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ABM > SEC Filings for ABM > Form 10-K on 18-Dec-2013All Recent SEC Filings

Show all filings for ABM INDUSTRIES INC /DE/

Form 10-K for ABM INDUSTRIES INC /DE/


18-Dec-2013

Annual Report


ITEM 7. 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 consolidated financial statements and the accompanying notes ("Financial Statements") contained in Item 8, "Financial Statements and Supplementary Data." This 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 the "Forward-Looking Statements" section and Item 1A., "Risk Factors," in this report. 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

Environmental Matters

Effect of Inflation

Critical Accounting Policies and Estimates

Recent Accounting Pronouncements

Business Overview

ABM is a leading provider of end-to-end integrated facility solutions services to thousands of commercial, industrial, institutional, retail, residential, and governmental 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

We are making investments in technology, human capital, and acquisitions, as well as other areas, to strengthen our position as a leader in integrated facility services by providing end-to-end delivery systems for markets we service. We expect to achieve long-term earnings growth through organic revenue growth and strategic acquisitions while maintaining desirable profit margins and keeping overall costs low. Our strategy also includes the expansion of certain key industry vertical markets to service the end-to-end needs of clients.

In 2012, we continued the development of a platform to deliver an end-to-end service model to our clients. As a result, in the first quarter of 2013, we began to realign our infrastructure and operations into an onsite, mobile, and on-demand market-based structure. This realignment will continue through 2014 and is designed to 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. In addition, our realignment initiatives are designed to result in greater synergies from our acquisitions, achieve further integration among our onsite businesses, and decrease operating expenses by streamlining functions and reducing organizational layers.

On November 1, 2012, we acquired Air Serv Corporation ("Air Serv"), a provider of facility solutions services for airlines, airports, 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. These acquisitions allowed us to significantly expand our vertical market expertise in servicing the comprehensive needs of airlines, airport authorities, and healthcare service markets. The operations of Air Serv and HHA are included in the Other and Building & Energy Solutions segments, respectively. We refer to these acquisitions and the acquisition of certain assets and liabilities of Calvert-Jones Company, Inc. ("Calvert-Jones"), collectively as the "November Acquisitions."

In December 2010, we acquired The Linc Group, LLC ("Linc") for an aggregate purchase price of $298.7 million (the "Linc Acquisition"). Linc provides comprehensive integrated facility solutions services, military base operation services, and translation and other services in support of U.S. military operations. Linc's clients include state and federal governments, commercial entities, and residential clients throughout the United States and in select international locations. The operations of Linc are included in the Building & Energy Solutions and Facility Services segments as of the acquisition date.


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We continue to assess the impact that the size, composition, and timing of congressional approval of the annual federal budget will have on our operations. In addition, we monitor and assess the potential impact of U.S. government policy and strategy changes on our business. While the volume of bid activity and requests for proposals for future awards remains active, our business has experienced and may continue to experience delays in new U.S. Government contract awards and in the start dates of currently awarded contracts or early termination of existing contracts.

2013 Changes in Reportable Segments

We regularly review our segment reporting for alignment with our strategic goals and operational structure as well as for evaluation of business performance and allocation of resources by our Chief Executive Officer ("CEO").

In periods prior to the first quarter of 2013, our reportable segments consisted of:

Janitorial,

Facility Solutions,

Parking, and

Security.

Effective in the first quarter of 2013, we revised our reportable segments to reflect the reorganization of our businesses to an onsite, mobile and on-demand market-based structure. This realignment will continue through 2014 and is designed to 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. As a result of this realignment, we have separated our previous Facility Solutions segment into two new reportable segments: Facility Services and Building & Energy Solutions.

Our onsite businesses consist of the following reportable segments:

Janitorial,

Facility Services,

Parking, and

Security.

Our mobile and on-demand businesses consist of the following:

the Building & Energy Solutions reportable segment, and

certain unconsolidated affiliates that provide facility solutions, primarily to the U.S. Government, which complement the other operations of the Building & Energy Solutions segment.

