ABM Industries Incorporated — FY2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
ABM provides facility services, including janitorial, engineering and maintenance, parking, security, energy solutions, healthcare support, and aviation services. It operates primarily in the United States through six reportable segments. Approximately 118,000 employees worked for the company at year-end; about 59,000 were covered by collective bargaining agreements. No client represented more than 10% of consolidated revenue.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $5,032.8 | $4,809.3 |
| Operating profit | $128.6 | $119.0 |
| Operating margin | 2.6% | 2.5% |
| Net income | $75.6 | $72.9 |
| Diluted EPS | $1.32 | $1.30 |
| Cash from operating activities | $120.7 | $135.3 |
- Revenue grew 4.6%; management attributed $178.3 million of the increase to net new business. Gross margin held at 10.3%. The effective tax rate rose to 39.2% from 35.1%.
- Fourth-quarter revenue was $1,298.9 million and net income was $27.9 million, versus $1,236.8 million and $24.2 million, respectively, in Q4 2013. Diluted EPS was $0.49 versus $0.43.
- FY2014 segment revenue and operating profit: Janitorial $2,583.2 and $144.4; Facility Services $599.3 and $26.9; Parking $616.1 and $30.9; Security $383.1 and $12.5; Building & Energy Solutions $483.8 and $23.1; Other $367.3 and $12.2. Corporate expenses were $114.8.
- Year-end cash was $36.7; total assets were $2,192.9 and total liabilities were $1,224.1. Line-of-credit borrowings were $319.8, with stated borrowing capacity of up to $365.3, subject to covenants. ABM reported compliance with all covenants.
- Capital spending was $37.4; net cash used in investing was $82.0, including $48.2 for acquisitions. The company paid $34.6 in dividends and repurchased $20.0 of shares. Annual dividends declared were $0.62 per share.
Material changes versus FY2013
- Operating profit increased 8.1%, while net income rose 3.7%; operating cash flow declined $14.6, primarily due to higher cash taxes and payroll-payment timing.
- Building & Energy Solutions revenue grew 20.5% and operating profit grew 51.0%; Other revenue increased 12.5%. Facility Services revenue declined 1.7%, and Security operating profit declined 3.8%.
- FY2014 acquisitions included GBM, Airco, and Alpha, with stated purchase prices of $22.7 million, $17.8 million, and $12.2 million, respectively. Acquisition cash spending was substantially lower than in FY2013.
- ABM said its Onsite Services realignment had generated $10.7 million in savings since 2013, including $7.9 million in FY2014. Corporate expenses nevertheless increased 9.1%.
- Actuarial reviews reduced expected reserves for FY2014 claims by $6.2 million but increased reserves for prior-year claims by $11.5 million. The prior-year increase was recorded in Corporate expenses.
Outlook, risks, contingencies, and unusual items
- Management expects long-term earnings growth through organic growth and strategic acquisitions, while maintaining margins and managing costs. It believes operating cash flow, cash, credit capacity, and capital-market access can fund requirements for the next 12 months; this is not quantified earnings guidance.
- Management cited delays, early terminations, and award protests in U.S. Government contracting. Government appropriations and contract timing may affect results. Healthcare reform-related employer costs were expected to begin affecting large employers in 2015.
- Key risks include competitive bidding and pricing pressure, short-notice contract cancellations, labor availability and collective bargaining, wage and insurance cost inflation, self-insurance reserve volatility, acquisition integration, client collections, weather, cybersecurity, and variable-rate debt.
- The Augustus California rest-break class action had an approximately $89.7 million judgment, with an additional $4.5 million attorney-fee award included in the company’s estimated reasonably possible loss range. ABM appealed; the court’s decision was expected by January 19, 2015. The company estimated reasonably possible losses of up to $98.8 million in total, including $94.2 million related to Augustus. Management stated it expected to prevail but noted litigation is unpredictable.
- ABM disclosed an ongoing government investigation following its voluntary disclosure concerning a foreign entity affiliated with a former Linc joint-venture partner. The potential liability could not be reasonably estimated; the company stated it did not expect a material adverse effect based on known facts.
- Interest-rate exposure: a hypothetical 1 percentage-point rate increase would have added about $2.0 million of FY2014 interest expense, net of swaps. The company had $155.0 million of interest-rate swaps outstanding.
- KPMG gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Progress and realized savings from the restructuring, and whether new-business margins normalize as expected.
- Resolution and financial exposure of the Augustus appeal, other employment litigation, and the FCPA-related government investigation.
- Future development of self-insurance claims, particularly prior-year California claims; recorded insurance claims totaled $349.7 million, with $66.4 million of insurance recoverables.
- Government contract funding and award timing, as well as the extent of healthcare-reform and labor-cost pass-through to clients.
- Credit-facility availability and covenant headroom, given $319.8 million of borrowings and variable interest rates.
- Whether operating cash flow recovers from its FY2014 decline and supports acquisitions, capital spending, dividends, and share repurchases.