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ABM > SEC Filings for ABM > Form 10-Q on 5-Sep-2013All Recent SEC Filings

Show all filings for ABM INDUSTRIES INC /DE/

Form 10-Q for ABM INDUSTRIES INC /DE/


5-Sep-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to facilitate an understanding of the results of operations and financial condition of ABM Industries Incorporated and its consolidated subsidiaries (hereinafter collectively referred to as "ABM," "we," "us," "our," or the "Company"). This MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and the accompanying notes ("Financial Statements") and our Annual Report on Form 10-K for the year ended October 31, 2012 (the "Annual Report"), which has been filed with the Securities and Exchange Commission ("SEC"). The MD&A may contain forward-looking statements about our business, operations, and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, and intentions. Our future results and financial condition may differ materially from those we currently anticipate. See "Forward-Looking Statements." Unless otherwise noted, all information in the discussion and references to years are based on our fiscal year, which ends on October 31. Our MD&A is comprised of the following sections:

Business Overview

Results of Operations

Liquidity and Capital Resources

Contingencies

Critical Accounting Policies and Estimates

Recent Account Pronouncements

Business Overview

ABM is a leading provider of end-to-end integrated facility solutions services to thousands of commercial, governmental, industrial, institutional, retail, and residential facilities located primarily throughout the United States. Our comprehensive capabilities include expansive facility solutions, energy solutions, commercial cleaning, maintenance and repair, HVAC, electrical, landscaping, parking, and security services, provided through stand-alone or integrated solutions.

Strategy and Outlook

Our strategy includes the expansion of our vertical market expertise in servicing the end-to-end needs of clients in certain industries. We expect to achieve our long-term growth opportunities through strategic acquisitions and through organic growth while maintaining desirable profit margins and keeping overall costs low. Additionally, we continue to assess the impact that the annual federal budget and U.S. Government policy and strategy changes will have on our government clients and our business.

In 2012, we further developed a platform to deliver an end-to-end service model to our clients. As a result, beginning in the first quarter of 2013, we realigned our operational structure to an onsite, mobile, and on-demand market-based structure. This realignment will continue through 2013 and 2014 and should improve our long-term growth prospects and provide higher margin opportunities by giving us the ability to better deliver end-to-end services to clients located in urban, suburban, and rural areas.

On November 1, 2012, we acquired Air Serv Corporation ("Air Serv"), a provider of integrated facility solutions services for airlines and freight companies, and HHA Services, Inc. ("HHA"), a provider of housekeeping, laundry, patient assist, plant maintenance, and food services to hospitals, healthcare systems, long-term care facilities, and retirement communities. The purchase prices for the Air Serv and HHA acquisitions were $162.9 million and $33.7 million, respectively. The Air Serv and HHA acquisitions should allow us to significantly expand our vertical market expertise in servicing the end-to-end needs of airlines, airport authorities, and healthcare service markets.


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2013 Changes in Reportable Segments

In periods prior to the first quarter of 2013, our reportable segments consisted of Janitorial, Parking, Security, and Facility Solutions. Effective in the first quarter of 2013, we revised our reportable segments to align them with the reorganization of our operational structure to an onsite, mobile, and on-demand market-based structure. Our Onsite Services include the Janitorial, Parking, and Security reportable segments and a portion of our prior Facility Solutions segment. As a result, we have separated our previous Facility Solutions reportable segment into two new reportable segments, Facility Services and Building & Energy Solutions. The Building & Energy Solutions measurement of segment operating profit also includes the results of certain investments in unconsolidated affiliates that provide facility solutions primarily to the U.S. Government. Services provided by those affiliates complement services provided by our other business operations included in the Building & Energy Solutions segment. Air Serv is reported in a new segment, Other. Prior period segment results have been restated to conform to the new segment reporting structure.

Our segments and their activities are as follows:

Segment                       Activities
Janitorial                    Provides a wide range of essential janitorial services for
                              clients in a variety of facilities, including commercial
                              office buildings, industrial buildings, retail stores,
                              shopping centers, warehouses, airport terminals, health
                              facilities, educational institutions, stadiums and arenas,
                              and government buildings.

Facility Services             Provides onsite mechanical engineering and technical services
                              and solutions for facilities and infrastructure systems for
                              clients in a variety of facilities, including: schools,
                              universities, shopping malls, museums, commercial
                              infrastructure, airports and other transportation centers,
                              data centers, high technology manufacturing facilities,
                              corporate office buildings, and resorts.

Parking                       Provides parking and transportation services and operates
                              parking lots and garages for clients at many facilities,
                              including office buildings, hotels, medical centers, retail
                              centers, sports and entertainment arenas, educational
                              institutions, municipalities, and airports.

