ABM Industries Incorporated — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended April 30, 2013. Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2012 periods unless noted.
Business context and reporting period
ABM provides facility services, including janitorial, engineering, parking, security, and building and energy solutions. During FY2013, it reorganized its reporting structure around six segments: Janitorial, Facility Services, Parking, Security, Building & Energy Solutions, and Other. Prior-period segment results were restated. The November 2012 acquisitions of Air Serv, HHA Services, and Calvert-Jones expanded its aviation, healthcare, and energy-services offerings.
Key financial metrics
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Revenue | $1,173.6; up 11.0% | $2,355.7; up 10.5% |
| Operating profit | $33.6; up 78.2% | $52.9; up 44.4% |
| Gross margin | 10.7%, versus 10.3% | 10.2%, unchanged |
| Net income | $19.3, versus $11.7 | $32.7, versus $22.3 |
| Diluted EPS | $0.35, versus $0.21 | $0.59, versus $0.41 |
| Interest expense | $3.0, versus $2.4 | $6.3, versus $5.3 |
| Operating cash flow | Six months: $37.8, versus $55.5 |
For the six-month period, cash used in investing was $196.9, principally including $192.0 net cash paid for acquisitions; financing provided $153.5. Cash and equivalents were $37.9 at April 30, compared with $43.5 at October 31, 2012. Working capital was $345.1, up $51.6 from October 31.
At April 30, line-of-credit borrowings were $384.0, compared with $215.0 at October 31. The $650.0 facility also supported $103.8 of standby letters of credit; reported borrowing capacity was $162.2. The company was in compliance with its credit covenants. Management stated that cash, operating cash flows, borrowing capacity, and capital-market access were expected to meet requirements for the next 12 months, subject to risks and availability.
Dividends declared were $0.15 per share for the quarter and $0.30 per share for the six months. The effective tax rate was 39.2% for the quarter and 33.2% for the six months; the six-month rate reflected a $2.9 tax benefit from reinstated federal employment credits. Excluding discrete items, the estimated FY2013 annual effective tax rate was 39.0%.
Material changes versus prior periods
- Acquisitions contributed $97.7 of second-quarter revenue and $198.0 of first-half revenue. They contributed $3.1 and $5.1 of operating profit, respectively.
- Organic growth in Janitorial, Facility Services, and Security added $29.9 of Q2 revenue and $57.6 for the first half. Management attributed improved operating profit, excluding acquisitions, to organic growth, one fewer working day, and lower legal costs.
- Building & Energy Solutions revenue, excluding HHA and Calvert-Jones, declined $10.6 in Q2 and $28.2 in the first half, mainly from the timing and mix of U.S. Government contracts. Segment operating profit declined 4.5% in Q2 and 15.6% year to date.
- First-half operating cash flow fell $17.7, mainly because of working-capital timing and higher income-tax payments. Average credit-line borrowings rose, contributing to higher interest expense.
- Corporate expenses declined, in part because 2012 legal costs and investigation expenses were lower in the current period. Acquired-business costs, sales initiatives, and restructuring partly offset those reductions.
Outlook, risks, contingencies, and unusual items
Management’s strategy is to expand vertical-market expertise through acquisitions and organic growth while maintaining margins and controlling costs. The company expects its ongoing operational realignment to support growth and higher-margin opportunities, but provided no specific financial guidance. It also noted uncertainty around government budgets, policy, and contract timing.
At April 30, accrued probable litigation losses were $1.4. Management estimated reasonably possible losses at up to $96.4, including $94.2 related to the Augustus wage-and-hour case. A trial court had entered an approximately $89.7 judgment and awarded additional attorney fees; ABM appealed. The filing cautions that outcomes are uncertain and the estimated range is not a maximum exposure. The company also reported an ongoing DOJ and SEC investigation concerning a former joint-venture-related arrangement; potential liability could not be reasonably estimated, though management did not expect a material adverse effect based on known facts.
Other risks include self-insured claims and potential reserve adjustments following actuarial reviews; the company reported $350.7 of insurance claims reserves. Unrecognized tax benefits were $88.8. The filing also identifies risks from short-notice contract cancellations, competition, labor and pension obligations, government procurement and funding, client financial distress, acquisition integration, variable-rate debt, and incidents in airport operations. Interest-rate swaps hedged $180.0 of borrowings; management estimated a hypothetical 1% rate increase would have added $1.2 of first-half interest expense net of swaps.
Important facts for investors to verify
- Whether acquired businesses deliver expected growth and synergies, and how integration affects margins and debt.
- Collection timing and working-capital needs, given lower first-half operating cash flow and higher receivables.
- Remaining credit capacity, covenant headroom, and interest-rate exposure as borrowings remain elevated.
- Developments in the Augustus appeal and other litigation, including possible exposure beyond recorded accruals.
- Government-contract awards and timing, insurance-reserve reviews, and the outcome of tax examinations and the DOJ/SEC matter.