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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 31, 2013
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-8929
ABM INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
| Delaware | 94-1369354 | |||
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
551 Fifth Avenue, Suite 300
New York, New York 10176
(Address of principal executive offices)
Registrant’s telephone number, including area code: (212) 297-0200
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| Common Stock, $.01 par value | New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer |
þ |
Accelerated filer |
¨ | |||
| Non-accelerated filer |
¨ (Do not check if a smaller reporting company) |
Smaller reporting company |
¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of ABM Industries Common Stock held by nonaffiliates of ABM Industries as of April 30, 2013, the last day of business of our most recently completed second fiscal quarter, was $1,212,922,174 (based on the closing sale price of ABM Industries’ Common Stock on that date as reported on the New York Stock Exchange).
Number of shares of common stock outstanding as of December 11, 2013: 55,523,316.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on March 5, 2014 are incorporated by reference into Part III of this Report.
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
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Certain statements contained in this report, and in particular statements found in Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are not statements of historical fact constitute forward-looking statements. These statements give current expectations or forecasts of future events and are often identified by the words “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” “seek,” or other words and terms of similar meaning in connection with discussions of future strategy and operating or financial performance. Such statements reflect the current views of ABM Industries Incorporated (“ABM”), and its subsidiaries (collectively referred to as “ABM,” “we,” “us,” “our,” or the “Company”), with respect to future events and are based on assumptions and estimates which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Accordingly, undue reliance should not be placed on these forward-looking statements. In Item 1A., “Risk Factors,” we have listed specific risks and uncertainties that you should carefully read and consider. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
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Description of Business
ABM Industries Incorporated was reincorporated in Delaware on March 19, 1985, as the successor to a business founded in California in 1909. References in this report to “ABM,” “we,” “us,” “our,” or the “Company” refer to ABM Industries Incorporated and all of its consolidated subsidiaries, except as otherwise indicated or as the context otherwise requires.
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.
Unless otherwise noted, all references to years are to our fiscal year, which ends on October 31.
Significant Acquisitions
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 Air Serv and HHA 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, as of the acquisition date.
In December 2010, we acquired The Linc Group, LLC (“Linc”). 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. The name of Linc was changed to ABM Facility Solutions Group, LLC in fiscal 2012.
Segment Realignment
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.
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. 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. 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.
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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. For segment and geographical financial information, see Note 16, “Segment and Geographic Information,” in the Notes to Consolidated Financial Statements. In addition, for a discussion of risks attendant to our foreign operations, see “Risk Factors” in Item 1A.
Our Onsite business activities by reportable segment are described below.
Janitorial
Our Janitorial segment provides a wide range of essential janitorial services for a variety of client facilities, including airports and other transportation centers, commercial office buildings, educational institutions, government buildings, health facilities, industrial buildings, retail stores, shopping centers, stadiums and arenas, and warehouses. These services include carpet cleaning and dusting, floor cleaning and finishing, furniture polishing, window washing, and other building cleaning services. Janitorial services are provided in all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as in certain international locations. This segment has thousands of contracts, most of which are obtained by competitive bidding. These arrangements include “fixed-price” arrangements, “cost-plus” arrangements, and “tag” (supplemental services) work. Fixed-price arrangements are contracts in which the client agrees to pay a fixed fee every month over a specified contract term. A variation of a fixed-price arrangement is a square-foot arrangement, under which monthly billings are based on the actual square footage serviced. In cost-plus arrangements, the clients reimburse us for the agreed-upon amount of wages and benefits, payroll taxes, insurance charges, and other expenses associated with the contracted work, plus a profit margin. Tag work generally consists of supplemental services requested by clients outside of the standard service specification. Examples are cleanup after tenant moves, construction cleanup, flood cleanup, snow removal, and extermination services. The majority of the Janitorial segment’s contracts are fixed-price agreements for one to three year periods that contain automatic renewal clauses but are subject to termination by either party upon 30 to 90 days’ written notice. Profit margins on contracts tend to be inversely proportional to the size of the contract, as large-scale contracts tend to be more competitively priced than small or stand-alone agreements.
Facility Services
Our Facility Services segment provides onsite mechanical engineering and technical services and solutions for facilities and infrastructure systems for a variety of client facilities, including airports and other transportation centers, commercial infrastructure, corporate office buildings, data centers, educational institutions, high technology manufacturing facilities, museums, resorts, and shopping centers. These services are designed to extend the useful life of facility fixed assets, improve equipment operating efficiencies, reduce energy consumption, lower overall operational costs for clients, and enhance the sustainability of client locations. Facility services are provided in 42 states and the District of Columbia, as well as in certain international locations.
The majority of our Facility Services contracts are structured as cost-plus arrangements in which clients reimburse us for the agreed-upon amount of wages and benefits, payroll taxes, insurance charges, and other expenses associated with the contracted work, plus a profit margin. Additionally, most Facility Services contracts are for three year periods and may contain renewal clauses, but are subject to termination by either party upon 30 to 90 days’ written notice. Nearly all Facility Services contracts are obtained by competitive bidding.
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Parking
Our Parking segment provides parking and transportation services for clients at many facilities, including airports and other transportation centers, educational institutions, health facilities, hotels, municipalities, office buildings, retail centers, and stadiums and arenas. Parking services are provided in 41 states and the District of Columbia. There are three types of arrangements for parking services: managed locations, leased locations, and allowance locations. Nearly all contracts are obtained by competitive bidding.
Under managed locations arrangements, we manage the underlying parking facility for the owner in exchange for a management fee. Contract terms for managed locations arrangements are generally from one to three years, can usually be terminated upon 30 days’ notice, and may also contain renewal clauses. We pass through revenues and expenses from managed locations to the facility owner under the terms and conditions of the contract. We report revenues and expenses, in equal amounts, for costs directly reimbursed from our managed locations. Such amounts comprised approximately 49.6% of the Parking segment revenues in the year ended October 31, 2013.
Under leased locations arrangements, we lease parking facilities from the owner and we are responsible for a majority of the operating expenses incurred. We retain all revenues from monthly and transient parkers and pay rent to the owner per the terms and conditions of the lease. The lease terms generally range from one to five years and provide for payment of a fixed amount of rent plus a percentage of revenues. The leases usually contain renewal options and may be terminated by the owner for various reasons, including development of real estate. Leases that expire may continue on a month-to-month basis.
Under allowance locations arrangements, we are paid a fixed or hourly fee to provide parking services and are then responsible for the agreed-upon operating expenses based upon the agreement terms. Allowance locations contract terms are generally from one to three years, can usually be terminated upon 30 days’ notice, and may also contain renewal clauses.
We continue to improve parking operations through the increased use of technology, including enhancements to our proprietary revenue control software, SCORE4; implementation of our client access software, ABM4WD.com; and increased use of our on-line payment software.
Security
Our Security segment provides security services for a wide range of facilities, including Class “A” high rise, commercial, health, industrial, petro-chemical, residential, and retail 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. Security staffing, or “guarding,” is the provision of dedicated security officers to a client facility. This component is the core of our security business and represents the largest portion of security revenues. Mobile patrol is the use of roving security officers in vehicles that serve multiple locations and clients across a pre-defined geographic area. Investigative services include white collar crime investigation, undercover operations, and background screening services. Electronic monitoring is primarily achieved through our partnership with a major systems integrator. Security services are provided in 42 states, the District of Columbia, and the Commonwealth of Puerto Rico.
The revenues for the Security segment are generally based on actual hours of service at contractually specified rates. In some cases, flat monthly billing or single rate billing is used, especially in the case of mobile patrol and investigative services. The majority of Security contracts are for one year periods and generally contain automatic renewal clauses, but are subject to termination by either party upon 30 to 90 days’ written notice. Nearly all Security contracts are obtained by competitive bidding.
Building & Energy Solutions
The business activities of our Building & Energy Solutions segment, which includes our mobile and on-demand operations, are described below.
Our Building & Energy Solutions segment provides heating, ventilation, air-conditioning, electrical, lighting and other general maintenance and repair services. These services include preventative maintenance, retro-commissioning, installations, retrofits and upgrades, environmental services, systems start-ups, performance testing, energy audits, and bundled energy solutions for a wide variety of clients in both the private and public sectors. These services are designed to extend the useful life of facility fixed assets, improve equipment operating efficiencies, reduce energy consumption, lower overall operational costs for clients, and enhance the sustainability of client locations. Also included within the Building & Energy Solutions segment are our franchised operations under the Linc Network, TEGG, and CurrentSAFE brands, which provide mechanical and electrical preventive and predictive maintenance solutions. Our GreenHomes America brand provides home energy efficiency solutions. These franchised operations contributed approximately 6.0% to this segment’s revenue in the year ended October 31, 2013. The operations of the recently acquired HHA business, and the acquisition of certain assets and liabilities of Calvert-Jones Company, Inc. (“Calvert-Jones”), and BEST Infrared Services, Inc. (“BEST”) are also included within this segment’s results in the year ended October 31, 2013. Our Building & Energy Solutions segment operates in all 50 states and the District of Columbia, as well as in certain international locations. The most significant client, with approximately 40 contracts, provided 20.4% of revenues for this segment in 2013.
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This segment also provides support to U.S. Government entities for specialty service solutions, such as military base operations, leadership development, education and training, energy efficiency management, medical support services, and construction management.
The Building & Energy Solutions contracts are structured as cost-plus arrangements, fixed-price arrangements, fixed-price repair and refurbishment arrangements, and franchise arrangements. In cost-plus arrangements, clients reimburse us for the agreed-upon amount of wages and benefits, payroll taxes, insurance charges, and other expenses associated with the contracted work, plus a profit margin. Fixed-price agreements are contracts in which the client agrees to pay a fixed fee for a defined scope of services. Certain fixed-price repair and refurbishment arrangements are accounted for under the percentage-of-completion method of accounting, most often based on the cost-to-cost method. For franchise operations, initial franchise fees are recognized when we have performed substantially all initial services required by the franchise agreement. Continuing franchise royalty fees that are based on a percentage of the franchisees’ revenues are recognized in the period in which the revenue is reported to have occurred, whereas franchise fees charged to franchisees on a flat rate are recognized as earned.
The majority of Building & Energy Solutions contracts are for one to three years and may contain renewal clauses, but are subject to termination by either party upon 30 to 90 days’ written notice. U.S. Government contracts are normally structured as one year contracts with multiple option years and contain the contractual right for the U.S. Government to terminate or reduce the amount of work at any time.
Other
The business activities of our Other segment include the operations of our recently acquired Air Serv business as described below.
Air Serv provides facility solutions services to clients in our aviation vertical related to passenger assistance, including wheelchair operations, aircraft cabin cleaning, janitorial services, shuttle bus operations, and access control, among others. Air Serv operates in 26 states and the United Kingdom. Two significant clients, with approximately 90 contracts, provided 45.3% of revenues for this segment in 2013. The majority of contracts are structured as long-term contracts that average approximately three to five years in duration. These arrangements include “fixed-price” arrangements, “transaction-price” arrangements, and “hourly” arrangements. Fixed-price arrangements are contracts in which the client agrees to pay a fixed fee every month over a specified contract term. Transaction-price arrangements are agreements in which the clients are billed for each transaction performed on a monthly basis (i.e. wheelchair passengers served, aircrafts cleaned). Some contracts include both a fixed fee component and a variable pricing component. Hourly arrangements are contracts in which the client is billed a set hourly rate for each labor hour provided. This segment has hundreds of contracts, most of which are under master agreements with several clients and are typically competitively re-bid upon renewal. These contracts, which typically cover a single service type at a single location but may also cover multiple service types and multiple locations, are subject to termination by the client upon 30 to 90 days’ written notice.
Trademarks
We believe that we own or are licensed to use all corporate names, trade names, trademarks, service marks, copyrights, patents, and trade secrets that are material to our operations.
Dependence on Significant Client
No client accounted for more than 10% of our consolidated revenues during any of the years ended October 31, 2013, 2012, or 2011.
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Competition
We believe that each aspect of our business is highly competitive and that competition is based primarily on price, quality of service, and ability to anticipate and respond to industry changes. A majority of our revenues are derived from projects requiring competitive bids; however, an invitation to bid is often conditioned upon prior experience, industry expertise, and financial strength. The low cost of entry in the facility services business results in a very competitive market. We experience competition from a large number of mostly regional and local owner-operated companies that may have better visibility to local markets and significantly lower labor and overhead costs, providing them with a competitive advantage. The competitive environment for each of our businesses is described below.