Security                      Provides security services for clients in a wide range of
                              facilities, including Class "A" high rise, commercial,
                              industrial, retail, medical, petro-chemical, and residential
                              facilities. Security services include: staffing of security
                              officers; mobile patrol services; investigative services;
                              electronic monitoring of fire and life safety systems and
                              access control devices; and security consulting services.

Building & Energy Solutions   Provides services related to preventative maintenance,
                              retro-commissioning, mechanical retrofits and upgrades,
                              electric vehicle charging stations, electrical service,
                              systems start-ups, performance testing, and energy audits to
                              a wide variety of clients in both the private and public
                              sectors, including U.S. Government entities.

                              This segment also provides support to U.S. Government
                              entities for specialty service solutions such as leadership
                              development, education and training, language support
                              services, medical support services, and construction
                              management.

                              The Building & Energy Solutions segment also includes our
                              franchised operations under the Linc Network, TEGG,
                              CurrentSAFE, and GreenHomes America brands which provide
                              electrical preventive and predictive maintenance solutions,
                              the recently acquired HHA, and the assets and business of
                              Calvert-Jones Company, Inc. ("Calvert-Jones").

Other                         This segment includes Air Serv which provides integrated
                              facility solutions services for airlines and freight
                              companies at airports primarily in the United States.
                              Services include passenger assistance, wheelchair operations,
                              cabin cleaning, cargo handling, shuttle bus operations,
                              access control, and janitorial services, among others.

Air Serv, headquartered in Atlanta, Georgia, provides integrated facility solutions services for airlines and freight companies at airports primarily in the United States. Air Serv operates in forty-four airports in the United States and six in the United Kingdom. Clients include most domestic air carriers, such as Delta, United, American, US Airways, Jet Blue, and Southwest, as well as airport authorities in certain locations. Most of Air Serv's revenues are derived under long-term contracts that average approximately three years in duration. As a result of the acquisition, we expect to significantly expand our vertical market expertise in servicing the end-to-end needs of airlines and airport authorities.


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Financial and Operating Summary

Revenues increased by $137.5 million and $362.2 million, during the three and nine months ended July 31, 2013, respectively. The increase in revenues was attributed to the following:

The businesses acquired on November 1, 2012, namely Air Serv, HHA, and Calvert-Jones (collectively, the "November Acquisitions"), contributed $105.7 million and $303.8 million of additional revenues during the three and nine months ended July 31, 2013, respectively.

The Janitorial, Facility Services, and Security segments experienced organic growth that contributed additional revenues of $33.1 million and $90.7 million during the three and nine months ended July 31, 2013, respectively.

Those revenue increases were partially offset by:

Sales in the Building & Energy Solutions segment, excluding revenues related to the HHA and Calvert-Jones acquisitions, slightly decreased during the three months ended July 31, 2013 and decreased by $28.5 million during the nine months ended July 31, 2013, as compared to the same periods in the prior year. This decrease was primarily a result of the comparative mix and timing of certain awarded and completed U.S. Government contracts during 2012 and 2013, the impact of which was partially offset by an increase in revenues from new commercial service and maintenance contracts in 2013, including new bundled energy solutions contracts.

Operating profit increased by $5.5 million and $21.8 million, during the three and nine months ended July 31, 2013, respectively. The increase in operating profit was attributed to the following:

The November Acquisitions contribution of $5.1 million and $10.2 million of additional operating profit during the three and nine months ended July 31, 2013, respectively;

Contributions from the organic growth experienced in the Janitorial, Facility Services, and Security segments;

A reduction in legal fees and costs associated with the settlement of certain legal cases in the three and nine months ended July 31, 2012;

Lower payroll and payroll-related expenses as a result of one less working day in the nine months ended July 31, 2013;

partially offset by:

Higher initial costs incurred on new contracts, including higher labor costs, which in the short term have negatively impacted margins.

Net cash provided by operating activities was $84.3 million in the nine months ended July 31, 2013.

Dividends of $24.3 million were paid to shareholders and dividends of $0.45 per common share were declared during the nine months ended July 31, 2013.

As of July 31, 2013, total outstanding borrowings under our line of credit were $348.5 million, and we had up to $197.6 million borrowing capacity under the line of credit.

Insurance

During the three months ended July 31, 2013, our annual actuarial evaluations were performed for the majority of our casualty insurance programs (excluding a portion of the claims existing from certain previously acquired businesses). As a result of these evaluations, it was determined that there were unfavorable developments in certain general liability, automobile liability, and workers' compensation claims for various policy years prior to 2013.

