ABM Industries Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended January 31, 2013. ABM provides integrated facility services, including janitorial, engineering, parking, security, and building and energy solutions, primarily in the United States. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where applicable.
Financial performance
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,182.1 million | $1,073.8 million | +10.1% |
| Operating profit | $19.3 million | $17.8 million | +8.5% |
| Net income | $13.4 million | $10.6 million | +25.9% |
| Diluted EPS | $0.24 | $0.20 | +$0.04 |
| Gross margin | 9.7% | 10.0% | -0.3 percentage points |
| Cash from operating activities | $(11.5) million | $12.0 million provided | $(23.5) million |
Revenue growth was driven largely by the November 1, 2012 acquisitions, which contributed $100.4 million in revenue. New business and expanded client work added $27.7 million, partly offset by a $17.6 million decline in Building & Energy Solutions excluding acquired businesses. Lower operating margin reflected, in part, a prior-year $2.7 million sales-allowance reserve benefit. Operating cash use was attributed mainly to timing of vendor and accrued-liability payments; management said first-quarter cash flow is typically lower than in later quarters.
Liquidity, debt and cash flows
At January 31, 2013, cash was $36.4 million, working capital was $361.3 million, and the company had $423.0 million outstanding on its $650 million revolving credit facility, compared with $215.0 million outstanding at October 31, 2012. Remaining borrowing capacity was $123.0 million, subject to covenants; $104.0 million of standby letters of credit was also outstanding under the facility. ABM reported compliance with its covenants. Management believed operating cash flow, cash, available credit and capital-market access would fund requirements for the next 12 months, while cautioning that cash generation and borrowing availability are not assured.
Investing cash use was $191.8 million, principally $187.8 million paid net of cash acquired for the November acquisitions. Financing provided $196.3 million, largely through net credit-facility borrowings. Interest expense increased 16.8% to $3.3 million, primarily because average line-of-credit borrowings rose to $447.4 million from $312.1 million.
Material changes, outlook and risks
- ABM acquired Air Serv, HHA Services and Calvert-Jones on November 1, 2012, for stated cash consideration of approximately $199.3 million combined; purchase-price allocations remained preliminary. Air Serv contributed $84.0 million revenue and $2.0 million operating profit in the quarter. Acquisition-related integration and anticipated synergies remain execution considerations.
- ABM reorganized reporting around an onsite, mobile and on-demand structure, creating Facility Services, Building & Energy Solutions and Other segments. Management said the restructuring would continue through 2013 and expects the strategy to support long-term growth and higher-margin opportunities; no specific financial guidance was provided.
- Management expects a 39.0% annual effective tax rate excluding discrete items. The reported quarterly rate was 22.2%, versus 41.2% a year earlier, mainly due to $2.9 million of retroactively reinstated federal employment-based tax credits.
- Litigation is a significant contingency. ABM accrued $1.7 million for probable losses and estimated reasonably possible losses at $0–$97.7 million, including $94.2 million related to the Augustus rest-break case. A California court entered an approximately $89.7 million judgment against the company and awarded fees from the common fund; it also reduced a separate fee request against ABM to approximately $4.5 million. ABM appealed and disputed the rulings. The company warned outcomes could materially affect financial position or cash flows.
- Insurance claims reserves totaled $353.5 million. Management said updated actuarial reports expected later in fiscal 2013 could result in earnings adjustments. Other risks include variable-rate debt, client contract cancelability, labor and employment claims, government-contract timing and appropriations, and the ongoing government investigation concerning potential Foreign Corrupt Practices Act matters; ABM said it could not reasonably estimate any liability from that investigation.
- Auction-rate securities were carried at $17.8 million at quarter-end, against $20.0 million original principal; one $5.0 million security was redeemed at par on February 8, 2013, after quarter-end.
Investor facts to verify
- Whether acquired businesses deliver expected integration savings and growth, and how final purchase-price allocations affect goodwill and amortization.
- Cash conversion and working-capital trends, particularly receivable collection and vendor-payment timing.
- Debt, borrowing capacity and covenant headroom as acquisition financing increases interest-rate exposure.
- Developments in the Augustus appeal and other litigation, including any changes to estimated exposure.
- Whether government-contract activity and segment margins recover, especially in Building & Energy Solutions.