ABM Industries Incorporated — FY2013 Form 10-K
Business context and reporting period. ABM provides janitorial, facility engineering, parking, security, building and energy, and aviation services, primarily in the United States. This annual report covers the fiscal year ended October 31, 2013; fiscal fourth-quarter figures are also summarized below. Effective Q1 2013, ABM reorganized reporting into six segments, with prior segment results recast. Air Serv, HHA, Calvert-Jones, Blackjack, and BEST were acquired during the year.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $4,809.3 million | $4,300.3 million |
| Operating profit | $119.0 million | $96.6 million |
| Net income | $72.9 million | $62.6 million |
| Diluted EPS | $1.30 | $1.14 |
| Operating cash flow | $135.3 million | $150.6 million |
- Revenue rose 11.8%; acquired businesses contributed $408.1 million. Janitorial, Facility Services, and Security generated a combined $119.8 million of additional organic revenue, partly offset by lower Building & Energy Solutions revenue excluding acquisitions.
- Operating profit increased 23.3%. Gross margin edged down to 10.3% from 10.4%; SG&A was 7.2% of revenue versus 7.6%. Higher startup costs on new contracts and a $10.6 million prior-year insurance-reserve adjustment weighed on margins.
- FY2013 Q4 revenue was $1,236.8 million and net income was $24.2 million; diluted EPS was $0.43.
- Operating cash flow declined year over year, primarily due to the timing of client receivable collections. Investing cash outflow was $225.9 million, including $199.3 million, net of cash acquired, for acquisitions. Capital expenditures were $32.6 million.
- At year-end, cash was $32.6 million, current assets $864.6 million, and current liabilities $508.5 million. The company reported $314.9 million drawn on its credit line, $100.6 million in standby letters of credit, and $234.5 million of available borrowing capacity. The $650 million facility was amended after year-end to $800 million and extended to December 2018; ABM reported covenant compliance at year-end.
- Dividends declared were $0.60 per share for FY2013, and $32.9 million was paid. Total assets were $2,119.2 million and stockholders’ equity was $917.5 million. Goodwill was $872.4 million.
Material changes versus the prior period
- Growth reflected both acquisitions and organic gains, but acquisition-related borrowing increased year-end line-of-credit debt from $215.0 million to $314.9 million; interest expense rose 28.9% to $12.9 million.
- Segment operating profit improved notably in Security and Building & Energy Solutions; Janitorial operating profit fell 1.0%, while Parking revenue declined 1.0% but operating profit improved 5.1%.
- Prior-year operating results included $7.8 million of certain legal and settlement fees and a $7.3 million increase in prior-claim insurance reserves; FY2013 included the $10.6 million reserve increase.
Outlook, risks, contingencies, and unusual items
- Management expects long-term earnings growth through organic expansion and strategic acquisitions, with integrated facility solutions and growth in vertical markets. The operating realignment is planned to continue through FY2014; the filing provides no quantified earnings or revenue guidance.
- Management said operating cash flows, cash, credit capacity, and capital-market access should cover requirements for the next 12 months, while cautioning that cash generation and borrowing availability are not assured. Government contract awards and start dates may be delayed; sequestration and appropriation uncertainty could affect government business.
- ABM is exposed to intense price competition, labor and benefit costs, union and multiemployer pension obligations, client contract termination, self-insurance claims, acquisition integration, and variable-rate debt. A hypothetical 1% interest-rate increase was estimated to add $3.0 million to annual interest expense on FY2013 average borrowings, net of swaps.
- The Augustus wage-and-hour class action remained on appeal. ABM disclosed a potential $94.2 million impact for that case within a $1.0 million to $98.1 million range of reasonably possible losses; accrued probable litigation losses were $2.2 million. The company also disclosed an ongoing DOJ/SEC investigation related to a foreign entity associated with a former Linc joint-venture partner; potential liability could not be reasonably estimated.
- Energy-savings guarantees totaled $31.4 million and extend through 2027; ABM said historical losses had not been significant. Auction-rate securities had a $13.0 million carrying value and were classified as noncurrent; auctions had not occurred since 2007. The company reported effective disclosure controls and internal control over financial reporting, with an unqualified auditor opinion.
Important facts for investors to verify
- How much of revenue and operating-profit growth persists after separating acquisition contributions from organic growth, and whether new-contract startup costs normalize.
- Receivables and cash conversion, including the collection timing behind the FY2013 operating-cash-flow decline.
- Debt, credit-line availability and covenant headroom following the December 2013 facility amendment, including exposure to variable interest rates.
- Developments and potential financial exposure in the Augustus appeal, other employment litigation, and the DOJ/SEC investigation.
- Insurance-reserve adequacy and multiemployer pension exposure; the filing notes that a 10% change in projected ultimate self-insured losses would affect FY2013 net income by approximately $23.2 million.