Our new segment, Other, is comprised of Air Serv.

Prior period segment results have been restated to conform to the new segment reporting structure.

Financial and Operating Summary

Revenues increased by $509.0 million during the year ended October 31, 2013. The increase in revenues was attributed to the following:

o $408.1 million of additional revenues associated with our significant acquisitions during the year ended October 31, 2013, consisting of the November Acquisitions;

o the Janitorial, Facility Services, and Security segments experienced organic growth that contributed additional revenues of $119.8 million during the year ended October 31, 2013; and

o an increase in Building & Energy Solutions revenues from new commercial service and maintenance contracts in 2013, including new bundled energy solutions contracts;


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partially offset by:

o a decrease in Building & Energy Solutions revenues primarily as a result of the comparative mix and timing of certain awarded and completed U.S. Government contracts during 2012 and 2013.

Operating profit increased by $22.5 million during the year ended October 31, 2013. The increase in operating profit was attributed to:

o the November Acquisitions contribution of $14.8 million of operating profit during the year ended October 31, 2013;

o a $12.0 million reduction in legal fees and costs associated with the settlement of certain legal cases in fiscal year 2012, as well as a reduction in costs associated with an internal investigation into a foreign entity previously affiliated with the joint venture;

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

o lower salary and salary-related expenses as a result of one less working day in the year ended October 31, 2013;

partially offset by:

o the short term impact of higher initial costs incurred on new contracts during the year ended October 31, 2013;

o increase in selling, general and administrative salary and salary-related expenses of $11.3 million as a result of investments in new sales and growth initiatives, higher bonus due to improved performance, and higher share-based compensation expense.

Net cash provided by operating activities was $135.3 million in the year ended October 31, 2013.

Dividends of $32.9 million were paid to shareholders and dividends of $0.60 per common share were declared during the year ended October 31, 2013.

As of October 31, 2013, total outstanding borrowings under our line of credit were $314.9 million, and we had up to $234.5 million borrowing capacity under our line of credit.

Insurance Summary

Annual actuarial evaluations during the year ended October 31, 2013 were performed for the majority of our casualty insurance programs, including those related to certain previously acquired businesses. Based on the results of these evaluations, we have allocated insurance expense for the year ended October 31, 2013 to our operating segments based upon their underlying exposures. Additionally, 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. This impact was partially offset by the implementation of a series of initiatives to improve the management of general liability claims. 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.

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, which may have contributed to some of the unfavorable development. Conversely, the workers' compensation loss patterns in states other than California warranted a favorable adjustment which partially offset the adverse development experienced in California. Additional favorable prior-year developments were also realized in Illinois which continues to benefit from workers' compensation reform that has contributed to lower claim-related medical cost.

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 reserves for prior year claims, which resulted in an increase in the related insurance expense of $10.6 million during the year ended October 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 prior years during the years ended October 31, 2012 and 2011 were $7.3 million and $2.1 million, respectively.


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Results of Operations

The Year Ended October 31, 2013 Compared with the Year Ended October 31, 2012

Consolidated



                                                       Years ended October 31,
($ in thousands)                                   2013                      2012                        Increase / (Decrease)
Revenues                                  $    4,809,281            $    4,300,265            $    509,016                   11.8 %
Expenses
Operating                                      4,313,429                 3,854,380                 459,049                   11.9 %
Gross margin as a % of revenues                     10.3 %                    10.4 %                  (0.1 )%
Selling, general and administrative              348,274                   327,855                  20,419                    6.2 %
As a % of revenues                                   7.2 %                     7.6 %                  (0.4 )%
Amortization of intangible assets                 28,553                    21,464                   7,089                   33.0 %

Total expenses                                 4,690,256                 4,203,699                 486,557                   11.6 %

Operating profit                                 119,025                    96,566                  22,459                   23.3 %
Other-than-temporary impairment credit
losses on auction rate security
recognized in earnings                                 -                      (313 )                   313                 (100.0 )%
Income from unconsolidated affiliates,
net                                                6,319                     6,395                     (76 )                 (1.2 )%
Interest expense                                 (12,892 )                  (9,999 )                (2,893 )                 28.9 %