Janitorial
Our janitorial business competes with local, regional, and national providers. On a national basis, we compete with the operating divisions of a few large, diversified facility services companies. We also compete indirectly with building owners and tenants who can perform internally one or more of the services we provide. These building owners and tenants have an increased advantage in locations where our services are subject to sales tax and internal operations are not. Competitors of our janitorial business include Able Services, GCA Services Group, Inc., Harvard Maintenance, ISS Facility Services, Inc., and UNICCO Service Company.
Facility Services
Competition related to our Facility Services segment is based on technical expertise, price, and quality of service. Our ability to attract and retain qualified personnel depends on workforce availability and our ability to successfully compete for persons having the necessary skills and experience. On a national basis, we compete with the operating divisions of many large, diversified facility services companies. Competitors of our Facility Services business include Able Services, Aramark Corporation, Johnson Controls, Inc., and UNICCO Service Company.
Parking
Our parking business competes with local, regional, and national parking management companies. On a national basis, we compete with a small number of parking management companies, including LAZ Parking, LLC and Standard Parking Corporation. We compete directly with many local and regional parking companies. We also compete indirectly with hotels, municipalities, and other entities that manage their own parking facilities, potentially eliminating those facilities as management or lease opportunities for us. Additionally, the construction of new parking facilities near our existing facilities can adversely affect our business. We also face significant competition in our efforts to provide ancillary services such as shuttle transportation services and parking enforcement because several large companies specialize in these services.
Security
Competition related to our security business is based on our ability to recruit and train qualified personnel, price, and quality of service. Our ability to attract and retain qualified personnel depends on workforce availability and our ability to successfully compete for persons having the necessary skills and experience. On a national basis, we compete with larger companies that also offer a range of security and investigative services that are directly competitive with the services we offer. Competitors of our security business include AlliedBarton Security Services, LLC, G4S Secure Solutions, Inc., Guardsmark, LLC, and Securitas Security Services USA, Inc.
Building & Energy Solutions
Competition related to our Building & Energy Solutions segment is based on technical expertise, the availability of qualified personnel and managers, service innovation, reputation, past contract performance, industry experience, customer relationships, geographic reach, mobility, price, and quality of service. Our ability to attract and retain qualified personnel depends on workforce availability and our ability to successfully compete for persons having the necessary skills and experience.
On a national basis, we compete with the operating divisions of many large, diversified facility services companies. We also compete against smaller, more specialized companies that concentrate their resources on particular geographic areas.
We face intense competition for available U.S. Government business. Current trends in the U.S. Government contracting process, which include fewer sole source awards, more emphasis on cost competitiveness, and increased set-aside awards for small and/or disadvantaged businesses have increased competition for U.S. Government contracts and increased pricing pressure. The U.S. Government’s increased use of set-aside awards makes it advantageous for us to increase the percentage of business we pursue through strategic joint ventures.
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Within our healthcare support services business, we face significant competition from several large, global competitors as well as hospitals and health systems providing their own services “in house.” Healthcare reform brought on by the Patient Protection and Affordable Care Act is changing the marketplace and may result in increased competition. This has the combined effect of compressing margins on existing business while increasing demand for outsourced services in general.
Competitors of our Building & Energy Solutions business include Aramark Corporation, Comfort Systems USA, Inc., Dyncorp International, LLC, Emcor Group, Inc., IAP Worldwide Services, Inc., J&J Maintenance, Inc., Johnson Controls, Inc., and Siemens Building Technologies.
Other
Competition related to the Air Serv business is based on reputation, expertise, price, and quality of service. We experience competition on a local, regional, national, and international basis with a large and diverse set of aviation services companies. We also compete indirectly with airlines that manage their own aviation services on an “insourced basis,” as that eliminates those operations as opportunities for us. Competitors of our Air Serv business include Aviation Safeguards, G2 Secure Staff, LLC, G4S plc, ISS Facility Services, Inc., Menzies Aviation, PLC, Mitie Group, PLC, OCS Group Limited, PrimeFlight Aviation Services, Prospect Aviation Corporation, and Swissport International, LTD.
Sales and Marketing
Our sales and marketing efforts are conducted by our corporate, subsidiary, regional, branch, and district offices. Sales, marketing, management, and operations personnel in each of these offices participate directly in selling to and servicing clients. The broad geographic coverage of these offices enables us to provide a full range of facility solutions through intra-company sales referrals, multi-service “bundled” sales, and national account sales.
In fiscal 2013, we made significant progress toward completing the rebranding initiative that began in fiscal 2012 and illustrates our transformation through strategic acquisitions and organic development. This transformation has brought us into new markets and expanded our expertise and end-to-end service capabilities.
Regulatory Environment and Environmental Compliance
Our operations are subject to various federal, state, and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, such as discharge into soil, water, and air, and the generation, handling, storage, transportation, and disposal of waste and hazardous substances. These laws generally have the effect of increasing costs and potential liabilities associated with the conduct of our operations. In addition, from time to time we are involved in environmental matters at certain of our locations or in connection with our operations. Historically, the cost of complying with environmental laws or resolving environmental issues relating to United States locations or operations has not had a material adverse effect on our financial position, results of operations, or cash flows. We do not believe that the resolution of matters known at this time will be material.
Employees
As of October 31, 2013, we employed approximately 110,000 employees. Approximately 47,000 of these employees are covered under collective bargaining agreements. Approximately 7,000 of our employees have executive, managerial, supervisory, administrative, professional, sales, marketing, office, or clerical responsibilities.
Available Information
We are required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information with the U.S. Securities and Exchange Commission (“SEC”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge on our Internet site at www.abm.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. We provide references to our website for your convenience, but our website does not constitute, and should not be viewed as, a part hereof or incorporated into this or any of our other filings with the SEC.
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Risks Related to Our Operations
Risks relating to our acquisition strategy may adversely impact our results of operations.
A significant portion of our historic growth has been generated by acquisitions and we expect to continue to acquire businesses in the future as part of our growth strategy. A slowdown in the pace of our acquisitions could lead to a slower growth rate. There can be no assurance that any acquisition we make in the future will provide us with the benefits that we anticipate when entering into the transaction. Among the benefits we may expect from potential as well as completed acquisitions are synergies, cost savings, growth opportunities, including increased profitability, or access to new markets or geographic locations. The process of integrating an acquired business may create unforeseen difficulties and expenses. The areas in which we may face risks in connection with any potential acquisitions of a business include, but are not limited to:
| • | management time and focus may be diverted from operating our business to acquisition integration; |
| • | clients or key employees of acquired businesses may not remain, which could negatively impact our ability to grow the acquired business; |
| • | we may fail to integrate the acquired business’s accounting, information technology, human resources, and other administrative systems to permit effective management and expense reduction; |
| • | we may fail to implement or improve internal controls, procedures, and policies appropriate for a public company at a business that prior to the acquisition lacked some of these controls, procedures, and policies; |
| • | we may incur additional indebtedness as a result of an acquisition, which could impact our financial position, results of operations, and cash flows; and |
| • | we may encounter unanticipated or unknown liabilities relating to the acquired business. |
Our strategy of moving to an integrated facility solutions provider platform, which focuses on vertical market strategy, may not generate the organic growth in revenues or profitability that we expect.
We believe that an integrated facility solutions approach will result in organic growth, increased profitability, and significant benefits to us and our clients. These benefits include enhanced service quality, contract simplicity and flexibility, and improved innovations in the delivery of services. Our organic growth strategy depends on our ability to procure contracts and on current and future trends across both the private and public sectors to outsource facility services. The procurement of contracts is difficult in markets characterized by commodity driven purchasing decisions, which may generate lower levels of profitability. In addition, we may not be able to execute on this strategy as a result of, among other things, client resistance to an integrated approach, the challenges of our vertical marketing strategy, difficulty in penetrating certain markets, inability to deliver end-to-end services requested, inability to acquire vertical market expertise, competition from integrated facility solutions providers, as well as increased competition from single service providers or module providers. Any organizational change relating to this strategy may give rise to additional costs.
We are subject to intense competition that can constrain our ability to gain business as well as our profitability.
We believe that each aspect of our business is highly competitive and that such competition is based primarily on price, quality of service, and ability to anticipate and respond to industry changes. A majority of our revenues are derived from projects requiring competitive bids; however, an invitation to bid is often conditioned upon prior experience, industry expertise, and financial strength. The low cost of entry in the facility services business results in a very competitive market. We experience competition from a large number of mostly regional and local owner-operated companies that may have better visibility to local markets and significantly lower labor and overhead costs, providing them with a competitive advantage. These strong competitive pressures could inhibit our success in bidding for profitable business and our ability to increase prices as costs rise, thereby reducing margins.
Increases in costs that we cannot pass on to clients could affect our profitability.
We negotiate many contracts under which our clients agree to pay certain costs at specified rates, including those related to workers’ compensation, other insurance where we self-insure much of our risk, salary and salary-related expenses, and petroleum. If actual costs exceed the rates specified in the contracts, our profitability may decline unless we can negotiate increases in these rates. In addition, if our costs exceed those of our competitors, we may lose existing business unless we reduce our rates to levels that may not fully cover our costs.
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Our restructuring initiatives may not achieve the expected cost reductions.
Effective in the first quarter of fiscal 2013, we began to realign our operations into an onsite, mobile, and on-demand market-based structure. This realignment will continue through fiscal 2014 and is designed to improve our long-term growth prospects and provide higher margin opportunities by giving us the ability to better deliver comprehensive services to clients located in urban, suburban, and rural areas. In addition, these 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. Our ability to achieve the anticipated cost savings and other benefits from these initiatives within the expected time frame is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive, and other uncertainties, some of which are beyond our control. We have incurred in fiscal 2013, and will continue to incur in the near term, restructuring charges as a result of these activities. Failure to achieve the expected cost reductions related to these restructuring initiatives could have a material adverse effect on our business and results of operations.
We have high deductibles for certain insurable risks, and therefore we are subject to volatility associated with those risks.
We use a combination of insured and self-insurance programs to provide for a number of risks, including workers’ compensation, general liability, automobile liability, property damage, professional liability, and certain employee-related health care benefits plans. We are responsible for claims both within and in excess of our retained limits under our insurance policies, and while we endeavor to purchase insurance coverage that is appropriate to our assessment of risk, we are unable to predict with certainty the frequency, nature, or magnitude of claims for direct or consequential damages. Our business may be negatively affected if in the future our insurance proves to be inadequate or unavailable. We attempt to mitigate these risks through the implementation of company-wide safety and loss control efforts designed to decrease the incidence of events that might increase our liability. These loss control efforts also include fostering a climate of safety awareness, proactive pre-job hazard assessments, and the dissemination of safety training materials and other employee engagement tools.
Should we be unable to renew our excess, umbrella, or other commercial insurance policies at competitive rates, it would have a material adverse impact on our business, as would the incurrence of catastrophic uninsured claims or the inability or refusal of our insurance carriers to pay otherwise insured claims. Further, to the extent that we self-insure our losses, deterioration in our loss control and/or continuing claim management efforts could increase the overall cost of claims within our retained limits. A material change in our insurance costs due to changes in the frequency of claims, the severity of the claims, the costs of excess/umbrella premiums, or regulatory changes could have a material adverse effect on our financial position, results of operations, or cash flows.
Although we engage third-party experts to assist us in estimating appropriate insurance accounting reserves, the determination of the required reserves is dependent upon significant actuarial judgments that have a material impact on our reserves. For example, quantitative assessments of the impact of recently enacted legislation and regulations and/or court rulings require both quantitative and qualitative actuarial judgments, which are updated as actual experience becomes available. Changes in our insurance reserves as a result of our periodic evaluations of the related liabilities may cause significant volatility in our operating results that might not be indicative of the operations of our ongoing business.
We are at risk of losses stemming from any accident or other incident involving our airport operations.
We provide services in support of commercial aviation at airports in the United States and the United Kingdom. Our operations involve passenger assistance, such as wheelchair operations, aircraft cabin cleaning, janitorial services, shuttle bus operations, and access control, among others. An accident or other incident involving our aviation support services could expose us to significant liability. If the insurance we carry to cover damages relating to future accidents or other incidents involving our airport operations is not adequate, we may be exposed to substantial losses arising from such accident or other incident.
Our business success depends on our ability to preserve our long-term relationships with clients.
We primarily provide our services pursuant to agreements that are cancelable by either party upon 30 to 90 days’ notice, which may adversely affect our results of operations. Our business associated with long-term relationships is generally more profitable than that associated with short-term relationships because we generally incur higher initial costs on new contracts.
