ABM Industries Incorporated — Q3 FY2010 Form 10-Q
Reporting period: Three and nine months ended July 31, 2010; fiscal year ends October 31. Figures below are in millions of dollars unless stated otherwise. Comparisons are with the corresponding 2009 periods.
Business context and financial results
ABM provides janitorial, parking, security, and engineering services, primarily in the United States. Its labor-intensive contract businesses are exposed to client spending, contract renewals, pricing pressure, and labor and insurance costs.
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Revenue | $869.0, down 0.2% from $870.6 | $2,594.4, down 0.7% from $2,613.8 |
| Operating profit | $35.3, up 72.3% from $20.5 | $73.1, up 5.7% from $69.1 |
| Income from continuing operations | $21.0, up 69.1% from $12.4 | $42.4, up 5.5% from $40.2 |
| Net income | $21.0 vs. $12.3; diluted EPS $0.40 vs. $0.24 | $42.3 vs. $39.3; diluted EPS $0.80 vs. $0.76 |
| Gross margin | 10.7% vs. 10.1% | 10.2% vs. 10.6% |
For the nine-month period, cash provided by continuing operating activities was $73.0; cash from all operating activities, including discontinued operations, was $80.3, compared with $76.5 a year earlier. Investing activities used $47.9, including acquisition spending, and financing activities used $33.6. Cash ended at $32.9, down $1.3 since October 31, 2009.
At July 31, 2010, working capital was $281.5. The company had $150.0 drawn on its $450.0 credit facility, $103.8 of standby letters of credit, and up to $196.2 of available credit. Total liabilities were $811.9. The facility expires November 2012; ABM reported covenant compliance and expected to remain compliant.
Changes versus the prior comparable period
- Quarterly revenue was nearly flat. Janitorial revenue fell 2.0%, while Engineering revenue rose 14.2%; Engineering growth reflected new clients and expanded services.
- For the first nine months, Janitorial revenue declined 2.9%, while Engineering revenue increased 17.4%. Parking and Security revenues also declined modestly. Segment operating profit increased in Parking and Engineering, declined slightly in Janitorial, and fell 27.4% in Security.
- Operating profit improvement reflected lower costs and favorable comparisons, including one fewer working day in the quarter, absence of a $3.5 prior-year self-insurance reserve adjustment, and a $3.4 reversal of previously recorded share-based compensation expense after performance targets were deemed no longer probable.
- Nine-month results also benefited from lower information-technology and interest costs and lower auction-rate-security impairment charges. Comparisons were partly offset by the absence of a $9.6 prior-year legal settlement gain and higher litigation accruals.
- The effective tax rate rose to 38.6% for the quarter from 29.0%, and to 38.9% for the nine months from 36.3%; prior-year rates included nonrecurring tax benefits.
Outlook, commentary, risks, and unusual items
- Management said future performance depends on retaining clients at desired margins, passing through cost increases, and controlling costs. It planned continued cost control, selective exit from high-risk or low-margin arrangements, and pursuit of organic growth and acquisitions. No specific earnings or revenue guidance was provided.
- Management attributed ongoing revenue pressure mainly to earlier client losses, reduced service scope, price compression, and lower janitorial “tag” work. It cited Engineering growth as a partial offset.
- ABM acquired Diversco in June 2010 for approximately $30.3 cash after a working-capital adjustment. Diversco contributed $6.9 in revenue and $0.3 in earnings in the reported period; purchase accounting remained preliminary.
- The $5.8 Morales case settlement was accrued, subject to court approval expected in Q4 2010. Total accruals for probable losses were $10.8. The company also faced wage-and-hour class actions; outcomes could adversely affect results.
- Self-insurance reserves were based on the most recent actuarial report; a further report was expected in Q4 and could result in an earnings adjustment. Insurance claim liabilities included $266.6 classified as non-current.
- ABM held auction rate securities with $25.0 original principal and $19.6 estimated fair value. Auctions had not occurred since August 2007; the securities were classified as long-term. Further fair-value declines or impairment were possible.
- Unrecognized tax benefits were $102.4, including $2.0 recorded as a current liability; tax examinations were ongoing. The filing also identified health-care reform costs, labor and client-retention risks, competition, economic weakness, acquisition execution, and interest-rate and credit-market exposure.
Important facts for investors to verify
- How much of the reported profit increase reflects sustainable operations versus the share-based compensation reversal, fewer workdays, and other prior-period comparisons.
- Whether Engineering growth and cost controls can offset continuing Janitorial and Security pressure, including pricing and service-scope reductions.
- The outcome and final approval of the Morales settlement, other employment litigation, and the Q4 self-insurance actuarial review.
- Collection and liquidity implications of receivables, restricted insurance deposits, standby letters of credit, and the remaining credit-facility availability.
- The valuation and recoverability of auction rate securities, and final purchase accounting for Diversco.