ABM Industries Incorporated — FY2012 Form 10-K
Reporting period: Fiscal year ended October 31, 2012. This is an annual filing, not a standalone quarterly filing; selected fourth-quarter results are noted below. ABM provides janitorial, facility and energy solutions, parking, and security services. Its largest segment, Janitorial, generated 55.7% of annual revenue.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $4.300 billion | $4.247 billion |
| Operating profit | $96.6 million | $117.6 million |
| Gross margin | 10.4% | 11.0% |
| Income from continuing operations | $62.7 million | $68.7 million |
| Net income | $62.6 million | $68.5 million |
| Diluted EPS | $1.14 | $1.27 |
| Cash from operating activities | $150.6 million | $160.0 million |
| Cash and cash equivalents at year-end | $43.5 million | $26.5 million |
| Line-of-credit borrowings at year-end | $215.0 million | $300.0 million |
- Revenue increased 1.3%, but operating profit fell 17.9% and net income fell 8.6%. Management cited competitive pricing, lost or reduced-scope contracts, higher payroll costs, adverse prior-year insurance claim development, and legal costs.
- Working capital was $293.5 million; total assets were $1.869 billion. At October 31, ABM reported $330 million of remaining facility availability, subject to covenants. It was in compliance with its credit covenants.
- Capital expenditures were $28.1 million, dividends paid were $31.3 million, and the company authorized a share repurchase program of up to $50 million; no shares were repurchased in FY2012.
- FY2012 fourth-quarter revenue was $1.090 billion, income from continuing operations was $27.7 million, net income was $27.7 million, and diluted EPS was $0.50. FY2011 fourth-quarter net income was $18.0 million and diluted EPS was $0.33.
Segments and changes versus prior year
- Janitorial: Revenue rose 0.6% to $2.394 billion; operating profit declined 3.3% to $136.0 million, with margin down to 5.7% from 5.9%.
- Facility Solutions: Revenue rose 2.8% to $924.4 million, while operating profit declined 4.3% to $32.0 million. Growth from new building and energy contracts and the Linc acquisition was partly offset by lower government revenue, including Iraq contract terminations.
- Parking: Revenue was nearly flat at $615.1 million; operating profit rose 8.0% to $26.2 million, partly reflecting improved contract margins and termination of unprofitable contracts.
- Security: Revenue rose 4.4% to $365.9 million; operating profit fell 1.7% to $7.8 million.
- ABM renamed its Engineering segment Facility Solutions and continued restructuring around on-site, mobile, and on-demand services. The filing says the realignment would continue in FY2013; it provides no quantified financial guidance.
Outlook, risks, and unusual items
- Management expects its integrated-services strategy and vertical-market expansion to support long-term growth and higher-margin opportunities, while pursuing both acquisitions and organic growth. It cautioned that government award and contract start delays, pricing pressure, and contract losses may continue.
- On November 1, 2012, ABM acquired Air Serv, HHA Services, and Calvert-Jones for stated cash purchase prices of $157.5 million, $34.0 million, and $6.3 million, respectively, subject to adjustments. The acquisitions were funded through the credit facility; ABM borrowed approximately $195 million, reducing availability. Purchase accounting was incomplete at filing.
- A California wage-and-hour case, Augustus, resulted in an $89.7 million judgment against ABM, excluding attorneys’ fees; the company appealed. Management disclosed reasonably possible losses ranging from $0 to $104 million, including the potential Augustus impact, while accrued probable litigation losses totaled $8.0 million. Outcomes remain uncertain.
- ABM voluntarily disclosed an internal investigation concerning possible Foreign Corrupt Practices Act and internal-policy issues involving a foreign entity affiliated with a former Linc joint-venture partner. It is cooperating with DOJ and SEC inquiries and said it could not reasonably estimate any potential liability.
- Insurance reserves totaled $343.8 million, and a $7.3 million increase for prior-year claims was recorded in FY2012. Other key risks include labor and multiemployer pension obligations, government budget constraints, client cancellations, variable-rate debt, and auction-rate securities that are not actively traded. The securities had $17.8 million fair value against $20.0 million original principal; ABM recorded a $0.3 million impairment credit loss in FY2012.
- The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of October 31, 2012.
Most important facts for investors to verify
- Progress and realized margins from the FY2013 organizational realignment, and whether pricing pressure and contract losses persist.
- Final purchase accounting, integration results, and post-acquisition borrowing and covenant headroom for the November 2012 acquisitions.
- Developments in the Augustus appeal, attorneys’ fee claims, and the company’s wider litigation exposure.
- Changes in self-insurance reserves and claims experience, particularly workers’ compensation and general liability.
- Government contract funding, award timing, and exposure to budget reductions; also the status and potential consequences of the FCPA-related inquiry.