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Once these costs are expensed or fully amortized over the appropriate periods, the underlying contracts become more profitable. Our loss of long-term clients could have an adverse impact on our profitability even if we generate equivalent revenues from new clients.
In addition, our clients can unilaterally decrease the amount of services we provide or terminate all services pursuant to the terms of our service agreements. Any loss of a significant number of clients could in the aggregate materially adversely affect our results of operations.
We are at risk of losses stemming from damage to our reputation.
Any damage to our reputation may adversely affect our results of operations. We depend to a large extent on our relationships with our clients and our reputation for quality integrated facility services. Our clients’ expectations and perception of the quality of our services are in large part determined by the satisfaction they derive from contact with our managers. The areas in which we may face risks in connection with damage to our reputation include, but are not limited to:
| • | Adverse publicity stemming from an accident or other incident involving our facility operations could result in a negative perception of our services and the loss of existing or potential clients, which could have a material adverse effect on our business, financial condition, and results of operations; |
| • | Although substantially all of our operations are conducted in the United States, failure by our employees, representatives, or agents, as well as by our joint venture partners, to comply with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar laws in other foreign jurisdictions could result in administrative, civil, or criminal liabilities and could result in suspension or debarment from government contracts; |
| • | Any improper actions by our joint venture employees, partners, or agents could result in civil or criminal investigations, monetary and non-monetary penalties, suspension or debarment from government contracts, and could have an adverse effect on our financial position, results of operations, or cash flows as well as our reputation and ability to conduct business; |
| • | We must comply with complex laws and regulations relating to the award, administration, and performance of U.S. Government contracts and a violation of these laws and regulations could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts with the U.S. Government, or debarment from government contracts; and |
| • | Compliance with more stringent immigration reform laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could negatively impact our reputation. |
Our business success depends on retaining senior management and attracting and retaining qualified personnel.
Our future performance depends on the continuing services and contributions of our senior management to execute on our acquisition and organic growth strategy and to identify and pursue new opportunities. Our future success also depends, in large degree, on our continued ability to attract and retain qualified personnel. Any unplanned turnover in senior management or inability to attract and retain qualified personnel could have a negative effect on our results of operations.
Significant delays or reductions in appropriations for our government contracts may negatively affect our business and could have an adverse effect on our financial position, results of operations, and cash flows.
The funding of U.S. Government programs are subject to annual congressional budget authorization and appropriation processes. In many situations, Congress appropriates funds on a fiscal year basis even though the contract performance period may extend over several fiscal years. Accordingly, programs are often partially funded and additional funds are committed only as Congress makes further appropriations. If we incur costs in excess of funds committed on a contract, we may not receive reimbursement of those costs unless additional funds are appropriated. In the event that government funding for any of the programs relating to our U.S. Government contracts is reduced or delayed, the U.S. Government could terminate or adjust our contracts or subcontracts under such program, which could have an adverse effect on our financial position, results of operations, and cash flows.
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We conduct some of our operations through joint ventures, and our ability to do business may be affected by the failure of our joint venture partners to perform their obligations.
The success of our joint ventures depends, in large degree, on the satisfactory performance by our joint venture partners of their obligations, including any obligation to commit capital, equity, or credit support as required by the joint venture agreements. If a joint venture partner fails to perform its obligations as a result of financial or other difficulties or any other reason, the joint venture may be unable to perform or deliver its contracted services. In addition, we also participate in joint ventures where we are not a controlling party, and in these cases, we may have limited control over the joint venture.
Our services in areas of military conflict expose us to additional risks.
Although substantially all of our operations are conducted in the United States, the services we provide internationally, including through the use of subcontractors, are sometimes in areas of military conflict or at military installations, which increases the risk of a situation causing injury or loss of life to our employees, subcontractors, or other third parties. In addition to the human costs, this could have an adverse effect on our financial position, results of operations, or cash flows and our ability to conduct business.
Negative or unexpected tax consequences could adversely affect our results of operations.
Adverse changes in the underlying profitability and financial outlook of our operations could lead to changes in our valuation allowances against deferred tax assets on our consolidated balance sheet, which could materially and adversely affect our results of operations. Additionally, changes in tax laws in the United States where we have significant operations could have an adverse effect on deferred tax assets and liabilities on our consolidated balance sheets and results of operations. We are also subject to tax audits by governmental authorities in the United States. Negative unexpected results from one or more such tax audits could have an adverse effect on our results of operations.
We are subject to business continuity risks associated with centralization of certain administrative functions.
Certain administrative functions, primarily in North America, have been regionally centralized to improve efficiency and reduce costs. To the extent that these central locations are disrupted or disabled for a long period of time due to crisis, natural disaster or other business interruption, key business processes, such as accounts payable, information technology, payroll, and general management operations, could be interrupted.
We are subject to cyber-security risks arising out of breaches of security relating to sensitive company, client, and employee information, as well as relating to the technology that manages our operations and other business processes.
Our business operations rely upon secure information technology systems for data capture, processing, storage, and reporting. Notwithstanding careful security and controls design, our information technology systems and those of our third-party providers could become subject to cyber attacks. Network, system, application, and data breaches could result in operational disruptions or information misappropriation, including, but not limited to, interruptions to systems availability and denial of access to and misuse of applications required by our clients to conduct business with us. Theft of intellectual property or trade secrets, and inappropriate disclosure of confidential information, could stem from such incidents. Any such operational disruption and/or misappropriation of information could result in lost sales, negative publicity, or business delays and could have a material adverse effect on our business.
We could incur additional costs to cover guarantees.
In some instances, we offer clients guaranteed energy savings on installed equipment. In the event those guaranteed savings are not achieved, we may be required to pay liquidated or other damages.
Risks Related to Market and Economic Conditions
A decline in commercial office building occupancy and rental rates could affect our revenues and profitability.
Our revenues are affected by commercial real estate occupancy levels. In certain geographic areas and service lines, our most profitable revenues are known as tag work. These services are performed for tenants in buildings in which we perform building services for the property owner or management company. A decline in occupancy rates could result in a decline in scope of work, including tag work, and depressed prices for our services. If this were to occur, we could experience lower revenues and pricing pressures resulting in lower margins. Additionally, adverse changes in occupancy rates may further reduce demand, depress prices for our services, and cause our clients to cancel their service agreements with us. This could reduce earnings and adversely affect our business and results of operations. In addition, in those areas where our workers are unionized, decreases in revenues can be accompanied by relative increases in labor costs if we are obligated by collective bargaining agreements to retain workers with seniority and are unable to pass these costs to our clients.
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Deterioration in general economic conditions could reduce the demand for facility services and, as a result, reduce our earnings and adversely affect our financial condition.
Slow domestic and international economic growth or other negative changes in global, national, and local economic conditions could have a negative impact on our business. Specifically, adverse economic conditions may result in clients cutting back on discretionary spending, such as tag work. Additionally, since a significant portion of our aviation services and parking revenues are tied to the number of airline passengers, hotel guests, and sports arenas attendees, results for these businesses could be adversely affected by curtailment of business or personal travel and cutbacks in discretionary spending.
Changes in energy prices and government regulations could adversely impact the results of operations of our Building & Energy Solutions business.
Energy efficiency projects are designed to reduce the client’s overall consumption of commodities such as electricity and natural gas. The economic benefit to the client is impacted by volatility in the price of those commodities. Downward fluctuations in commodity prices may reduce clients’ demand for our services. This could have an adverse effect on our financial position, results of operations, and cash flows.
We depend, in part, on federal and state legislation and policies that support energy efficiency projects. If current legislation or policies are adversely amended, eliminated, or not extended beyond their current expiration dates, or if funding for energy incentives is reduced or delayed, it could adversely affect our ability to obtain new business and thereby have an adverse effect on our financial position, results of operations, and cash flows.
Financial difficulties or bankruptcy of one or more of our clients could adversely affect our results.
Future revenues and our ability to collect accounts receivable depend, in part, on the financial strength of our clients. Any tightening of credit in financial markets may adversely affect the ability of our clients to obtain financing and impact our ability to collect amounts due from such clients. In addition, this could result in a decrease, or cancellation, of our services under our client contracts. In connection with these risks, we estimate an allowance for accounts receivable that we do not consider collectible. This allowance adversely impacts our profitability. In the event clients experience financial difficulty and, in particular, if bankruptcy results, our profitability could be further impacted by a failure to collect accounts receivable in excess of the estimated allowance. Declines in our ability to collect receivables or in the level of client spending could adversely affect our results of operations and our liquidity.
Future declines in the fair value of our investments in auction rate securities could negatively impact our earnings.
Future declines in the fair value of our investments in auction rate securities that we consider temporary will be recorded to accumulated other comprehensive loss, net of taxes. We have experienced declines in the fair value of our investments in auction rate securities that we have determined to be other-than-temporary. If at any time in the future we determine that a further decline in fair value is other-than-temporary, we will record a charge to earnings for the credit loss portion of the impairment. In addition, estimated credit losses based on significant assumptions may be different than actual realized losses, which could impact our earnings.
We incur accounting and other control costs that reduce profitability.
As a publicly traded corporation, we incur certain costs to comply with regulatory requirements. If regulatory requirements were to become more stringent or if accounting or other controls thought to be effective later fail, we may be forced to make additional expenditures, the amounts of which could be material. Most of our competitors are privately owned, so our accounting and control costs can be a competitive disadvantage.
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Sequestration under the Budget Control Act of 2011 (the “Budget Control Act”) may negatively impact our business.
The Budget Control Act has resulted in substantial reductions in defense and discretionary spending by the U.S. Government. Spending caps and reductions, referred to as sequestration, went into effect on March 3, 2013. We expect the sequestration process as mandated by the Budget Control Act to continue. The automatic across-the-board sequestration cuts as well as the reductions already reflected in defense funding over a ten-year period could have significant consequences to our government business and the industry. On October 16, 2013, the House and Senate approved H.R. 2775, the Continuing Appropriations Act of 2014. Under the so-called continuing resolution, the federal government was reopened, after being closed since October 1, 2013. The resolution also funds government operations through January 15, 2014 and suspends the debt limit through February 7, 2014. If additional appropriations are not made after the funds available under the Continuing Appropriations Act of 2014 end, then another government shutdown may occur. If this happens, performance on our existing contracts may be affected by, among other things, the lack of government personnel for contract administration or by the shuttering of non-essential government facilities. Furthermore, without appropriations there are generally no additional funds made available for the award of new contracts or the obligations to fund existing contracts by, for example, issuing task orders. We are continuously reviewing our operations in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. While we are already experiencing reduced funding on some of our programs and may see further reductions, we do not expect the cancellation of any of our major programs.
Risks Relating to Indebtedness and Impairment Charges
Any future increase in the level of our debt or in interest rates could affect our results of operations.
Any future increase in the level of our debt will likely increase our interest expense. Unless the operating income associated with the use of these funds exceeds the debt expense, borrowing money will have an adverse impact on our results. In addition, incurring debt requires that a portion of cash flow from operating activities be dedicated to interest payments and principal payments. Debt service requirements could reduce our ability to use our cash flow to fund operations and capital expenditures or to capitalize on future business opportunities, including additional acquisitions. Because current interest rates on our debt are variable, an increase in prevailing rates would increase our interest costs. Further, our credit facility agreement contains both financial covenants and other covenants that limit our ability to engage in specified transactions, which may also constrain our flexibility.
Our ability to operate and pay our debt obligations depends upon our access to cash.
Because we conduct business operations through operating subsidiaries, we depend on those entities to generate the funds necessary to meet financial obligations. Delays in collections, which could be heightened by disruption in the credit markets and the financial services industry, or legal restrictions could restrict our subsidiaries’ ability to make distributions or loans to us. The earnings from, or available assets of, these operating subsidiaries may not be sufficient to fund operations. If this were to occur, we would be unable to make distributions to pay interest on our debt obligations when due or to pay the principal of such debt. In addition, we have standby letters of credit and insurance deposits that represent amounts collateralizing self-insurance claims that we cannot access for operations. Moreover, $15.0 million original principal amount of our investment portfolio is invested in auction rate securities that are not actively traded. In the event we need to liquidate our auction rate securities prior to a successful auction, our expected holding period, or their scheduled maturity, we might not be able to do so without realizing further losses. In addition, the United States and global economies continue to experience slow growth, and the financial and credit markets could return to significant declines that could diminish liquidity and credit availability. Any such diminishment may have a material adverse effect on our operations and our costs of borrowing.