Certain general liability claims related to earlier policy years reflected loss development that was measurably higher than previously estimated. The majority of the adverse impact seen in the general liability program was the result of claim development in two jurisdictions - California and New York. A similar trend was also experienced in our automobile liability program, which was largely attributable to considerable changes in a small population of the automobile liability claim pool.


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In California, a jurisdiction in which we maintain a significant presence, the workers' compensation claim development patterns warranted an unfavorable adjustment to our insurance reserves. In response to California's challenging workers' compensation environment, we undertook several claim expense reduction initiatives to resolve claims at an accelerated pace where feasible. Conversely, the workers' compensation loss patterns in states other than California warranted a favorable adjustment which partially offset the adverse development experienced in California.

After analyzing the historical loss development patterns, comparing the loss development against benchmarks, and applying actuarial projection methods to determine the estimate of ultimate losses, we increased our expected reserves for prior year claims, which resulted in an increase in the related insurance expense of $9.9 million during the nine months ended July 31, 2013 and was recorded as part of Corporate expenses, consistent with prior periods. Insurance reserve adjustments resulting from periodic actuarial evaluations of ultimate losses relating to years prior to 2012 during the nine months ended July 31, 2012 were $9.5 million. During the fourth quarter of 2013, actuarial assessments using recent claim development experience are expected to be completed for several of our remaining insurance programs, which are primarily related to certain previously acquired businesses, and may result in additional expense recognition during the period.


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Results of Operations

Three Months Ended July 31, 2013 Compared with the Three Months Ended July 31, 2012

Consolidated




                                                 Three Months Ended July 31,
($ in thousands)                                    2013               2012              Increase /(Decrease)
Revenues                                       $    1,216,768       $ 1,079,235      $   137,533            12.7%
Expenses
Operating                                           1,095,766           971,628          124,138            12.8%
Gross margin as a % of revenues                           9.9 %            10.0 %           (0.1 )%
Selling, general and administrative                    85,329            79,100            6,229             7.9%
As a % of revenues                                        7.0 %             7.3 %           (0.3 )%
Amortization of intangible assets                       6,975             5,334            1,641            30.8%

Total expenses                                      1,188,070         1,056,062          132,008            12.5%

Operating profit                                       28,698            23,173            5,525            23.8%
Income from unconsolidated affiliates, net              1,596               747              849             NM*
Interest expense                                       (3,335 )          (2,407 )           (928 )          38.6%

Income from continuing operations before
income taxes                                           26,959            21,513            5,446            25.3%
Provision for income taxes                            (10,883 )          (8,887 )         (1,996 )          22.5%

Income from continuing operations                      16,076            12,626            3,450            27.3%
Loss from discontinued operations, net of
taxes                                                      -                (49 )             49         (100.0)%

Net income                                     $       16,076       $    12,577      $     3,499            27.8%

* Not meaningful

Revenues

Revenues increased by $137.5 million, or 12.7%, during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. The increase was primarily related to revenues from the November Acquisitions, which contributed $105.7 million in the third quarter of 2013. The remaining increase in revenues was primarily related to new business and increased scope of work within the Janitorial, Facility Services, and Security segments, which contributed $33.1 million in additional revenues in the third quarter of 2013. Sales in the Building & Energy Solutions segment, excluding revenues related to the HHA and Calvert-Jones acquisitions, slightly decreased as compared to the same period in the prior year. This decrease was primarily a result of the comparative mix and timing of certain awarded and completed U.S. Government contracts during 2012 and 2013, the impact of which was almost entirely offset by an increase in revenues from new commercial service and maintenance contracts in 2013, including new bundled energy solutions contracts.

Operating Expenses

Operating expenses increased by $124.1 million, or 12.8%, during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. The increase in operating expenses was primarily related to the November Acquisitions. As a percentage of revenues, gross margin decreased by 0.1%, to 9.9% in the three months ended July 31, 2013 from 10.0% in the three months ended July 31, 2012. The decrease in gross margin was primarily related to higher initial costs incurred on new contracts, including higher labor costs, which in the short term have negatively impacted margins. This decrease was partially offset by improved margins on certain contracts as a result of increased tag work and the termination of certain lower margin contracts.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased by $6.2 million, or 7.9%, during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. As a percentage of revenues, selling, general and administrative expenses decreased by 0.3%, to 7.0% in the three months ended July 31, 2013 from 7.3% in the three months ended July 31, 2012.


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The increase in selling, general and administrative expenses was primarily related to:

$4.0 million of incremental selling, general and administrative expenses of acquired businesses;

a $4.0 million increase in salary and salary-related expense as a result of investments in new sales and growth initiatives and a benefit received in 2012 to reverse previously recorded share-based compensation expense due to the change in our assessment of the probability of achieving the financial performance targets established in connection with certain performance share grants; and

a $0.8 million increase in costs associated with our rebranding initiative;

partially offset by:

the absence of a $1.8 million settlement paid in the prior year quarter in exchange for a release from certain restrictive covenants in connection with a contract related to a prior divestiture; and

a $0.6 million reduction in legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture.

