ABM Industries Inc. — Q1 FY2011 10-Q
Reporting period: Three months ended January 31, 2011; comparisons are with the three months ended January 31, 2010. Balance-sheet comparisons are with October 31, 2010. Figures are in millions of dollars unless stated otherwise.
Business context
ABM provides janitorial, engineering, parking and security services, primarily in the United States. The quarter included The Linc Group, acquired December 1, 2010, in the Engineering segment. Management said results for this quarter are not necessarily indicative of the full fiscal year.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $1,029.2 | $869.9 | +18.3% |
| Operating profit | $16.9 | $22.2 | -23.8% |
| Income from continuing operations | $8.4 | $12.8 | -34.5% |
| Net income | $8.4 | $12.8 | -34.3% |
| Diluted EPS | $0.16 | $0.24 | Down $0.08 |
| Gross margin | 9.9% | 10.1% | Down 0.2 percentage points |
| Operating cash flow | $1.3 | $(8.9) | Improved $10.2 |
| Investing cash flow | $(298.0) | $(6.9) | Primarily Linc acquisition |
| Financing cash flow | $288.6 | $2.9 | Primarily acquisition borrowing |
Revenue growth was largely acquisition-driven: Linc and the Diversco and L&R acquisitions contributed $156.1 million of the $159.3 million increase. Linc contributed $93.6 million of revenue and $3.1 million of operating profit in the quarter. Higher labor costs and acquisition transaction costs contributed to lower operating profit. SG&A rose 26.1% to $79.2 million, including $13.1 million attributable to Linc and a $3.4 million increase in transaction costs. Interest expense rose to $4.0 million from $1.2 million, reflecting higher borrowings and interest rates. The effective tax rate was 38.5%, compared with 38.8%.
By segment, Janitorial revenue was $594.6 million and operating profit $29.9 million; Engineering revenue was $192.6 million and operating profit $7.5 million; Parking revenue was $152.9 million and operating profit $4.7 million; Security revenue was $88.8 million and operating profit $1.3 million. Engineering and Parking revenue increases were primarily acquisition-related. Janitorial profit fell 11.6%, mainly from an additional working day and higher state unemployment insurance costs; Parking profit declined 5.8%, partly due to L&R integration costs.
At January 31, cash was $31.4 million, working capital $316.2 million, and total liabilities $1,207.0 million. Borrowings under the $650 million revolving facility were $430.0 million; standby letters of credit were $106.1 million, and reported available credit was $113.9 million. ABM was in compliance with facility covenants. The facility expires in November 2015 and may be increased to $850 million subject to lender commitments. Dividends declared were $0.14 per share.
Material changes, outlook and risks
- ABM paid $300.6 million for Linc; cash used for business acquisitions, net of cash acquired, was $292.2 million. The preliminary purchase-price allocation includes $132.5 million of goodwill and $102.0 million of identifiable intangible assets; the allocation remained subject to review.
- Management said cash from operations and facility availability should be sufficient for foreseeable operating and cash requirements. No quantified earnings or revenue guidance was provided. Management’s stated priorities include integrating recent acquisitions, controlling costs, retaining clients at desirable margins, and pursuing organic and acquisition growth.
- Operating cash flow improved year over year, primarily due to the timing of vendor payments; it remained modest at $1.3 million. Receivables increased to $574.5 million from $450.5 million at October 31, 2010.
- Self-insurance reserves may be adjusted after actuarial reviews expected during the remainder of 2011, potentially affecting third- and fourth-quarter earnings. Insurance claims liabilities totaled $346.8 million; the company also reported $106.1 million of standby letters of credit, $36.2 million of restricted insurance deposits, and $188.8 million of surety bonds supporting claims.
- ABM accrued $6.4 million for probable losses across contingencies. In the Augustus case, the court granted plaintiffs summary judgment on a rest-break issue after decertifying the meal-break class; ABM intended to challenge the decision, and potential exposure could not be estimated. Other litigation outcomes remain uncertain.
- Auction-rate securities had a fair value of $20.9 million and remained illiquid; one $5.0 million security was redeemed at par on February 11, 2011. No other-than-temporary impairment was identified in the quarter. Unrecognized tax benefits totaled $101.8 million, and tax examinations were ongoing.
- All $430.0 million of outstanding debt was floating-rate. Management estimated that a hypothetical 1% increase in rates would add $2.1 million of interest expense for the quarter, net of swaps. Disclosure controls were considered effective; assessment and integration of Linc’s internal controls were planned during fiscal 2011.
Important facts for investors to verify
- Whether Linc and other acquisitions deliver expected integration benefits and margins, and how much future growth is acquisition-dependent.
- Whether Janitorial labor-cost pressure, transaction costs and acquisition-related amortization continue to weigh on profitability.
- Cash conversion, receivable collections, and liquidity after acquisition-related borrowing; confirm facility availability and covenant headroom.
- Results of actuarial reviews and developments in the Augustus case and other legal contingencies.
- Valuation and eventual liquidity of remaining auction-rate securities, and outcomes of tax examinations and the final Linc purchase-price allocation.