Goodwill impairment charges could have a material adverse effect on our financial condition and results of operations.
Goodwill represents the excess purchase price of acquired businesses over the fair values of the assets acquired and liabilities assumed. We have elected to make the first day of our fiscal fourth quarter, August 1st, the annual impairment assessment date for goodwill. However, we could be required to evaluate the recoverability of goodwill prior to the required annual assessment if we experience a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of one of our businesses. If the fair value of one of our businesses is less than its carrying amount, we could be required to record an impairment charge. The valuation of the businesses requires judgment in evaluating, among other things, recent indications of market activity and estimates of future cash flows, discount rates, and other factors. In making these judgments, we evaluate the financial health of our business, including such factors as market performance, changes in our client base, and operating cash flows. The amount of any impairment could have a material adverse effect on our reported financial results for the period in which the charge is taken.
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Impairment of long-lived assets may adversely affect our operating results.
We review our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. These events and circumstances include, but are not limited to, a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, a significant adverse change in the extent or manner in which we use a long-lived asset, or a change in its physical condition. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying amount. If the projected undiscounted cash flows are less than the carrying amount, an impairment is recorded for the excess of the carrying amount over the estimated fair value, which is generally determined using discounted future cash flows. The amount of any impairment could have a material adverse effect on our reported financial results for the period in which the charge is taken.
Risks Related to Labor and Legal Proceedings
We are defendants in class and representative actions and other lawsuits alleging various claims that could cause us to incur substantial liabilities.
Our business involves employing tens of thousands of employees, many of whom work at our clients’ facilities. We incur risks relating to our employment of these workers, including, but not limited to: claims of misconduct or negligence on the part of our employees; claims by our employees of discrimination or harassment directed at them, including claims relating to actions of our clients; claims related to the employment of undocumented workers or unlicensed personnel; and claims for violations of wage and hour requirements. Some or all of these claims may lead to litigation, including class action litigation, and these matters may cause us to incur negative publicity with respect to these problems. Our insurance will not cover all claims that may be asserted against us. In addition, it is not possible to predict the outcome of these lawsuits or any other proceeding to which we may be subject. These lawsuits and other proceedings may consume substantial amounts of our financial and managerial resources, regardless of the ultimate outcome of the lawsuits and other proceedings. In addition, we may become subject to similar lawsuits in the same or other jurisdictions. An unfavorable outcome with respect to these lawsuits and any future lawsuits could, individually or in the aggregate, cause us to incur substantial liabilities that may have a material adverse effect upon our business, reputation, financial condition, or results of operations. We discuss certain cases to which we are party in greater detail in “Item 3., “Legal Proceedings,” and Note 12, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements
Federal health care reform legislation may adversely affect our business and results of operations.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the United States (collectively, the “Health Care Reform Laws”). The Health Care Reform Laws include a large number of health-related provisions, including requiring most individuals to have health insurance and establishing new regulations on health plans. Although the Health Care Reform Laws do not mandate that employers offer health insurance, beginning in 2015, penalties will be assessed on large employers who do not offer health insurance that meets certain affordability or benefit requirements. Providing such additional health insurance benefits to our employees, or the payment of penalties if such coverage is not provided, would increase our expense. If we are unable to raise the rates we charge our clients to cover this expense, such increases in expense could reduce our operating profit.
In addition, under the Health Care Reform Laws, employers will have to file a significant amount of additional information with the Internal Revenue Service. These and other requirements related to compliance under the Health Care Reform Laws could result in increased costs, expanded liability exposure, and other changes in the ways we provide healthcare and other benefits to our employees.
Changes in immigration laws or enforcement actions or investigations under such laws could significantly adversely affect our labor force, operations, and financial results.
As many of our jobs do not require our employees to be able to read or write the English language, we are an attractive employer for recent émigrés to this country. While immigration laws require us to take certain steps intended to confirm the legal status of our immigrant labor force and while we reinforce these steps with additional measures desires to reinforce compliance, we may nonetheless inadvertently employ workers who are or become undocumented. Violations of laws and regulations could subject us to substantial fines and penalties. To the extent that these laws and regulations and corresponding enforcement practices and compliance standards become more stringent, our payroll expenses could be negatively impacted.
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Labor disputes could lead to loss of revenues or expense variations.
At October 31, 2013, approximately 43% of our employees were subject to various local collective bargaining agreements, some of which will expire or become subject to renegotiation during the year. In addition, at any given time we may face a number of union organizing drives. When one or more of our major collective bargaining agreements becomes subject to renegotiation or when we face union organizing drives, we and the union may disagree on important issues that could lead to a strike, work slowdown, or other job actions at one or more of our locations. In a market where we and a number of major competitors are unionized, but other competitors are not unionized, we could lose clients to competitors who are not unionized. A strike, work slowdown, or other job action could in some cases disrupt us from providing services, resulting in reduced revenues. If declines in client service occur or if our clients are targeted for sympathy strikes by other unionized workers, contract cancellations could result. Moreover, negotiating a first time agreement or renegotiating an existing collective bargaining agreement could result in a substantial increase in labor and benefits expenses that we may be unable to pass through to clients.
We participate in multiemployer pension plans that under certain circumstances could result in material liabilities being incurred.
We participate in various multiemployer pension plans under union and industry-wide agreements that generally provide defined pension benefits to employees covered by collective bargaining agreements. Because of the nature of multiemployer plans, there are risks associated with participation in these plans that differ from single-employer plans. Assets contributed by an employer to a multiemployer plan are not segregated into a separate account and are not restricted to provide benefits only to employees of that contributing employer. In the event another participating employer to a multiemployer plan no longer contributes to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, including us. In the event of the termination of a multiemployer pension plan or if we withdraw from a multiemployer pension plan, under applicable law we potentially could incur material liabilities. We further discuss our participation in multiemployer pension and postretirement plans in Note 11, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements.
Other
Natural disasters or acts of terrorism could disrupt services.
Storms, earthquakes, drought, floods, or other natural disasters or acts of terrorism may result in reduced revenues or property damage. Disasters may also cause economic dislocations throughout the country. In addition, natural disasters or acts of terrorism may increase the volatility of financial results, either due to increased costs caused by the disaster with partial or no corresponding compensation from clients or, alternatively, increased revenues and profitability related to tag jobs, special projects, and other higher margin work necessitated by the disaster.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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Our principal executive office is located at 551 Fifth Avenue, Suite 300, New York, New York 10176. Below is a summary of our principal properties as of October 31, 2013, which consists primarily of our executive offices, including IT datacenters and shared services.
| Location | Character | Approximate Square Feet |
Lease Expiration Date, Unless Owned |
Segment | ||||
| Alpharetta, Georgia |
Office (IT Datacenter) | 24,870 | Owned | All | ||||
| Atlanta, Georgia |
Office (Shared Services) | 33,004 | 11/30/2016 | All | ||||
| Atlanta, Georgia |
Office (Air Serv Headquarters) |
18,154 | 10/15/2015 | Other | ||||
| Houston, Texas |
Office (Shared Services) | 36,248 | 7/31/2017 | All | ||||
| Houston, Texas |
Office (Onsite Headquarters) |
11,290 | 8/31/2018 | Janitorial, Facility Services, Parking, Security | ||||
| Irvine, California |
Office (Building & Energy Solutions Headquarters) |
29,192 | 12/31/2016 | Building & Energy Solutions, Facility Services | ||||
| New York, New York |
Office (Corporate Headquarters) |
23,580 | 2/28/2028 | Corporate | ||||
In addition to the above properties, we have other corporate, subsidiary, regional, branch, or district offices and warehouses, and we operate parking facilities in several locations primarily in the United States. We believe that these properties are well maintained, in good operating condition, and suitable for the purposes for which they are used.
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We are party to various legal, administrative, and other inquiries arising in the normal course of business relating to labor and employment, contracts, personal injury, and other matters, some of which allege substantial monetary damages. Some of these actions may be brought as a class action on behalf of a purported class of employees. While the results of these proceedings, claims, and inquiries cannot be predicted with certainty, management believes that the final outcome of the foregoing will not have a material adverse effect on our consolidated financial statements, results of operations, or cash flows.
Ongoing Cases
We are a defendant in a number of lawsuits, including but not limited to the following lawsuits related to alleged violations of federal and/or state wage-and-hour laws or allegations of sexual harassment, discrimination, or retaliation:
| • | the consolidated cases of Augustus, Hall and Davis v. American Commercial Security Services (ACSS) filed July 12, 2005, in the Superior Court of California, Los Angeles County (the “Augustus case”); |
| • | Bojorquez v. ABM Industries Incorporated and ABM Janitorial Services—Northern California, Inc. filed on January 13, 2010, in the San Francisco Superior Court (the “Bojorquez case”); and |
| • | the consolidated cases of Bucio and Martinez v. ABM Janitorial Services filed on April 7, 2006, in the Superior Court of California, County of San Francisco (the “Bucio case”). |
Augustus
The Augustus case is a certified class action involving allegations that we violated certain state laws relating to rest breaks. On February 8, 2012, the plaintiffs filed a motion for summary judgment on the rest break claim, which sought damages in the amount of $103.1 million, and we filed a motion for decertification of the class. OnJuly 6, 2012, the Superior Court of California, Los Angeles County (the “Superior Court”), heard plaintiffs’ motion for damages on the rest break claim and our motion to decertify the class. On July 31, 2012, the Superior Court denied our motion and entered judgment in favor of plaintiffs in the amount of approximately $89.7 million. This amount did not include plaintiffs’ attorneys’ fees. We filed a notice of appeal on August 29, 2012. The plaintiffs filed three separate motions for attorneys’ fees. One motion sought attorneys’ fees from the common fund. (The common fund refers to the approximately $89.7 million judgment entered in favor of the plaintiffs.) The other two motions sought attorneys’ fees from us in an aggregate amount of approximately $12.4 million. On October 12, 2012, we filed oppositions to the two fee motions seeking attorneys’ fees from us. On January 14, 2013, the Superior Court heard all three fee motions and it granted plaintiffs’ fee motion with respect to the common fund in full. The Superior Court denied one fee motion in its entirety and reduced the other fee motion to approximately $4.5 million. We have appealed the Superior Court’s rulings, and on April 30, 2013, the Court agreed to consolidate the appeals. We strongly disagree with the decisions of the Superior Court both with respect to the underlying case and with respect to the award of attorneys’ fees and costs. We firmly believe that we have complied with applicable law.
Bojorquez
We are a defendant in the Bojorquez case. Plaintiff brought suit for sexual harassment, retaliation, and failure to prevent harassment and discrimination. On May 17, 2012, a jury awarded the plaintiff approximately $0.8 million in damages. We have appealed this decision. On April 11, 2013, the Court awarded plaintiff attorneys’ fees in the amount of $2.5 million. If we prevail in our appeal of the jury’s verdict, the Court’s award of plaintiff’s attorneys’ fees will be reversed.
Bucio
The Bucio case is a purported class action involving allegations that we failed to track work time and provide breaks. On April 19, 2011, the trial court held a hearing on plaintiffs’ motion to certify the class. At the conclusion of that hearing, the trial court denied plaintiffs’ motion to certify the class. On May 11, 2011, the plaintiffs filed a motion to reconsider, which was denied. The plaintiffs have appealed the class certification issues. The trial court stayed the underlying lawsuit pending the decision in the appeal. On August 30, 2012, the plaintiffs filed their appellate brief on the class certification issues. We filed our responsive brief on November 15, 2012. Oral argument relating to the appeal has not been scheduled.
We expect to prevail in these ongoing cases. However, as litigation is inherently unpredictable, there can be no assurance in this regard. If the plaintiffs in one or more of these cases, or other cases, do prevail, the results may have a material effect on our financial position or cash flows.
