ABM Industries Incorporated — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2016. Amounts are in U.S. dollars; financial statement amounts are generally in millions, except per-share data.
Business context
ABM provides integrated facility services, including janitorial, facilities engineering, parking, building and energy solutions, and airport support. The company is executing its “2020 Vision” transformation and sold its Security business in October 2015; Security results are presented as discontinued operations. ABM acquired U.K. technical engineering provider Westway for $81.0 million in December 2015.
Financial performance
- Revenue: Second-quarter revenue increased 6.9% to $1,257.1 million; organic growth was 4.0%. Six-month revenue rose 6.5% to $2,525.5 million. Acquisitions contributed $34.0 million in the quarter and $63.2 million for the six months.
- Profit: Second-quarter operating profit fell 56.7% to $11.8 million, and continuing-operations income fell 57.6% to $6.8 million. Net income was $4.4 million, or $0.08 diluted per share, versus $18.3 million, or $0.32, a year earlier. For six months, operating profit declined 42.2% to $25.4 million; continuing-operations income was $20.4 million and net income was $18.4 million, or $0.32 diluted per share.
- Margins: Gross margin declined to 9.9% from 10.5% in the quarter and to 9.8% from 10.3% for six months. Operating margin was approximately 0.9% in the quarter and 1.0% for six months, down from approximately 2.3% and 1.9%, respectively, in the prior-year periods.
- Cash flow: Six-month cash from continuing operations was $78.5 million, versus $39.9 million. Cash used in investing was $94.4 million, including the Westway acquisition; financing provided $28.6 million. Cash declined $9.8 million from fiscal year-end to $45.7 million.
- Balance sheet and liquidity: At April 30, cash was $45.7 million and total assets were $2,184.5 million. Line-of-credit borrowings were $208.9 million, up from $158.0 million at October 31, 2015; available borrowing capacity was $463.5 million, subject to covenants. Total liabilities were $1,192.3 million. ABM reported compliance with its credit covenants.
- Shareholder returns: Six-month dividends paid were $18.5 million; dividends declared were $0.33 per share. ABM repurchased 0.7 million shares for $21.5 million, with $167.1 million remaining under its authorization at April 30.
Changes and operating drivers
- Growth reflected organic expansion in onsite services, airport contract expansion, technical-services revenue, and acquisitions. Building & Energy Solutions revenue rose 25.7% for six months, primarily from acquisitions and technical-services work; Janitorial revenue rose 3.5%.
- Profitability was pressured by higher insurance costs, restructuring charges, an additional working day, and specific client receivable reserves. A $9.8 million increase in bad-debt expense for six months included reserves related to two client receivables.
- Corporate expenses rose $14.9 million for six months, reflecting restructuring costs, higher prior-year insurance claims expense, and a client receivable reserve. Segment results were mixed: Building & Energy Solutions operating profit improved, while Janitorial and Parking operating profit declined.
- Discontinued operations recorded a six-month loss of $2.0 million, including a $3.1 million final working-capital payment related to the Security sale. Cash used by discontinued operations was $22.5 million, including $20.6 million in taxes paid on the sale.
Outlook, risks, and unusual items
- 2020 Vision: Management expects total pretax restructuring and related charges of $45 million to $60 million, with most incurred through the end of 2016. Cumulative charges were $28.7 million through April 30. The initiative is expected to be fully implemented by the second half of 2017, with annualized operational benefits of $40 million to $50 million by year-end 2017; ABM reported $6.2 million of savings in the first six months.
- Tax outlook: Management expected 2016 Work Opportunity Tax Credits to reduce tax expense by approximately $7 million. It also expected $15 million to $20 million of 2016 cash tax savings related to its captive insurance company.
- Insurance estimates: Actuarial developments led ABM to increase reserves for prior-period claims by $12.0 million through April 30. Higher insurance expense was $14.0 million for six months. Management planned further actuarial evaluations in the third quarter; additional reserve adjustments may be required.
- Contingencies: Accrued probable litigation losses were $11.4 million. Management estimated reasonably possible losses of $0 to $14 million, excluding the Augustus and Bucio cases; actual exposure may exceed recorded accruals or estimated ranges. The Augustus case remained before the California Supreme Court, and other litigation and a government investigation relating to a former joint-venture arrangement remain matters to monitor.
- Other risks cited include client retention and credit quality, labor and employment claims, self-insurance volatility, acquisitions, competition, government-contract funding, and the ability to maintain cash access. Management stated operating cash flow and borrowing capacity should fund requirements for the next 12 months.
Important facts for investors to verify
- Whether insurance-claim trends stabilize and whether further reserve increases affect earnings.
- Collection and recoverability of the client receivables subject to specific reserves, and any additional bad-debt charges.
- Actual restructuring costs and realized savings compared with the $40 million to $50 million annualized target.
- Westway’s contribution to revenue and margins, and the effect of acquisition-related borrowing on liquidity and covenant headroom.
- Developments in the Augustus, Bucio, and other legal matters, including potential exposure beyond recorded estimates.
- Performance in lower-margin segments and progress converting revenue growth into operating profit.