ABM Industries Incorporated — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended July 31, 2012; fiscal year ends October 31. Results are unaudited. Amounts below are in millions of dollars, except per-share data.
Business context and reporting period
ABM provides integrated facilities services, including janitorial, facility solutions, parking and security, primarily in the United States. It renamed its Engineering segment Facility Solutions during the period. The quarter included the TEGG and CurrentSAFE acquisition, effective May 1, 2012, which added electrical preventive and predictive maintenance services.
Financial performance and liquidity
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $1,079.2 | $1,076.2 | $3,210.3 | $3,165.5 |
| Operating profit | $23.2 | $40.7 | $59.8 | $84.1 |
| Operating margin | 2.1% | 3.8% | 1.9% | 2.7% |
| Income from continuing operations | $12.6 | $27.9 | $35.0 | $50.5 |
| Net income | $12.6 | $27.9 | $34.9 | $50.5 |
| Diluted EPS | $0.23 | $0.51 | $0.64 | $0.93 |
- Operating expenses rose faster than revenue; gross margin fell from 11.5% to 10.0% in the quarter and from 10.9% to 10.1% year to date. SG&A was 7.3% of quarterly revenue versus 7.1%; year-to-date SG&A was 7.7% in both periods.
- Continuing operating cash flow was $82.2 million for the nine months, versus $82.6 million; total operating cash flow was $83.8 million versus $84.8 million. Capital expenditures were $23.8 million. Cash ended at $21.7 million, down from $26.5 million at October 31, 2011.
- Working capital was $300.1 million, up $9.5 million from fiscal year-end. The $650 million credit facility had $252.0 million of cash borrowings, $96.7 million of standby letters of credit, and $301.3 million available credit. ABM reported compliance with covenants. Borrowings were $300.0 million at October 31, 2011.
- Total assets were $1,886.9 million and total liabilities $1,061.4 million at July 31, 2012. Interest expense declined to $2.4 million for the quarter and $7.7 million year to date, primarily reflecting lower average borrowings and rates.
Material changes versus the prior comparable period
- Quarterly revenue increased 0.3%, but operating profit fell 43.1% and net income fell 54.9%. Year-to-date revenue rose 1.4%, while operating profit declined 28.9% and net income declined 30.8%.
- Management attributed weaker profitability to higher self-insurance and payroll costs, price compression and contract losses, legal costs, and reduced government revenue following termination of certain Iraq contracts. It also cited higher unemployment insurance costs year to date.
- Quarterly segment revenue rose in Janitorial, Parking, and Security, but fell 2.7% in Facility Solutions. Year-to-date Facility Solutions revenue grew 4.3%, partly reflecting acquisition timing and new ABES contracts. Parking operating profit improved; Janitorial and Facility Solutions operating profit declined.
- The effective tax rate was 41.3% for the quarter and 38.8% year to date, compared with 26.1% and 32.2%. The 2011 periods benefited from a $4.7 million tax benefit; 2012 rates also reflected expiration of employment-based tax credits.
Outlook, commentary, risks and unusual items
- ABM expects to pursue organic growth and domestic and international acquisitions, and says future growth and profitability depend on client retention at desirable margins, successful acquisitions, and cost control. No quantified earnings or revenue guidance is provided.
- Management described a weaker-than-expected economy, price compression and client contract losses. Government contract award and start-date delays, early termination, and changing federal budgets or priorities may pressure results. ABM said bid activity remained active.
- Actuarial reviews increased self-insurance reserves for prior-year claims. The note reports a $9.7 million increase for the quarter; MD&A reports $9.5 million. Management said remaining actuarial reviews in Q4 could result in further earnings adjustments.
- In the Augustus employment class action, a California court entered an approximately $89.7 million judgment on July 31, excluding plaintiffs’ counsel fees. ABM disputes the decision and intends to appeal. The amount is included in the estimated $0–$92.3 million range of reasonably possible litigation losses; $6.9 million was accrued for probable litigation losses overall.
- ABM disclosed a continuing internal investigation into possible Foreign Corrupt Practices Act and policy compliance matters involving a former Linc joint-venture affiliate. It voluntarily disclosed findings to the DOJ and SEC, but cannot reasonably estimate potential liability. Management did not believe, based on facts then known, that the matter would materially adversely affect the company.
- Auction rate securities had a carrying fair value of $16.7 million and remained illiquid; auctions had not occurred since 2007. ABM recorded a $0.3 million credit impairment in the nine-month period and noted that further fair-value declines or impairment were possible.
- Unrecognized tax benefits totaled $96.7 million; ABM said a decrease of up to approximately $8.7 million was reasonably possible over the next 12 months. The company was under federal and multiple state tax examinations.
Important facts for investors to verify
- Progress and financial impact of the Augustus appeal, including any attorneys’ fees and potential changes in litigation exposure.
- Results of the remaining self-insurance actuarial reviews and reconciliation of the $9.7 million note disclosure with the $9.5 million MD&A figure.
- Developments in the FCPA-related investigation, any potential liability, and related compliance-control remediation.
- Whether government contract delays, Iraq contract terminations, price compression, and labor-cost increases persist or ease.
- Cash conversion, receivable collections, borrowing availability, covenant headroom, and liquidity needs as claims, taxes, and other obligations are paid.
- Valuation and recovery prospects for auction rate securities, as well as the outcome of tax examinations and possible realization of unrecognized tax benefits.