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Other
During October 2011, we began an internal investigation into matters relating to compliance with the U.S. Foreign Corrupt Practices Act and our internal policies in connection with services provided by a foreign entity affiliated with a former joint venture partner of The Linc Group, LLC (“Linc”). Such services commenced prior to the acquisition of Linc. As a result of the investigation, we caused Linc to terminate its association with the arrangement. In December 2011, we contacted the U.S. Department of Justice and the SEC to voluntarily disclose the results of our internal investigation to date, and we are cooperating with the government’s investigation. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information and Dividends
Our common stock is listed on the New York Stock Exchange (NYSE: ABM). The following table sets forth the high and low sales prices of our common stock on the New York Stock Exchange and quarterly cash dividends declared on shares of common stock for the periods indicated.
| Fiscal Quarter | ||||||||||||||||
| (In dollars) | First | Second | Third | Fourth | ||||||||||||
| Fiscal Year 2013 |
||||||||||||||||
| Price range of common stock: |
||||||||||||||||
| High |
$ | 22.00 | $ | 23.48 | $ | 26.70 | $ | 29.20 | ||||||||
| Low |
$ | 17.98 | $ | 20.09 | $ | 21.79 | $ | 24.11 | ||||||||
| Dividends declared per share |
$ | 0.150 | $ | 0.150 | $ | 0.150 | $ | 0.150 | ||||||||
| Fiscal Year 2012 |
||||||||||||||||
| Price range of common stock: |
||||||||||||||||
| High |
$ | 22.96 | $ | 24.61 | $ | 23.41 | $ | 20.83 | ||||||||
| Low |
$ | 18.98 | $ | 21.73 | $ | 17.85 | $ | 17.95 | ||||||||
| Dividends declared per share |
$ | 0.145 | $ | 0.145 | $ | 0.145 | $ | 0.145 | ||||||||
To our knowledge, there are no current factors that are likely to materially limit our ability to pay comparable dividends for the foreseeable future.
Stockholders
At December 11, 2013, there were 3,481 registered holders of our common stock.
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Performance Graph.
The following graph compares a $100 investment in our stock on October 31, 2008 with a $100 investment in each of the Standard & Poor’s 500 Index (“S&P 500 Index”) and the Russell 2000 Value Index, also made on October 31, 2008. The graph portrays total return, 2008–2013, assuming reinvestment of dividends. The comparisons in the following graph are based on historical data and are not indicative of, or intended to forecast, the possible future performance of our common stock. This graph shows returns based on fiscal years ended October 31.
| INDEXED RETURNS Years Ending October 31, |
||||||||||||||||||||||||
| Company / Index |
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||||
| ABM Industries Incorporated |
100 | 118.53 | 146.01 | 134.14 | 129.65 | 192.54 | ||||||||||||||||||
| S&P 500 Index |
100 | 109.80 | 127.94 | 138.29 | 159.32 | 202.61 | ||||||||||||||||||
| Russell 2000 Value Index |
100 | 101.96 | 126.87 | 131.36 | 150.37 | 199.75 | ||||||||||||||||||
This performance graph shall not be deemed to be “soliciting material”, or “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from our consolidated financial statements. Certain amounts in the balance sheet data have been reclassified to conform to the current year presentation. The following data should be read in conjunction with Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8., “Financial Statements and Supplementary Data.” These items include discussions of factors affecting comparability of the information shown below.
| Years Ended October 31, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| (in thousands, except per share amounts) |
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| Statement of Income Data: |
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| Revenues (1) |
$ | 4,809,281 | $ | 4,300,265 | $ | 4,246,842 | $ | 3,495,747 | $ | 3,481,823 | ||||||||||
| Operating profit (2) |
119,025 | 96,566 | 117,568 | 108,839 | 92,107 | |||||||||||||||
| Income from continuing operations |
72,900 | 62,718 | 68,698 | 63,870 | 55,490 | |||||||||||||||
| Per Share Data: |
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| Net income per common share—Basic |
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| Income from continuing operations |
$ | 1.33 | $ | 1.16 | $ | 1.29 | $ | 1.23 | $ | 1.08 | ||||||||||
| Loss from discontinued operations, net of taxes |
— | — | — | — | (0.02) | |||||||||||||||
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| Net income |
$ | 1.33 | $ | 1.16 | $ | 1.29 | $ | 1.23 | $ | 1.06 | ||||||||||
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| Net income per common share—Diluted |
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| Income from continuing operations |
$ | 1.30 | $ | 1.14 | $ | 1.27 | $ | 1.21 | $ | 1.07 | ||||||||||
| Loss from discontinued operations, net of taxes |
— | — | — | — | (0.02) | |||||||||||||||
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| Net income |
$ | 1.30 | $ | 1.14 | $ | 1.27 | $ | 1.21 | $ | 1.05 | ||||||||||
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| Weighted-average common and common equivalent shares outstanding |
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| Basic |
54,877 | 53,987 | 53,121 | 52,117 | 51,373 | |||||||||||||||
| Diluted |
56,067 | 54,914 | 54,103 | 52,908 | 51,845 | |||||||||||||||
| Dividends declared per common share |
$ | 0.60 | $ | 0.58 | $ | 0.56 | $ | 0.54 | $ | 0.52 | ||||||||||
| Statement of Cash Flow Data: |
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| Net cash provided by continuing operating activities |
$ | 135,313 | $ | 148,947 | $ | 156,800 | $ | 140,746 | $ | 121,255 | ||||||||||
| As of October 31, | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| (in thousands) |
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| Balance Sheet Data: |
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| Total assets |
$ | 2,119,236 | $ | 1,851,158 | $ | 1,861,505 | $ | 1,548,670 | $ | 1,521,153 | ||||||||||
| Trade accounts receivable, net of allowances (3) |
672,525 | 561,317 | 552,098 | 450,513 | 445,241 | |||||||||||||||
| Insurance recoverables |
68,704 | 64,500 | 70,610 | 76,098 | 72,117 | |||||||||||||||
| Goodwill (4) |
872,396 | 751,610 | 750,872 | 593,983 | 547,237 | |||||||||||||||
| Other intangible assets, net of accumulated amortization (5) |
144,401 | 109,138 | 128,994 | 65,774 | 60,199 | |||||||||||||||
| Investments in auction rate securities (6) |
12,994 | 17,780 | 15,670 | 20,171 | 19,531 | |||||||||||||||
| Investments in unconsolidated affiliates, net (7) |
17,952 | 14,863 | 14,423 | — | — | |||||||||||||||
| Line of credit (8) |
314,870 | 215,000 | 300,000 | 140,500 | 172,500 | |||||||||||||||
| Insurance claims |
357,964 | 343,804 | 341,401 | 348,314 | 346,327 | |||||||||||||||
| (1) | Factors affecting comparability of revenues consisted of the following: |
| • | Revenues in the year ended October 31, 2013 included $408.1 million associated with our acquisitions on November 1, 2012 consisting of Air Serv Corporation (“Air Serv”), HHA Services, Inc. (“HHA”), and certain assets and liabilities of Calvert-Jones Company, Inc. (“Calvert-Jones”) (collectively, the “November Acquisitions”). |
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| • | Revenues in the year ended October 31, 2011 included $512.9 million associated with the December 1, 2010 acquisition of The Linc Group, LLC (“Linc”). |
| • | Revenues in the year ended October 31, 2010 included approximately $43.0 million associated with the acquisition of certain assets of Five Star Parking, Network Parking Company Ltd., and System Parking, Inc. (collectively, this asset acquisition is referred to as “L&R”), and Diversco, Inc. L&R was acquired on October 1, 2010, and Diversco, Inc. was acquired on June 30, 2010. |
| (2) | Factors affecting comparability of operating profit consisted of the following: |
| • | Operating profit in the year ended October 31, 2013 included operating profit of $14.8 million related to the November Acquisitions, which consisted of $366.6 million of operating expenses, $16.9 million of selling, general and administrative expenses, and $9.3 million of amortization expense. Additionally, operating profit reflected a $10.6 million adjustment to increase self-insurance reserves related to prior year claims. |
| • | Operating profit in the year ended October 31, 2012 reflected $7.8 million in certain legal and settlement fees and a $7.3 million adjustment to increase self-insurance reserves related to prior year claims. |
| • | Operating profit in the year ended October 31, 2011 included operating profit of $11.1 related to the Linc acquisition, which consisted of $417.7 million of operating expenses, $72.7 million of selling, general and administrative expenses, and $11.3 million of amortization expense. |
| • | Operating profit in the year ended October 31, 2009 included the impact of a $21.8 million expense associated with (a) the implementation of a new payroll and human resources information system, and the upgrade of our accounting systems, (b) the transition of certain back office functions to our Shared Services Center in Houston, Texas, and (c) the move of our corporate headquarters to New York. Additionally, operating profit reflected a $9.4 million adjustment to increase self-insurance reserves related to prior year claims. |
(3) Trade accounts receivable, net of allowances, increased by $57.3 million on November 1, 2012 as a result of the November Acquisitions in fiscal year 2013. Trade accounts receivable, net of allowances, increased by $86.3 million on December 1, 2010 as a result of the Linc acquisition in fiscal year 2011.
(4) Goodwill increased by $117.1 million on November 1, 2012 as a result of the November Acquisitions in fiscal year 2013. Goodwill increased by $156.1 million on December 1, 2010 as a result of the Linc acquisition in fiscal year 2011.
(5) Other intangible assets, net of accumulated amortization, increased by $62.2 million on November 1, 2012 as a result of the November Acquisitions in fiscal year 2013. Other intangible assets, net of accumulated amortization, increased by $87.0 million on December 1, 2010 as a result of the Linc acquisition in fiscal year 2011.
(6) During the year ended October 31, 2013, one of our auction rate securities was redeemed by the issuer at its par value of $5.0 million. No gain or loss was recognized upon its redemption.
(7) Investments in unconsolidated affiliates relate to investments in certain unconsolidated affiliated entities that were acquired as a result of the Linc acquisition on December 1, 2010.
(8) Outstanding borrowings under our line of credit were primarily associated with acquisitions.
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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 |
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| 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 | % | |||||||||||||||||||||||||
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| Total expenses |
4,690,256 | 4,203,699 | 486,557 | 11.6 | % | |||||||||||||||||||||||||
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| 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 | % | ||||||||||||||||||||||
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| 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 | % | ||||||||||||||||||||||
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| Income from continuing operations |
72,900 | 62,718 | 10,182 | 16.2 | % | |||||||||||||||||||||||||
| Loss from discontinued operations, net of taxes |
— | (136 | ) | 136 | (100.0 | )% | ||||||||||||||||||||||||
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| Net income |
$ | 72,900 | $ | 62,582 | $ | 10,318 | 16.5 | % | ||||||||||||||||||||||
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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 |
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| 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 | * | |||||||||||||||||||||||||
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| $ | 4,809,281 | $ | 4,300,265 | $ | 509,016 | 11.8 | % | |||||||||||||||||||||||
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| Operating profit |
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| 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.
29
Table of Contents
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 | % | |||||||||||||||||||
| Operating profit as a % of revenues |
4.5 | % | 4.0 | % | 0.5 | % | ||||||||||||||||||
Facility Services revenues increased by $33.3 million, or 5.8%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The increase was primarily attributable to increase in the scope of work from existing clients and new business that exceeded contract losses.
Operating profit increased by $4.3 million, or 18.8%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. Operating profit margins increased by 0.5% to 4.5% in the year ended October 31, 2013 from 4.0% in the year ended October 31, 2012. The increase in operating profit margins was driven by a reduction in general and administrative expenses due to cost control measures.
Parking
| Years Ended October 31, | ||||||||||||||||||||
| ($ in thousands) |
2013 | 2012 | (Decrease) / Increase | |||||||||||||||||
| Revenues |
$ | 609,082 | $ | 615,132 | $ | (6,050 | ) | (1.0 | )% | |||||||||||
| Operating profit |
27,537 | 26,189 | 1,348 | 5.1 | % | |||||||||||||||
| Operating profit as a % of revenues |
4.5 | % | 4.3 | % | 0.2 | % | ||||||||||||||
Management reimbursement revenues totaled $302.4 million and $305.7 million for the years ended October 31, 2013 and 2012, respectively.
Parking revenues decreased by $6.1 million, or 1.0%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The decrease was primarily related to lower management reimbursement revenues and the termination of certain lower margin contracts that exceeded new business.
Operating profit increased by $1.3 million, or 5.1%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. Operating profit margins increased by 0.2% to 4.5% in the year ended October 31, 2013 from 4.3% in the year ended October 31, 2012. The increase in operating profit margins was driven by the termination of certain lower margin contracts. This increase was partially offset by the absence of a legal settlement in the current year which favorably impacted 2012.
Security
| Years Ended October 31, | ||||||||||||||||||||||||
| ($ in thousands) | 2013 | 2012 | Increase | |||||||||||||||||||||
| Revenues |
$ | 381,472 | $ | 365,926 | $ | 15,546 | 4.2 | % | ||||||||||||||||
| Operating profit |
12,943 | 7,835 | 5,108 | 65.2 | % | |||||||||||||||||||
| Operating profit as a % of revenues |
3.4 | % | 2.1 | % | 1.3 | % | ||||||||||||||||||
Security revenues increased by $15.5 million, or 4.2%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The increase was primarily driven by additional revenues from new business that exceeded contract losses and tag work revenue from existing clients.