Income from continuing operations
before income taxes                              112,452                    92,649                  19,803                   21.4 %
Provision for income taxes                       (39,552 )                 (29,931 )                (9,621 )                 32.1 %

Income from continuing operations                 72,900                    62,718                  10,182                   16.2 %
Loss from discontinued operations, net
of taxes                                               -                      (136 )                   136                 (100.0 )%

Net income                                $       72,900            $       62,582            $     10,318                   16.5 %

Revenues

Revenues increased by $509.0 million, or 11.8%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The increase was primarily related to revenues from the November Acquisitions, which contributed $408.1 million in the year ended October 31, 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 together contributed $119.8 million in additional revenues in the year ended October 31, 2013. This increase in revenues was partially offset by the impact of lower sales in the Building & Energy Solutions segment of $18.6 million, excluding revenues related to the HHA and Calvert-Jones acquisitions. 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 Expenses

Operating expenses increased by $459.0 million, or 11.9%, during the year ended October 31, 2013, as compared to the year ended October 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 10.3% in the year ended October 31, 2013 from 10.4% in the year ended October 31, 2012. The decrease in gross margin was primarily related to the short term impact of higher initial costs incurred on new contracts and higher self-insurance expenses related to prior year claims. This decrease was partially offset by lower salary and salary-related expenses as a result of one less working day in the year ended October 31, 2013, improved margins on certain contracts as a result of increased tag work, and the termination of certain lower margin contracts.


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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $20.4 million, or 6.2%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. As a percentage of revenues, selling, general and administrative expenses decreased by 0.4% to 7.2% in the year ended October 31, 2013 from 7.6% in the year ended October 31, 2012.

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

$16.9 million of incremental selling, general and administrative expenses of the November Acquisitions;

a $11.3 million increase in salary and salary-related expense as a result of investments in new sales and growth initiatives, higher bonus due to improved performance, and higher share-based compensation expense. The increase in share-based compensation expense resulted from an increase in the value of awards granted in more recent years and a benefit received in fiscal year 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;

a $3.8 million increase in restructuring costs associated with the realignment of our operational structure; and

a $0.9 million increase in costs associated with our rebranding initiative.

The increase was partially offset by:

a $7.5 million reduction in legal fees and costs associated with the settlement of certain legal cases in fiscal year 2012;

a $2.7 million reduction in legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture;

the absence of a $1.8 million settlement paid in fiscal year 2012 in exchange for a release from certain restrictive covenants related to a prior divestiture; and

$1.7 million lower IT costs as a result of the centralization of our IT datacenters in fiscal year 2012.

Amortization of Intangible Assets

Amortization of intangible assets increased by $7.1 million, or 33.0%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The increase was primarily related to the amortization of acquired intangible assets associated with the acquisitions made in 2013.

Income from Unconsolidated Affiliates, Net

Income from unconsolidated affiliates, net, decreased by $0.1 million, or 1.2%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The decrease was primarily related to our share of gain recognized in 2012 in connection with property sales completed by one of our investments in a low income housing partnership. This decrease was almost entirely offset by 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 $2.9 million, or 28.9%, during the year ended October 31, 2013, as compared to the year ended October 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 $416.4 million and $291.1 million in the years ended October 31, 2013 and 2012, respectively.

Provision for Income Taxes

The effective tax rates on income from continuing operations for the years ended October 31, 2013 and 2012 were 35.2% and 32.3%, respectively. The effective tax rate increased for the year ended October 31, 2013 over the year ended October 31, 2012 due to a tax benefit included in 2012 of $6.9 million related to a re-measurement of certain unrecognized tax benefits and discrete adjustments of $1.9 million for employment-based tax credits. The impact of these benefits was partially offset by discrete tax benefits during 2013 of $4.1 million related to a retroactive reinstatement of federal employment-based tax credits.


