ABM Industries Incorporated — FY2011 Form 10-K
Business context and reporting period. ABM provides janitorial, engineering, parking and security services, primarily in the United States. This filing covers the fiscal year ended October 31, 2011; quarterly figures below are for fiscal Q4. The company had approximately 96,000 employees. Comparability is affected by acquisitions, particularly Linc, acquired December 1, 2010.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $4,246.8 million | $3,495.7 million |
| Operating profit | $117.6 million | $108.8 million |
| Income from continuing operations | $68.7 million | $63.9 million |
| Net income | $68.5 million | $64.1 million |
| Diluted EPS | $1.27 | $1.21 |
| Gross margin | 11.0% | 10.3% |
| Operating cash flow | $160.0 million | $149.9 million |
Revenue rose 21.5%, but $724.7 million of the increase came from Linc, Diversco and L&R acquisitions. Operating margin was approximately 2.8%, versus 3.1% in FY2010. Net income increased 6.8%; higher interest expense and corporate costs tempered operating gains. The effective tax rate fell to 35.0% from 38.6%, including a $4.7 million benefit from remeasuring certain unrecognized tax benefits.
Fiscal Q4: Revenue was $1,081.3 million versus $901.4 million a year earlier; gross profit was $121.8 million versus $97.7 million. Continuing-operations income was $18.2 million versus $21.4 million, and net income was $18.0 million versus $21.8 million. Diluted EPS was $0.33 versus $0.41.
At year-end, cash was $26.5 million, working capital $290.6 million, total assets $1,879.6 million and total liabilities $1,083.7 million. Line-of-credit borrowings were $300.0 million; the $650 million revolving facility also supported $96.8 million of standby letters of credit, leaving $253.2 million available. The facility matures September 2016. Management reported covenant compliance and expected operating cash and available facility capacity to meet foreseeable needs. Dividends declared were $0.56 per share, up from $0.54.
Material changes versus the prior comparable period
- Engineering revenue increased 135.1% to $899.4 million, principally from Linc, which contributed $512.9 million of revenue and $11.1 million of operating profit.
- Parking revenue rose 31.2%, largely due to L&R; Janitorial revenue increased 3.2%, while Security revenue increased 4.2%.
- Interest expense climbed to $15.8 million from $4.6 million as average borrowings rose to $369.1 million from $156.7 million, primarily to finance Linc.
- Investing cash outflow increased to $307.4 million, including $291.0 million of net acquisition payments. Goodwill increased to $750.9 million, including $156.1 million related to Linc.
- Unrestricted cash declined by $13.0 million despite higher operating cash flow, reflecting acquisition spending and other cash uses.
Outlook, management commentary, risks and unusual items
- Management gave no specific numerical earnings or revenue guidance. It intended to pursue organic growth and acquisitions while maintaining a target leverage ratio, and to compete through cost control, technology and expansion in selected markets.
- Management reported weaker-than-expected economic conditions in the second half of 2011, client cost-containment and price compression, particularly in Janitorial, and higher unemployment-insurance and fuel costs. Delayed federal appropriations postponed some government contract awards and project start dates into 2012.
- Key risks include intense price competition, short-notice contract termination rights, labor and benefit cost increases, self-insurance claim volatility, government funding delays, acquisition integration and leverage, and sensitivity of parking demand to travel and discretionary spending.
- ABM self-insures significant workers’ compensation and liability risks, generally with $0.5–$1.0 million deductibles per occurrence, and carries $341.4 million of insurance-claim liabilities. Multiemployer plan contributions were $63.2 million in FY2011; potential withdrawal or unfunded-plan exposure is a stated risk.
- The company held auction-rate securities valued at $15.7 million against $20.0 million original principal; auctions had not occurred since August 2007. The investments were classified as long-term, and valuation relied on unobservable inputs. No additional impairment was identified in FY2011.
- Accrued probable litigation losses were $5.6 million; management estimated up to $13.2 million for probable and reasonably possible matters that could be estimated. A proposed Diaz settlement anticipated approximately $2.9 million, with a $4.7 million maximum. Several wage-and-hour cases remained pending, including Khadera, scheduled for trial in March 2012.
- ABM disclosed an internal investigation into possible Foreign Corrupt Practices Act and policy compliance issues involving a foreign entity affiliated with a Linc joint-venture partner. ABM terminated the arrangement and voluntarily disclosed findings to the DOJ and SEC; potential liability could not be reasonably estimated.
- Management identified possible future goodwill impairment in Security: estimated fair value exceeded carrying value by as little as 18%. The filing also reported $96.0 million of unrecognized tax benefits and $24.4 million of energy-savings guarantees extending through 2026.
Most important facts for investors to verify
- How much of FY2011 growth and operating profit is recurring and organic, versus acquisition-driven, and whether Linc integration realizes expected benefits.
- Whether Janitorial pricing pressure and government contract delays persist, and how they affect margins and cash collections.
- Debt reduction, variable-rate exposure and facility covenant headroom; a hypothetical 1% rate increase was estimated to add $3.1 million of FY2011 interest expense after swaps.
- Developments in wage-and-hour litigation and the FCPA investigation, including any revised loss estimates or regulatory outcomes.
- Changes in self-insurance reserves, Security goodwill valuation, auction-rate security recoverability and the realizability or settlement of tax positions.