30
Table of Contents
Operating profit increased by $5.1 million, or 65.2%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. Operating profit margins increased by 1.3% to 3.4% in the year ended October 31, 2013 from 2.1% in the year ended October 31, 2012. The increase in operating profit margins was primarily driven by higher margins on increased tag work in the current year and continuing reductions in the severity of the worker’s compensation claim pool, which ultimately translated to lower allocated insurance expense for the segment. In addition, operating profit margins were positively impacted by a reduction in salary and salary-related expenses due to improved labor management, a reduction in selling, general and administrative expenses due to additional cost control measures, and lower legal fees.
Building & Energy Solutions
| Years Ended October 31, | ||||||||||||||||||||||||
| ($ in thousands) | 2013 | 2012 | Increase | |||||||||||||||||||||
| Revenues |
$ | 401,536 | $ | 348,279 | $ | 53,257 | 15.3 | % | ||||||||||||||||
| Operating profit |
18,662 | 12,340 | 6,322 | 51.2 | % | |||||||||||||||||||
| Operating profit as a % of revenues |
4.6 | % | 3.5 | % | 1.1 | % | ||||||||||||||||||
Building & Energy Solutions revenues increased by $53.3 million, or 15.3%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. Revenues in the year ended October 31, 2013, included $71.9 million in revenues from the HHA and Calvert-Jones acquisitions on November 1, 2012. Excluding the impact of those acquisitions, revenues decreased by $18.6 million, or 5.3%. 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 $6.3 million, or 51.2%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. Operating profit in the year ended October 31, 2013, included $2.4 million in operating profit from the HHA and Calvert-Jones acquisitions. Operating profit margins increased by 1.1% to 4.6% in the year ended October 31, 2013 from 3.5% in the year ended October 31, 2012. The increase in operating profit margins was primarily related to:
| • | increased contribution from higher margin bundled energy solutions and franchise revenues; |
| • | higher equity earnings from certain investments in unconsolidated affiliates that provide facility solutions principally to the U.S. Government; and |
| • | a reduction in general and administrative expenses due to additional cost control measures. |
The increase was partially offset by:
| • | higher salary and salary-related expenses as a result of increased headcount to support sales initiatives; and |
| • | an accelerated method of amortization for recently acquired customer relationships from the HHA and Calvert-Jones acquisitions, which are amortized using the sum-of-the-years’-digits method. |
Other
| Years Ended October 31, | ||||||||||||||||||||||
| ($ in thousands) | 2013 | 2012 | Increase | |||||||||||||||||||
| Revenues |
$ | 341,516 | $ | — | $ | 341,516 | NM* | |||||||||||||||
| Operating profit |
12,606 | — | 12,606 | NM* | ||||||||||||||||||
| Operating profit as a % of revenues |
3.7 | % | — | 3.7 | % | |||||||||||||||||
| * | Not meaningful |
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Table of Contents
Revenues and operating profit in the first fiscal year of our Other segment, which was created as a result of the November 1, 2012 acquisition of Air Serv, were $341.5 million and $12.6 million, respectively. Operating profit for the year ended October 31, 2013 includes amortization expense of $6.4 million and depreciation expense of $5.2 million relating to the Air Serv acquisition.
As a result of the purchase price allocation, the fair value assigned to customer relationships was $42.0 million, which will be amortized on an accelerated method using the sum-of-the-years’-digits over a weighted-average life of 15 years. The fair value assigned to trademarks and a non-compete agreement was $2.5 million, which will be amortized on a straight-line basis over two to three years.
Corporate
| Years Ended October 31, | ||||||||||||||||||||||||
| ($ in thousands) | 2013 | 2012 | Increase | |||||||||||||||||||||
| Corporate expenses |
$ | (108,579) | $ | (105,390) | $ | (3,189) | (3.0)% | |||||||||||||||||
Corporate expenses increased by $3.2 million, or 3.0%, during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The increase in corporate expenses was primarily related to:
| • | a $4.0 million increase in sales and marketing expenses associated with new growth initiatives; |
| • | a $3.8 million increase in restructuring costs associated with the realignment of our operational structure; |
| • | a $3.3 million increase in the self-insurance expense related to prior year claims, primarily as a result of unfavorable developments in certain general liability and workers’ compensation claims during the year ended October 31, 2013; |
| • | a $3.1 million increase in share-based compensation expense resulting 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; and |
| • | a $0.9 million increase in costs associated with our rebranding initiative. |
The increase was partially offset by:
| • | a $6.3 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 in connection with a prior divestiture; and |
| • | $1.7 million lower IT costs as a result of the centralization of our IT datacenters in fiscal year 2012. |
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Table of Contents
The Year Ended October 31, 2012 Compared with the Year Ended October 31, 2011
Consolidated
| Years Ended October 31, | ||||||||||||||
| ($ in thousands) |
2012 | 2011 | Increase/(Decrease) | |||||||||||
| Revenues |
$ | 4,300,265 | $ | 4,246,842 | $ | 53,423 | 1.3% | |||||||
| Expenses |
||||||||||||||
| Operating |
3,854,380 | 3,781,264 | 73,116 | 1.9% | ||||||||||
| Gross margin as a % of revenues |
10.4% | 11.0% | (0.6)% | |||||||||||
| Selling, general and administrative |
327,855 | 324,762 | 3,093 | 1.0% | ||||||||||
| As a % of revenues |
7.6% | 7.6% | — | |||||||||||
| Amortization of intangible assets |
21,464 | 23,248 | (1,784) | (7.7)% | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total expenses |
4,203,699 | 4,129,274 | 74,425 | 1.8% | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Operating profit |
96,566 | 117,568 | (21,002) | (17.9)% | ||||||||||
| Other-than-temporary impairment credit |
(313) | — | (313) | NM* | ||||||||||
| Income from unconsolidated affiliates, net |
6,395 | 3,915 | 2,480 | 63.3% | ||||||||||
| Interest expense |
(9,999) | (15,805) | 5,806 | (36.7)% | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Income from continuing operations before |
92,649 | 105,678 | (13,029) | (12.3)% | ||||||||||
| Provision for income taxes |
(29,931) | (36,980) | 7,049 | (19.1)% | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Income from continuing operations |
62,718 | 68,698 | (5,980) | (8.7)% | ||||||||||
| Loss from discontinued operations, net of |
(136) | (194) | 58 | (29.9)% | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Net income |
$ | 62,582 | $ | 68,504 | $ | (5,922) | (8.6)% | |||||||
|
|
|
|
|
|
|
|||||||||
| * | Not meaningful |
Revenues
Revenues increased by $53.4 million, or 1.3%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to revenues associated with the timing of the Linc Acquisition, which occurred on December 1, 2010, new business within the Security and Janitorial segments, and additional revenues from new commercial service and maintenance contracts, including new bundled energy solutions contracts. The increase in revenues was partially offset by the continuing impact of reduction in scope of work and contract losses starting in 2011 and the termination of certain U.S. Government contracts in Iraq earlier in 2012.
Operating Expenses
Operating expenses increased by $73.1 million, or 1.9%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. As a percentage of revenues, gross margin decreased by 0.6% to 10.4% in the year ended October 31, 2011 from 11.0% in the year ended October 31, 2011. The decrease in gross margin was primarily related to an increase in salary and salary-related expenses, including higher state unemployment insurance rates, and the impact of one additional working day in the year ended October 31, 2012. Also contributing to the decrease were: higher self-insurance expenses related to prior year claims, primarily as a result of unfavorable developments in certain general liability and workers’ compensation claims during the year ended October 31, 2012; the absence of a refund of paid health insurance premiums during the year ended October 31, 2011; and the continuing impact of increasing competitive pricing pressures and contract losses starting in 2011, including the termination of certain U.S. Government contracts in Iraq earlier in 2012.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $3.1 million, or 1.0%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. As a percentage of revenues, selling, general and administrative expenses remained flat at 7.6% in the years ended October 31, 2012 and 2011.
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Table of Contents
The increase in selling, general and administrative expenses was primarily related to:
| • | $4.7 million higher expense associated with the settlement of certain legal cases; |
| • | $3.5 million of legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture; |
| • | the absence of a $2.7 million settlement received in 2011 related to a dispute that arose in connection with the 2010 acquisition of Five Star Parking, Network Parking Company Ltd., and System Parking, Inc. (collectively, this asset acquisition is referred to as “L&R”); |
| • | $2.0 million of cost increases associated with our rebranding initiative; and |
| • | a $1.8 million settlement paid in exchange for a release from certain restrictive covenants in connection with a prior divestiture. |
The increase was partially offset by:
| • | a $5.6 million reduction in acquisition transaction costs, primarily related to the Linc Acquisition in 2011; |
| • | $5.5 million lower employee compensation expense and the absence of severance expense relating to an executive officer in 2011; and |
| • | a $1.4 million reduction primarily related to the centralization of our IT datacenters and the impact of additional company-wide cost control measures in 2012. |
Amortization of Intangible Assets
Amortization of intangible assets decreased by $1.8 million, or 7.7%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The decrease was primarily related to certain intangible assets being amortized using the sum-of-the-years’-digits method, which results in declining amortization expense over the assets’ useful lives.
Income from Unconsolidated Affiliates, Net
Income from unconsolidated affiliates, net, increased by $2.5 million, or 63.3%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase 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.
Interest Expense
Interest expense decreased by $5.8 million, or 36.7%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The decrease was primarily related to a decrease in average borrowings and average interest rates under our line of credit. The average outstanding balances under our line of credit were $291.1 million and $369.1 million in the years ended October 31, 2012 and 2011, respectively.
Provision for Income Taxes
The effective tax rate on income from continuing operations for the years ended October 31, 2012 and 2011 was 32.3% and 35.0%, respectively. The effective tax rate for the year ended October 31, 2012 was lower than the effective tax rate for the year ended October 31, 2011, primarily due to net nonrecurring favorable federal and state tax benefits recorded during the year ended October 31, 2012. These tax benefits included a $6.9 million re-measurement of certain unrecognized tax benefits and $1.9 million of additional employment-based tax credits. Additionally, the effective tax rate decrease for 2012 was offset by the expiration of employment-based tax credits as of December 31, 2011 and an increase in certain state tax rates in jurisdictions where we operate.
34
Table of Contents
Segment Information
Segment revenues and operating profits for the years ended October 31, 2012 and 2011 were as follows:
| Years Ended October 31, | ||||||||||||||||
| ($ in thousands) |
2012 | 2011 | Increase / (Decrease) | |||||||||||||
| Revenues |
||||||||||||||||
| Janitorial |
$ | 2,394,344 | $ | 2,380,195 | $ | 14,149 | 0.6% | |||||||||
| Facility Services |
576,136 | 553,295 | 22,841 | 4.1% | ||||||||||||
| Parking |
615,132 | 615,679 | (547) | (0.1)% | ||||||||||||
| Security |
365,926 | 350,377 | 15,549 | 4.4% | ||||||||||||
| Building & Energy Solutions |
348,279 | 346,086 | 2,193 | 0.6% | ||||||||||||
| Corporate |
448 | 1,210 | (762) | (63.0)% | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| $ | 4,300,265 | $ | 4,246,842 | $ | 53,423 | 1.3% | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Operating profit |
||||||||||||||||
| Janitorial |
$ | 135,967 | $ | 140,621 | $ | (4,654) | (3.3)% | |||||||||
| Operating profit as a % of revenues |
5.7% | 5.9% | (0.2)% | |||||||||||||
| Facility Services |
23,083 | 24,876 | (1,793) | (7.2)% | ||||||||||||
| Operating profit as a % of revenues |
4.0% | 4.5% | (0.5)% | |||||||||||||
| Parking |
26,189 | 24,257 | 1,932 | 8.0% | ||||||||||||
| Operating profit as a % of revenues |
4.3% | 3.9% | 0.4% | |||||||||||||
| Security |
7,835 | 7,968 | (133) | (1.7)% | ||||||||||||
| Operating profit as a % of revenues |
2.1% | 2.3% | (0.2)% | |||||||||||||
| Building & Energy Solutions |
12,340 | 12,423 | (83) | (0.7)% | ||||||||||||
| Operating profit as a % of revenues |
3.5% | 3.6% | (0.1)% | |||||||||||||
| Corporate |
(105,390) | (88,662) | (16,728) | (18.9)% | ||||||||||||
| Adjustment for income from unconsolidated affiliates, net, included in Building & Energy Solutions |
(3,458) | (3,915) | 457 | (11.7)% | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| $ | 96,566 | $ | 117,568 | $ | (21,002) | (17.9)% | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Janitorial |
||||||||||||||||
| Years Ended October 31, | ||||||||||||||||
| ($ in thousands) |
2012 | 2011 | Increase / (Decrease) | |||||||||||||
| Revenues |
$ | 2,394,344 | $ | 2,380,195 | $ | 14,149 | 0.6% | |||||||||
| Operating profit |
135,967 | 140,621 | (4,654) | (3.3)% | ||||||||||||
| Operating profit as a % of revenues |
5.7% | 5.9% | (0.2)% | |||||||||||||
Janitorial revenues increased by $14.1 million, or 0.6%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to additional revenues from new business, partially offset by the continuing impact of lost business and reduction in scope of work starting in 2011.
