165.5 million | $2,594.4 million |
| Operating profit | $40.7 million | $35.3 million | $84.1 million | $73.1 million |
| Income from continuing operations | $27.9 million | $21.0 million | $50.5 million | $42.4 million |
| Net income | $27.9 million | $21.0 million | $50.5 million | $42.3 million |
| Diluted EPS | $0.51 | $0.40 | $0.93 | $0.80 |
| Gross margin | 11.5% | 10.7% | 10.9% | 10.2% |
- Q3 revenue rose 23.8% and net income 33.0%; nine-month revenue rose 22.0% and net income 19.2%. Acquisitions contributed $200.8 million of Q3 revenue growth and $554.8 million of nine-month growth. Linc contributed $142.7 million of Q3 revenue and $4.0 million of operating profit.
- For the nine months, cash from continuing operations was $82.6 million, versus $73.0 million. Total operating cash flow was $84.8 million; investing used $302.6 million, chiefly reflecting the Linc acquisition, while financing provided $217.9 million.
- At July 31, cash was $39.6 million and working capital $322.7 million. Line-of-credit borrowings were $365.0 million under a $650.0 million facility; available credit was $183.5 million. ABM reported covenant compliance. Total liabilities were $1.143 billion.
Changes and notable items
- Engineering and Parking revenue expanded substantially, largely from Linc and the L&R parking acquisition. Janitorial and Security growth was more modest. Operating profit growth lagged revenue growth, and corporate expense increased.
- Interest expense rose to $4.1 million in Q3 and $12.5 million for the nine months, primarily because of acquisition-related borrowing. Nine-month amortization of intangible assets increased to $17.3 million from $8.3 million.
- The 2011 tax provision included a $4.7 million benefit from remeasurement of unrecognized tax benefits; reported effective tax rates were 26.1% for Q3 and 32.2% for the nine months.
- A $2.7 million net settlement related to the L&R acquisition reduced SG&A. ABM also recorded a $1.1 million increase in reserves for prior-year self-insurance claims.
- Auction-rate securities had a $15.1 million fair value versus $20.2 million at October 31, 2010; one $5.0 million security was redeemed at par. No new other-than-temporary impairment was identified in the nine-month period.
Outlook, risks, and contingencies
- Management said weaker-than-anticipated economic conditions and client cost containment could increase price pressure, particularly in Janitorial. Higher unemployment-insurance and fuel costs, along with delayed federal appropriations and government contract starts, were expected to negatively affect Q4 FY2011 results. No numerical earnings guidance was provided.
- Management was focused on acquisition integration, cost control, retaining clients at acceptable margins, and organic growth and acquisitions. Linc’s government work faces award and start-date delays; government spending and payment timing are risks.
- ABM reported $6.1 million accrued for probable litigation losses and estimated up to $1.6 million of reasonably possible losses for estimable matters; this is not a maximum exposure estimate. A proposed parking-related settlement anticipated approximately $2.9 million, with a maximum potential payment of $4.7 million. A Texas environmental matter had a statutory maximum fine of $0.3 million.
- Linc energy-savings guarantees totaled $30.9 million and extend through 2026; management did not expect significant losses. The company also highlighted self-insurance reserve estimation risk, variable-rate debt exposure, and potential goodwill impairment: a post-quarter third-party indication of value for Security could suggest its fair value was not substantially above carrying value.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable without acquisitions, especially in Engineering and Parking.
- Whether government contract delays, client price pressure, fuel costs, and unemployment-insurance expenses affected Q4 results as management anticipated.
- Debt, borrowing availability, interest costs, covenant headroom, and cash collection trends, including longer collection periods on Linc government receivables.
- Outcome of the annual Security goodwill impairment test, ongoing tax examinations and unrecognized tax benefits, and developments in litigation and self-insurance reserves.