ABM Industries Inc. 10-K Summary (Fiscal Year Ended Oct 31, 2009)
Business Context and Reporting Period
Company: ABM Industries Incorporated (ABM)
Reporting Period: Fiscal year ended October 31, 2009
Business Overview: ABM is a leading provider of facility services in the United States, operating through four segments: Janitorial, Parking, Security, and Engineering. The company employs approximately 91,000 people and serves thousands of commercial, industrial, institutional, and retail clients.
Key Events:
- Acquisitions: Acquired assets of Control Building Services, Control Engineering Services, and TTF, Inc. in May 2009 for $15.1 million to expand Northeast operations.
- Discontinued Operations: Completed the sale of the Lighting segment in October 2008; results are classified as discontinued operations.
- OneSource Integration: Continued integration of OneSource Services, Inc. (acquired Nov 2007) into the Janitorial segment.
Key Financial Metrics
| Metric (in thousands) | 2009 | 2008 |
|---|---|---|
| Revenues | $3,481,823 | $3,623,590 |
| Operating Profit | $92,107 | $99,509 |
| Net Income | $54,293 | $45,434 |
| Diluted EPS | $1.05 | $0.88 |
| Operating Cash Flow | $140,871 | $68,307 |
| Total Assets | $1,521,153 | $1,575,944 |
| Debt (Line of Credit) | $172,500 | $230,000 |
| Working Capital | $278,303 | $273,980 |
Margins: Gross margin was 10.5% in 2009 compared to 11.0% in 2008. Operating margin was approximately 2.6% in 2009 versus 2.7% in 2008.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 3.9% to $3.48 billion, driven by the weak economic climate, reduced client discretionary spending (tag work), contract price compression, and the loss of some client contracts. Approximately $22.8 million of the decline was due to reduced reimbursable expenses in managed parking facilities.
- Net Income Increase: Despite lower revenues, Net Income increased 19.5% to $54.3 million. This was primarily due to:
- Improved operating profit in all segments due to cost control and strategic reduction of low-margin contracts.
- A $9.6 million legal settlement received from a former third-party administrator regarding workers' compensation claims.
- Lower interest expense ($5.9 million vs. $15.2 million) due to reduced debt balances.
- A $22.8 million favorable adjustment to self-insurance reserves in 2008 was not repeated; instead, 2009 saw a $9.4 million unfavorable adjustment (increase in reserves).
- Cash Flow Improvement: Operating cash flow more than doubled to $140.9 million, driven by improved collections of accounts receivable.
- Discontinued Operations: Recorded a loss of $1.2 million in 2009 compared to a $7.3 million loss in 2008 (which included a $4.5 million goodwill impairment and a $3.5 million loss on the sale of the Lighting segment).
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Management expects to remain competitive through cost control strategies and by exiting low-margin or high-risk client relationships.
- The company is aggressively seeking acquisitions domestically and internationally.
- Weakness in the U.S. economic climate is expected to continue impacting demand for facility services.
Unusual Items:
- Self-Insurance Reserves: A $9.4 million charge was recorded in 2009 to increase reserves due to unfavorable claim developments, particularly in California workers' compensation. This contrasts with a $22.8 million benefit in 2008.
- Auction Rate Securities: Recorded a $1.6 million credit loss on other-than-temporary impairment of auction rate securities.
- Legal Settlement: Received a $9.6 million net settlement from a former claims administrator.
Risks and Contingencies:
- Insurance Costs: High deductibles and self-insurance exposure create volatility. Changes in claim frequency or severity could materially impact results.
- Labor: Approximately 42% of employees are subject to collective bargaining agreements. Labor disputes or wage increases could impact profitability.
- Litigation: The company is a defendant in several class action lawsuits regarding wage-and-hour laws. Accruals for probable losses were $4.9 million as of Oct 31, 2009.
- Liquidity: $25.0 million of investments in auction rate securities are not actively traded. $118.6 million in standby letters of credit and $42.5 million in insurance deposits are restricted and unavailable for operations.
Key Facts for Investor Verification
- Self-Insurance Reserve Volatility: Verify the sustainability of the $9.4 million reserve increase and the potential for future volatility in operating results due to actuarial judgments on workers' compensation claims.
- Revenue Quality: Assess the impact of the economic downturn on "tag work" (higher margin discretionary services) and the company's ability to pass cost increases to clients.
- Debt Covenants: Confirm continued compliance with the $450 million line of credit covenants, specifically the fixed charge coverage ratio and leverage ratio.
- Legal Exposure: Monitor the status of pending wage-and-hour class action lawsuits and the adequacy of the $4.9 million accrual.
- Auction Rate Securities: Evaluate the liquidity risk and potential for further impairment charges on the $25 million portfolio of auction rate securities.