Operating profit decreased by $4.7 million, or 3.3%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. Operating profit margins decreased by 0.2% to 5.7% in the year ended October 31, 2012 from 5.9% in the year ended October 31, 2011. The decrease in operating profit was primarily related to higher salary and salary-related expenses, including the impact of higher state unemployment insurance rates and one additional working day in the year ended October 31, 2012. Also contributing to the decrease in operating profit were higher legal expenses and the continuing impact of lost business and increasing competitive pricing pressures starting in 2011. The decrease in operating profit was partially offset by: a reduction in the sales allowance reserve; lower selling, general and administrative expenses due to additional cost control measures; and lower amortization of intangible assets expense in the year ended October 31, 2012.
35
Table of Contents
| Facility Services |
||||||||||||||||
| Years Ended October 31, | ||||||||||||||||
| ($ in thousands) |
2012 | 2011 | Increase / (Decrease) | |||||||||||||
| Revenues |
$ | 576,136 | $ | 553,295 | $ | 22,841 | 4.1% | |||||||||
| Operating profit |
23,083 | 24,876 | (1,793) | (7.2)% | ||||||||||||
| Operating profit as a % of revenues |
4.0% | 4.5% | (0.5)% | |||||||||||||
Facility Services revenues increased by $22.8 million, or 4.1%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to revenues associated with the timing of the Linc Acquisition, which was acquired on December 1, 2010, increases in scope of work from existing clients, and new business that exceeded contract losses.
Operating profit decreased by $1.8 million, or 7.2%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. Operating profit margins decreased by 0.5% to 4.0% in the year ended October 31, 2012 from 4.5% in the year ended October 31, 2011. The decrease in operating profit margins was driven by lower margins on new business contracts as a result of increasing competitive pricing pressures and the impact of higher state unemployment insurance rates. The decrease in operating profit was partially offset by a reduction in selling, general and administrative expenses due to cost control measures.
| Parking |
||||||||||||||||
| Years Ended October 31, | ||||||||||||||||
| ($ in thousands) |
2012 | 2011 | (Decrease) / Increase | |||||||||||||
| Revenues |
$ | 615,132 | $ | 615,679 | $ | (547) | (0.1)% | |||||||||
| Operating profit |
26,189 | 24,257 | 1,932 | 8.0% | ||||||||||||
| Operating profit as a % of revenues |
4.3% | 3.9% | 0.4% | |||||||||||||
Management reimbursement revenues totaled $305.7 million and $299.4 million for the years ended October 31, 2012 and 2011, respectively.
Parking revenues decreased by $0.5 million, or 0.1%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The decrease was primarily related to lost contracts, including the termination of certain unprofitable contracts, partially offset by increased revenues from existing and new clients.
Operating profit increased by $1.9 million, or 8.0%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. Operating profit margins increased by 0.4% to 4.3% in the year ended October 31, 2012 from 3.9% in the year ended October 31, 2011. The increase in operating profit was primarily related to improved margins on certain existing contracts, the termination of certain unprofitable contracts, and the impact of a favorable legal settlement in fiscal year 2012.
| Security |
||||||||||||||||
| Years Ended October 31, | ||||||||||||||||
| ($ in thousands) |
2012 | 2011 | Increase / (Decrease) | |||||||||||||
| Revenues |
$ | 365,926 | $ | 350,377 | $ | 15,549 | 4.4% | |||||||||
| Operating profit |
7,835 | 7,968 | (133) | (1.7)% | ||||||||||||
| Operating profit as a % of revenues |
2.1% | 2.3% | (0.2)% | |||||||||||||
Security revenues increased by $15.5 million, or 4.4%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to additional revenues from new business that exceeded contract losses and increased revenues from existing clients.
Operating profit decreased by $0.1 million, or 1.7%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. Operating profit margins decreased by 0.2% to 2.1% in the year ended October 31, 2012 from 2.3% in the year ended October 31, 2011. The slight decrease was primarily related to increases in salary and salary-related expenses, including higher state unemployment insurance rates, partially offset by a reduction in selling, general and administrative expenses due to additional cost control measures in the year ended October 31, 2012.
36
Table of Contents
| Building & Energy Solutions |
||||||||||||||||
| Years Ended October 31, | ||||||||||||||||
| ($ in thousands) |
2012 | 2011 | Increase / (Decrease) | |||||||||||||
| Revenues |
$ | 348,279 | $ | 346,086 | $ | 2,193 | 0.6% | |||||||||
| Operating profit |
12,340 | 12,423 | (83) | (0.7)% | ||||||||||||
| Operating profit as a % of revenues |
3.5% | 3.6% | (0.1)% | |||||||||||||
Building & Energy Solutions revenues increased by $2.2 million, or 0.6%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to revenues associated with the timing of the Linc Acquisition, which was acquired on December 1, 2010, and an increase in commercial service and maintenance contracts, including new bundled energy solutions contracts. The increase was partially offset by decreases in U.S. Government contracts, including the termination of certain U.S. Government contracts in Iraq earlier in the year.
Operating profit decreased by $0.1 million, or 0.7%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. Operating profit margins decreased by 0.1% to 3.5% in the year ended October 31, 2012 from 3.6% in the year ended October 31, 2011. The decrease in operating profit margins was primarily related to the unfavorable margin impact of lower revenues from the U.S. Government. The decrease in operating profit was partially offset by higher margins on increased commercial service and maintenance contracts, including new bundled energy solutions contracts.
| Corporate |
||||||||||||||||
| Years Ended October 31, | ||||||||||||||||
| ($ in thousands) |
2012 | 2011 | Increase | |||||||||||||
| Corporate expenses |
$ | (105,390) | $ | (88,662) | $ | (16,728) | (18.9)% | |||||||||
Corporate expenses increased by $16.7 million, or 18.9%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase in corporate expenses was primarily related to:
| • | a $5.2 million increase in the self-insurance expense related to prior year claims, primarily as a result of unfavorable developments in certain general liability and workers’ compensation claims during the year ended October 31, 2012; |
| • | $4.7 million of higher expense in the year ended October 31, 2012 associated with the settlement of certain legal cases; |
| • | the absence of a $3.7 million benefit related to a 2011 refund of health insurance premiums paid to one of our health insurance providers; |
| • | $3.5 million of legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture; |
| • | the absence of a $2.7 million net benefit for a settlement received in 2011 related to a dispute that arose in connection with the L&R acquisition; |
| • | $2.0 million of cost increases associated with our rebranding initiative; and |
| • | a $1.8 million settlement paid in exchange for a release from certain restrictive covenants in connection with a prior divestiture. |
The increase was partially offset by:
| • | a $5.6 million reduction in acquisition transaction costs, primarily related to the Linc Acquisition in 2011; and |
| • | a $2.5 million reduction primarily related to the centralization of our IT datacenters and the absence of severance expense relating to an executive officer in 2011. |
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Liquidity and Capital Resources
We continually project anticipated cash requirements for our operating, investing, and financing needs as well as cash flows generated from operating activities available to meet these needs. Our operating needs could include, among other items, commitments for operating leases, payroll payments, insurance claim payments, interest payments, legal settlements, and pension funding obligations. Our investing and financing spending could include payments for acquired businesses, capital expenditures, commitments for capital leases, share repurchases, dividends, and payments on our outstanding indebtedness.
We believe that our operating cash flows, cash and cash equivalents, borrowing capacity under our line of credit, and access to capital markets are sufficient to fund our operating, investing, and financing requirements for the next twelve months. However, there can be no assurance that our business will generate sufficient cash flows from operations, that anticipated net sales growth and operating improvements will be realized, or that future borrowings will be available under our revolving credit facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.
On a continuing basis, we consider various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures, dividend payments, and share repurchases. These transactions may result in future cash proceeds or payments to shareholders.
As of October 31, 2013, the total outstanding amounts under our $650.0 million line of credit in the form of cash borrowings and standby letters of credit were $314.9 million and $100.6 million, respectively. As of October 31, 2013, we had up to $234.5 million borrowing capacity under our line of credit.
Our ability to draw down available amounts under our line of credit is subject to, and may be limited by, compliance with certain financial covenants, including covenants relating to a fixed charge coverage ratio, a leverage ratio, and consolidated net worth. In addition, other covenants under our line of credit include limitations on liens, dispositions, fundamental changes, investments, and certain transactions and payments. As of October 31, 2013, we were in compliance with all these covenants and expect to be in compliance in the foreseeable future.
On December 11, 2013, we entered into an amendment to increase the size of our line of credit from $650.0 million to $800.0 million and extend the maturity date to December 11, 2018. In connection with this amendment, the pricing for standby letters of credit fees can be reduced based upon certain threshold restrictions. Additionally, our commitment fee on the average daily unused portion of our line of credit decreased by 0.025%.
In addition to revenues and operating profit, our management views operating cash flows as a good indicator of financial performance, as strong operating cash flows provide opportunities for growth both organically and through acquisitions. Operating cash flows primarily depend on: revenue levels; the quality and timing of collections of accounts receivable (including receivables from U.S. Government contracts, which generally have longer collection periods); the timing of payments to suppliers and other vendors; the timing and amount of income tax payments; and the timing and amount of payments on insurance claims.
The table below summarizes our cash and cash equivalents activity:
| Years Ended October 31, | ||||||||||||
| (in thousands) |
2013 | 2012 | 2011 | |||||||||
| Net cash provided by operating activities |
$ | 135,313 | $ | 150,612 | $ | 159,990 | ||||||
| Net cash used in investing activities |
(225,888) | (29,838) | (307,412) | |||||||||
| Net cash provided by (used in) financing activities |
79,755 | (103,782) | 134,443 | |||||||||
Cash Flows
Operating Activities
Net cash provided by operating activities decreased by $15.3 million during the year ended October 31, 2013 as compared to the year ended October 31, 2012. The decrease was primarily related to timing of client receivable collections.
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Net cash provided by operating activities decreased by $9.4 million during the year ended October 31, 2012 as compared to the year ended October 31, 2011. The decrease was primarily related to the decrease in income from continuing operations before income taxes and the timing of payments made for vendor invoices and other accrued liabilities, partially offset by the timing of payments made for insurance claims and trade accounts receivable collections received from clients.
Investing Activities
Net cash used in investing activities increased by $196.1 million during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The increase was primarily related to $199.3 million cash paid, net of cash acquired, for acquisitions made during 2013. The increase was partially offset by the redemption of an auction rate security of $5.0 million in 2013.
Net cash used in investing activities decreased by $277.6 million during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The decrease was primarily related to $290.3 million cash paid, net of cash acquired, for the Linc Acquisition during the year ended October 31, 2011, partially offset by a $5.9 million increase in fixed asset additions in fiscal 2012, and the redemption of an auction rate security of $5.0 million in 2011.
Financing Activities
Net cash provided by financing activities increased by $183.5 million during the year ended October 31, 2013, as compared to the year ended October 31, 2012. The increase was related to a $184.9 million increase in net cash borrowings from our line of credit primarily due to the financing of the November Acquisitions.
Net cash used in financing activities increased by $238.2 million during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to $306.8 million cash borrowed to finance the Linc Acquisition in 2011 and higher net payments made on our line of credit during the year ended October 31, 2012.
Dividends
On December 9, 2013, we announced a quarterly cash dividend of $0.155 per share on our common stock, payable on February 3, 2014. We declared a quarterly cash dividend on our common stock during each of the four quarters of 2013, 2012, and 2011. The total annual dividends paid in the years ended October 31, 2013, 2012, and 2011 were $32.9 million, $31.3 million, and $29.7 million, respectively.