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Segment Information

Our segment information and the discussion below of our segment results are consistent with how our CEO monitors the performance of our businesses. Certain corporate expenses are not directly allocated. Such expenses include: certain CEO and other finance and human resource departmental costs, certain information technology costs, share-based compensation costs, certain legal costs and settlements, adjustments resulting from current actuarial developments of self-insurance reserves related to claims incurred in prior years, and direct acquisition costs. Segment revenues and operating profits for the years ended October 31, 2013 and 2012 were as follows:

                                                 Years Ended October 31,
($ in thousands)                             2013                       2012                       Increase / (Decrease)
Revenues
Janitorial                         $     2,465,312            $     2,394,344            $     70,968                  3.0 %
Facility Services                          609,435                    576,136                  33,299                  5.8 %
Parking                                    609,082                    615,132                  (6,050 )               (1.0 )%
Security                                   381,472                    365,926                  15,546                  4.2 %
Building & Energy Solutions                401,536                    348,279                  53,257                 15.3 %
Other                                      341,516                          -                 341,516                   NM *
Corporate                                      928                        448                     480                   NM *

                                   $     4,809,281            $     4,300,265            $    509,016                 11.8 %

Operating profit
Janitorial                         $       134,600            $       135,967            $     (1,367 )               (1.0 )%
Operating profit as a % of
revenues                                       5.5 %                      5.7 %                  (0.2 )%
Facility Services                           27,431                     23,083                   4,348                 18.8 %
Operating profit as a % of
revenues                                       4.5 %                      4.0 %                   0.5 %
Parking                                     27,537                     26,189                   1,348                  5.1 %
Operating profit as a % of
revenues                                       4.5 %                      4.3 %                   0.2 %
Security                                    12,943                      7,835                   5,108                 65.2 %
Operating profit as a % of
revenues                                       3.4 %                      2.1 %                   1.3 %
Building & Energy Solutions                 18,662                     12,340                   6,322                 51.2 %
Operating profit as a % of
revenues                                       4.6 %                      3.5 %                   1.1 %
Other                                       12,606                          -                  12,606                   NM *
Operating profit as a % of
revenues                                       3.7 %                        -                     3.7 %
Corporate                                 (108,579 )                 (105,390 )                (3,189 )               (3.0 )%
Adjustment for income from
unconsolidated affiliates, net,
included in Building & Energy
Solutions                                   (6,175 )                   (3,458 )                (2,717 )               78.6 %

                                   $       119,025            $        96,566            $     22,459                 23.3 %

* Not meaningful

Janitorial



                                                 Years Ended October 31,
($ in thousands)                              2013                    2012                   Increase / (Decrease)
Revenues                              $     2,465,312         $     2,394,344         $     70,968             3.0 %
Operating profit                              134,600                 135,967               (1,367 )          (1.0 )%
Operating profit as a % of revenues               5.5 %                   5.7 %               (0.2 )%

Janitorial revenues increased by $71.0 million, or 3.0%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The increase was primarily related to additional revenues from new business that exceeded contract losses, increases in the scope of work from existing clients, and the impact of additional tag work during the year ended October 31, 2013.


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Operating profit decreased by $1.4 million, or 1.0%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. Operating profit margins decreased by 0.2% to 5.5% in the year ended October 31, 2013 from 5.7% in the year ended October 31, 2012. The decrease in operating profit margins was attributable to the short term impact of higher initial costs incurred on new contracts during 2013. The year ended October 31, 2013 benefited from one less working day than in 2012, and also from lower legal expense and settlement costs. These benefits were largely offset by the nonrecurrence of an adjustment to the sales allowance reserve in 2012 resulting from sustained improvements in historical and expected credits on client receivables.

Facility Services



                                                  Years Ended October 31,
($ in thousands)                                2013                  2012                       Increase
Revenues                                 $     609,435         $     576,136         $     33,299            5.8 %
Operating profit                                27,431                23,083                4,348           18.8 %
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