Business context and reporting period
ABM Industries Incorporated provides janitorial, parking, security and engineering services, primarily in the United States. This Form 10-K covers the fiscal year ended October 31, 2010; it is an annual report, not a standalone quarterly filing. Unless noted otherwise, financial amounts below are in U.S. dollars.
ABM had approximately 96,000 employees. Janitorial generated 66.9% of revenue and 73.0% of segment operating profit before Corporate expense.
Key financial metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $3,495.7 million | $3,481.8 million |
| Operating profit | $108.8 million | $92.1 million |
| Income from continuing operations | $63.9 million | $55.5 million |
| Net income | $64.1 million | $54.3 million |
| Diluted EPS | $1.21 | $1.05 |
| Operating cash flow | $149.9 million | $140.9 million |
| Capital expenditures | $23.9 million | $18.6 million |
| Dividends declared per share | $0.54 | $0.52 |
Operating margin was approximately 3.1% (versus 2.6% in 2009); gross margin was 10.3% versus 10.5%. Net margin was approximately 1.8%. Fourth-quarter revenue was $901.4 million, continuing-operations income $21.4 million, net income $21.8 million and diluted EPS $0.41.
At October 31, 2010, cash and cash equivalents were $39.4 million, working capital $274.9 million, total assets $1,548.7 million and total liabilities $809.6 million. Current assets were $608.8 million and current liabilities $333.9 million. Line-of-credit borrowings were $140.5 million; the company also had $100.8 million of standby letters of credit and $112.5 million of surety bonds. Interest expense was $4.6 million. The filing reports no conventional long-term debt balance separate from the line of credit.
Material changes versus the prior comparable period
- Revenue increased 0.4% reported, but declined 0.8% excluding the L&R and Diversco acquisitions, which contributed approximately $43 million of revenue. Contract losses, reduced client services, pricing pressure and lower janitorial tag work continued to weigh on results.
- Operating profit rose 18.2% and net income rose 18.1%. Lower information-technology and corporate costs, cost controls, improved Parking and Engineering results, and a smaller increase in prior-year insurance reserves supported earnings. Results also reflected the absence of a $9.6 million legal-settlement gain recorded in 2009 and a $5.8 million Morales litigation settlement in 2010.
- By segment, Janitorial revenue declined 1.9% while operating profit increased 0.8%; Parking revenue increased 2.6% and operating profit 12.1%; Security revenue increased 0.5% while operating profit declined 8.9%; Engineering revenue increased 14.8% and operating profit 11.7%.
- Cash from operations increased to $149.9 million. Investing cash outflow rose to $87.9 million, principally reflecting $62.3 million paid for the L&R and Diversco acquisitions, net of cash acquired. Financing cash outflow was $56.7 million.
Outlook, risks, contingencies and unusual items
Management emphasized acquisition integration, continued cost control, retaining clients at acceptable margins, passing through cost increases and pursuing organic and acquired growth. It did not provide numerical earnings or revenue guidance in the supplied filing text.
- Subsequent acquisition: On December 1, 2010, after fiscal year-end, ABM acquired The Linc Group for approximately $301 million, subject to adjustments. Linc reported approximately $579 million in annual revenue and 3,000 employees; its results are not included in FY 2010. ABM replaced its old credit facility with a $650 million five-year facility in connection with the transaction. The company reported covenant compliance as of November 30, 2010 and expected continued compliance; post-acquisition debt outstanding is not clearly stated in the filing excerpt.
- Acquisition execution: Management cited integration, retention, systems and controls, unexpected liabilities, increased indebtedness, and Linc’s government, international and foreign-currency exposures as risks.
- Operating and labor risks: Competitive bidding and contracts terminable on relatively short notice expose ABM to pricing pressure and client losses. Labor costs, union negotiations, labor availability, healthcare reform, and the ability to pass through insurance and other cost increases may affect margins.
- Insurance and litigation: ABM self-insures significant workers’ compensation, general liability, automobile and property risks, making results sensitive to actuarial reserve estimates and claims developments. Prior-year self-insurance reserves increased by $1.2 million in 2010, versus $9.4 million in 2009. The company reported $4.2 million accrued for probable legal losses; multiple wage-and-hour cases remained pending. The Morales case was settled for $5.8 million and dismissed in September 2010.
- Other exposures: $25 million original principal of auction-rate securities remained illiquid and was valued at $20.2 million; auctions had not occurred since August 2007. Unrecognized tax benefits were $101.7 million, with settlement timing and cash impact uncertain. Multi-employer pension plans may give rise to material liabilities; 2010 contributions were $58.2 million.
- Reporting and controls: The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. A fourth-quarter correction increased insurance-related other assets by approximately $1.0 million net of tax for immaterial prior-period errors.
Important facts for investors to verify
- Whether reported revenue and earnings growth persists without acquisition contributions, particularly given continuing Janitorial pressure and Security margin compression.
- The financing terms, borrowings, covenant headroom and integration outcomes following the $301 million Linc acquisition.
- Developments in self-insurance claims and reserve estimates, wage-and-hour litigation, and the $101.7 million of unrecognized tax benefits.
- The recoverability and eventual liquidity of auction-rate securities, and the company’s capacity to sustain dividends while funding acquisitions and other commitments.