Amortization of Intangible Assets

Amortization of intangible assets increased by $1.6 million, or 30.8%, during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. The increase was primarily related to the amortization of acquired intangible assets associated with the November Acquisitions.

Income from Unconsolidated Affiliates, Net

Income from unconsolidated affiliates, net, increased by $0.8 million during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. The increase was primarily related to higher equity earnings from certain investments in unconsolidated affiliates that provide facility solutions principally to the U.S. Government.

Interest Expense

Interest expense increased by $0.9 million, or 38.6%, during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. The increase was primarily related to an increase in average borrowings under our line of credit to fund the November Acquisitions. The average outstanding balances under our line of credit were $401.4 million and $283.0 million in the three months ended July 31, 2013 and 2012, respectively.

Provision for Income Taxes

The effective tax rate on income from continuing operations for the three months ended July 31, 2013 and 2012 was 40.4% and 41.3%, respectively. The effective tax rate for the three months ended July 31, 2013 remained relatively consistent with the three months ended July 31, 2012.


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Segment Information

Segment revenues and operating profits for the three months ended July 31, 2013
and 2012 were as follows:



                                                  Three Months Ended July 31,
($ in thousands)                                     2013               2012             Increase /(Decrease)
Revenues
Janitorial                                      $      621,837       $   602,459      $  19,378            3.2%
Facility Services                                      152,751           143,672          9,079            6.3%
Parking                                                154,005           154,980           (975 )        (0.6)%
Security                                                96,203            91,602          4,601            5.0%
Building & Energy Solutions                            104,887            86,231         18,656           21.6%
Other                                                   86,845                -          86,845            NM*
Corporate                                                  240               291            (51 )       (17.5)%

                                                $    1,216,768       $ 1,079,235      $ 137,533           12.7%

Operating profit
Janitorial                                      $       34,400       $    34,850      $    (450 )        (1.3)%
Operating profit as a % of revenues                        5.5 %             5.8 %         (0.3 )%
Facility Services                                        7,029             5,787          1,242           21.5%
Operating profit as a % of revenues                        4.6 %             4.0 %          0.6 %
Parking                                                  8,104             7,768            336            4.3%
Operating profit as a % of revenues                        5.3 %             5.0 %          0.3 %
Security                                                 4,049             2,962          1,087           36.7%
Operating profit as a % of revenues                        4.2 %             3.2 %          1.0 %
Building & Energy Solutions                              6,734             3,689          3,045           82.5%
Operating profit as a % of revenues                        6.4 %             4.3 %          2.1 %
Other                                                    3,776                -           3,776            NM*
Operating profit as a % of revenues                        4.3 %              -             4.3 %
Corporate                                              (33,736 )         (31,192 )       (2,544 )        (8.2)%
Adjustment for income from unconsolidated
affiliates, net included in Building & Energy
Solutions                                               (1,658 )            (691 )         (967 )          NM*

                                                $       28,698       $    23,173      $   5,525           23.8%


* Not meaningful

Janitorial

                                                  Three Months Ended July 31,
($ in thousands)                                     2013               2012             Increase /(Decrease)
Revenues                                        $      621,837       $   602,459      $  19,378            3.2%
Operating profit                                        34,400            34,850           (450 )        (1.3)%
Operating profit as a % of revenues                        5.5 %             5.8 %         (0.3 )%

Janitorial revenues increased by $19.4 million, or 3.2%, during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. The increase was primarily related to additional revenues from new business that exceeded contract losses and increases in the scope of work from existing clients.

Operating profit decreased by $0.5 million, or 1.3%, during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. Operating profit margins decreased by 0.3%, to 5.5% in the three months ended July 31, 2013 from 5.8% in the three months ended July 31, 2012. The decrease in operating profit margins was primarily related to higher initial costs incurred on new contracts, including higher labor costs, which in the short term have negatively impacted margins.


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Facility Services



                                                   Three Months Ended July 31,
($ in thousands)                                    2013                 2012                   Increase
Revenues                                        $     152,751        $     143,672      $     9,079         6.3%
Operating profit                                        7,029                5,787            1,242        21.5%
Operating profit as a % of revenues                       4.6 %                4.0 %            0.6 %

Facility Services revenues increased by $9.1 million, or 6.3%, during the three months ended July 31, 2013, as compared to the three months ended July 31, 2012. . . .

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