ABM Industries Inc. — Q1 FY2015 Form 10-Q
Business context and period: ABM provides facility, janitorial, parking, security, energy, and related services, primarily in the United States. This filing covers the three months ended January 31, 2015; comparisons are with the three months ended January 31, 2014. Amounts are in millions except per-share data.
Key financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $1,289.4 | $1,226.5 |
| Gross margin | 9.9% | 9.6% |
| Operating profit | $19.2 | $23.9 |
| Income before taxes | $18.0 | $22.7 |
| Income tax provision (benefit) | $(0.3) | $9.6 |
| Net income | $17.7 | $13.1 |
| Diluted EPS | $0.31 | $0.23 |
| Net cash used in operating activities | $(32.4) | $(38.9) |
Revenue rose 5.1%, reflecting organic growth from new business and expanded client work, plus $24.0 of acquisition-related growth. Operating profit fell 19.7%; operating margin was approximately 1.5%, down from 1.9%. Net income and EPS increased chiefly because the effective tax rate fell to 1.7% from 42.3%, including $4.8 of retroactive federal Work Opportunity Tax Credit benefits and $2.5 of state employment-based credits.
Cash from operations was negative, as is typically the case in ABM’s first quarter. Investing cash use was $3.6, financing provided $38.1, and cash ended the period at $38.8. Capital expenditures were $6.4; dividends paid were $8.9.
Balance sheet and liquidity
At January 31, 2015, cash was $38.8 and total assets were $2,230.9. Line-of-credit borrowings were $362.5, up from $319.8 at October 31, 2014. The $800.0 revolving facility also had $114.3 of standby letters of credit outstanding and up to $323.2 of borrowing capacity, subject to covenants. ABM reported compliance with its credit covenants. Total liabilities were $1,247.3. Insurance claim reserves totaled $343.9.
Material changes and segment trends
- Janitorial revenue increased 4.5% to $666.0 and operating profit rose 15.2% to $34.9.
- Facility Services revenue increased 3.0% to $156.2 and operating profit rose 15.7% to $5.9.
- Parking revenue increased 3.6% to $155.7 and operating profit rose 25.0% to $6.5; reported revenue includes pass-through managed-location amounts.
- Security revenue declined 4.8% to $94.9 and operating profit fell 17.4% to $1.9, reflecting contract losses, reduced client scope, and higher overtime costs.
- Building & Energy Solutions revenue increased 16.9% to $119.4, but operating profit fell 55.6% to $1.2. Management cited acquired-contract startup costs, selling and business-development investment, operational issues, and a customer-dispute settlement.
- Corporate expense increased $10.2 to $32.3, including CEO-departure severance, legal costs, added personnel, and professional fees.
Management said lower payroll costs from one fewer working day, favorable insurance experience, and restructuring savings supported gross margin. Higher SG&A, legal and settlement costs, severance, and certain contract-related costs weighed on operating profit. The company reallocated certain overhead costs among segments and restated prior-period segment figures for comparability.
Outlook, risks, and unusual items
- Management expects positive operating cash flow for fiscal 2015 and believes cash, operating cash flows, and available credit can fund needs for the next 12 months. This is not earnings guidance; the filing provides no full-year revenue or profit forecast.
- ABM estimated a 34.0%–38.0% annual effective tax rate, assuming Congress would not reenact the WOTC for calendar 2015 before October 31, 2015.
- The California Court of Appeal reversed the judgment in the Augustus rest-break class action and vacated the approximately $89.7 judgment and attorneys’ fee award. Plaintiffs could seek California Supreme Court review.
- Accrued probable litigation losses were $3.4, including a $2.3 wage-and-hour settlement accrual; estimated reasonably possible losses were $0–$4.5. ABM cautioned that exposures may exceed these estimates. It also continued cooperating with the DOJ and SEC on an FCPA-related investigation and said potential liability could not be reasonably estimated.
- Insurance reserves depend on actuarial estimates; updated actuarial reports could result in earnings adjustments in the third or fourth quarters of 2015. Other cited risks include labor and employment claims, client retention, cost inflation, government-contract delays, acquisitions, and access to cash and credit.
Important facts for investors to verify
- Whether revenue growth translates into improved operating profit, particularly in Building & Energy Solutions and Security.
- Whether working-capital collection and payment timing support management’s expectation of positive fiscal-year operating cash flow.
- Credit-facility availability, covenant compliance, and the increase in borrowings.
- Final tax-credit treatment and the annual effective tax rate, given the unusually low Q1 rate.
- Developments in the Augustus appeal, other litigation, the FCPA investigation, and insurance-reserve actuarial reviews.