Share Repurchase Program
On September 5, 2012, our Board of Directors approved a share repurchase program authorizing up to $50.0 million in share repurchases. Under this repurchase program, we may purchase our common shares from time to time in open market purchases or privately negotiated transactions and the timing of repurchases will depend upon several factors, including market and business conditions. The repurchase program may be suspended or discontinued at any time without notice. There have been no stock repurchases under this share repurchase program.
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Contractual Obligations
As of October 31, 2013, our future contractual payments, other long-term liabilities, and commercial commitments were as follows:
| ($ in thousands) |
Payments Due By Period | |||||||||||||||||||
| Contractual Obligations |
Total | 2014 | 2015-2016 | 2017-2018 | 2019 and thereafter |
|||||||||||||||
| Operating leases (1) |
$ | 229,640 | $ | 70,268 | $ | 81,941 | $ | 44,679 | $ | 32,752 | ||||||||||
| Information technology service agreements (2) |
8,786 | 5,343 | 3,442 | 1 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 238,426 | $ | 75,611 | $ | 85,383 | $ | 44,680 | $ | 32,752 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Payments Due By Period | ||||||||||||||||||||
| Other Long-Term Liabilities |
Total | 2014 | 2015-2016 | 2017-2018 | 2019 and thereafter |
|||||||||||||||
| Benefit obligations (3) |
$ | 32,778 | $ | 3,681 | $ | 5,387 | $ | 5,625 | $ | 18,085 | ||||||||||
| Contingent consideration liability (4) |
1,755 | — | 1,755 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 34,533 | $ | 3,681 | $ | 7,142 | $ | 5,625 | $ | 18,085 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Amounts of Commitment Expiration Per Period | ||||||||||||||||||||
| Commercial Commitments |
Total | 2014 | 2015-2016 | 2017-2018 | 2019 and thereafter |
|||||||||||||||
| Borrowings under line of credit (5) |
$ | 314,870 | $ | — | $ | 314,870 | $ | — | $ | — | ||||||||||
| Fixed interest related to interest rate swaps (6) |
1,778 | 780 | 998 | — | — | |||||||||||||||
| Standby letters of credit (7) |
100,618 | — | 100,618 | — | — | |||||||||||||||
| Surety bonds (8) |
332,477 | 315,930 | 16,511 | 36 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 749,743 | 316,710 | 432,997 | 36 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Commitments |
$ | 1,022,702 | $ | 396,002 | $ | 525,522 | $ | 50,341 | $ | 50,837 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
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(1) Reflects our contractual obligations to make future payments under non-cancelable operating lease agreements for various facilities, vehicles, and other equipment.
(2) Reflects our contractual obligations to make future payments for outsourced services and licensing costs pursuant to our information technology agreements.
(3) Future benefits expected to be paid relate to our defined benefit, postretirement, and deferred compensation plans. These amounts do not include the union-sponsored multiemployer defined benefit pension and other postretirement benefit plans. These plans are not administered by us and contributions are determined in accordance with provisions of negotiated labor contracts. Contributions made to these plans were $264.4 million, $252.7 million, and $234.9 million in the years ended October 31, 2013, 2012, and 2011, respectively.
Amounts relating to our defined and postretirement benefits reflect expected future payments through 2023 and were calculated using the same assumptions used to measure our benefit obligation as of October 31, 2013. This expectation is based upon expected future service. See Note 11 in Item 8., “Financial Statements and Supplementary Data,” for further details on assumptions used.
(4) Reflects the undiscounted value of our contingent consideration liability incurred in connection with an acquisition made in 2013. See Notes 4 and 5 in Item 8., “Financial Statements and Supplementary Data” for additional disclosure related to our contingent consideration liability.
(5) Borrowings under our line of credit are presented at face value.
(6) Our estimates of future interest payments are calculated based on our hedged borrowings under our line of credit, using the fixed rates under our interest rate swap agreements for the applicable notional amounts. See Note 10 in Item 8., “Financial Statements and Supplementary Data,” for additional disclosure related to our interest rate swaps. We exclude interest payments on our remaining borrowings from these amounts because the cash outlay for the interest is unknown and cannot be reliably estimated as all of the debt is under a revolving credit facility. The interest payments on these remaining borrowings will be determined based upon the daily outstanding balance of the revolving credit facility and the prevailing interest rate during that time.
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(7) We had $100.6 million of standby letters of credit as of October 31, 2013, primarily related to our general liability, automobile, property damage, and workers’ compensation insurance programs.
(8) We use surety bonds, principally performance, payment, and insurance bonds related to contractual obligations in the normal course of business and to collateralize self-insurance obligations. These bonds typically remain in force for one to five years and may include optional renewal periods. At October 31, 2013, outstanding surety bonds totaled $332.5 million, of which $1.4 million have an effective date starting after October 31, 2013. We do not believe that these bonds will be drawn upon by the beneficiaries.
In addition to the information provided above, as of October 31, 2013, our total liability for unrecognized tax benefits was $87.6 million, of which $2.9 million is expected to be recognized in the next twelve months. The resolution or settlement of these tax positions with the taxing authorities is subject to significant uncertainty, and therefore we are unable to make a reliable estimate of the amount or timing of cash that may be required to settle these matters. In addition, certain of these matters may not require cash settlements due to the exercise of credits and net operating loss carryforwards as well as other offsets, including the indirect benefit from other taxing jurisdictions that may be available.
In some instances, we also offer certain clients guaranteed energy savings on installed equipment under certain contracts. The total energy savings guarantees were $31.4 million at October 31, 2013 and extend through 2027. We accrue for the estimated cost of guarantees when it is probable that a liability has been incurred and the amount can be reasonably estimated. Historically, we have not incurred significant losses in connection with these guarantees.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements include indemnification obligations with respect to letters of credit, primarily used for our general liability, automobile, property damage, and workers’ compensation insurance programs, and surety bonds, primarily used as security against non-performance in the normal course of business. At October 31, 2013, the outstanding letters of credit and surety bonds approximated $433.1 million, of which $1.4 million have an effective date starting after October 31, 2013, and were not recorded on the Consolidated Balance Sheet. None of these arrangements have a material current effect, or are reasonably likely to have a material future effect, on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Environmental Matters
Our operations are subject to various federal, state, and/or local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, such as discharge into soil, water, and air, and the generation, handling, storage, transportation, and disposal of waste and hazardous substances. These laws generally have the effect of increasing costs and potential liabilities associated with the conduct of our operations. In addition, from time to time we are involved in environmental matters at certain of our locations or in connection with our operations. Historically, the cost of complying with environmental laws or resolving environmental issues relating to United States locations or operations has not had a material adverse effect on our financial position, results of operations, or cash flows. We do not believe that the resolution of known matters at this time will be material.
Effect of Inflation
The rates of inflation experienced in recent years have not had a material impact on our financial statements. We attempt to recover increased costs by increasing prices for our services, to the extent permitted by contracts and competition.
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. We base our estimates on historical experience, known or expected trends, independent valuations, and various other assumptions that are believed to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. The current economic environment and U.S. Government policy and their potential effect on us and our clients have combined to increase the uncertainty inherent in such estimates and assumptions. Future results could be significantly affected if actual results were to be different from these estimates and assumptions. We believe the following critical accounting policies govern our more significant judgments and estimates used in the preparation of our Financial Statements.
| Description |
Judgments and Uncertainties |
Effect if Actual Results Differ from | ||
| Allowance for Doubtful Accounts |
||||
| We maintain an allowance for doubtful accounts to provide for losses on accounts receivable due to a client’s inability to pay. The allowance is estimated based on the historical rate of credit losses or write-offs, specific client concerns, and known or expected trends. |
The determination of our allowance for doubtful accounts contains uncertainties because it requires management to make assumptions and apply judgment about future uncollectible accounts. Actual write-offs and adjustments could differ from the allowance estimates due to unanticipated changes in the business environment as well as factors and risks associated with specific clients. In addition, changes in the financial condition of our clients or adverse developments in negotiations or legal proceedings to obtain payment could result in the actual loss exceeding the estimated allowance. |
We have not made any changes in the accounting methodology used to record our allowance for doubtful accounts during the past three years.
A 10% difference in our allowance for doubtful accounts as of October 31, 2013 would have affected net income by approximately $0.5 million during the year ended October 31, 2013. | ||
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| Description |
Judgments and Uncertainties |
Effect if Actual Results Differ from | ||
| Other-Than-Temporary Impairment of Auction Rate Securities |
||||
| Our investments in auction rate securities are classified as available for sale. Accordingly, auction rate securities are presented at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income.
We estimate the fair values utilizing a discounted cash flow model, which considers, among other factors, assumptions about:
(1) the underlying collateral;
(2) credit risks associated with the issuer;
(3) contractual maturity;
(4) credit enhancements associated with financial insurance guarantees, if any; and
(5) assumptions about when, if ever, the security might be re-financed by the issuer or have a successful auction.
Securities with unrealized losses are reviewed quarterly as deemed appropriate to assess whether the decline in fair value is temporary or other-than-temporary. The assessment is to determine whether the decline in value is from company-specific events, industry developments, general economic conditions, or other reasons. Declines in the fair value of available-for-sale securities below their cost or amortized cost that are deemed to be other-than-temporary are reflected in earnings.
The credit loss component of an other-than-temporary impairment (“OTTI”) is recorded in earnings in the period identified. During the year ended October 31, 2012, we recorded an OTTI credit loss of $0.3 million for one of our auction rate security investments. No OTTI credit loss has been recorded in the years ended October 31, 2013 and 2011. |
Significant judgment is involved in determining the fair value of our auction rate securities and when a decline in fair value is other-than-temporary. The factors considered by management include, but are not limited to:
(1) our intent to hold the securities;
(2) our assessment that it is not more likely than not that we will be required to sell the securities before recovering its cost basis;
(3) expected defaults;
(4) available ratings for the securities or the underlying collateral;
(5) the rating of the associated guarantor (where applicable);
(6) the nature and value of the underlying collateral expected to service the investment;
(7) actual historical performance of the security in servicing its obligations; and
(8) actuarial experience of the underlying re-insurance arrangement (where applicable), which in certain circumstances may have preferential rights to the underlying collateral.
Significant judgment is involved in determining whether an OTTI represents a credit loss and is based upon the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the security. The factors considered by management include, but are not limited to:
(1) default rates for the security and the mono-line insurer, if any (which are based on published historical default rates of similar securities and consideration of current market trends); and
(2) the expected life of the security (which represents our view of when market efficiencies for securities may be restored). |
We have not made any changes in the accounting methodology used to determine if our auction rate securities are other-than-temporarily impaired during the past three years.
Adverse changes in management’s assessment of the factors used to determine that an auction rate security was not other-than-temporarily impaired could lead to additional impairment charges. Conditions affecting an auction rate security that we determine to be temporary could become other-than-temporary and warrant an impairment charge.
At October 31, 2013, we held investments in auction rate securities from three different issuers having an aggregate original principal amount of $15.0 million, an adjusted cost basis of approximately $13.0 million, and an estimated fair value of approximately $13.0 million. None of the auction rate securities are considered to be other-than-temporarily impaired. | ||
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| Description |
Judgments and Uncertainties |
Effect if Actual Results Differ
from | ||
| Amortization and Impairment of Long-Lived Assets |
||||
| Our long-lived assets include: property, plant and equipment and amortizable intangible assets.
We estimate the depreciable lives of our long-lived assets. For depreciable fixed assets, our depreciable lives are based on our accounting policy, which is intended to mirror the expected useful life of the asset. In determining the estimated useful life of amortizable intangible assets, such as customer contracts and relationships, we rely on our historical experience to estimate the useful life of the applicable asset and consider industry norms as a benchmark.
We review our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. These events and circumstances include, but are not limited to, a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, a significant adverse change in the extent or manner in which we use a long-lived asset, or a change in its physical condition.
When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying amount. If the projected undiscounted cash flows are less than the carrying amount, an impairment is recorded for the excess of the carrying amount over the estimated fair value, which is generally determined using discounted future cash flows. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes the new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of that asset. |
Incorrect estimation of useful lives may result in inaccurate depreciation and amortization charges over future periods leading to future impairment. In addition, our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more likely than not that a location will be closed significantly before the end of its previously estimated useful life. Any impairment loss calculations would require us to apply judgment in estimating expected future cash flows, including estimated sales, margin, and controllable expenses, and assumptions about market performance for operating locations, and estimated selling prices or lease rates for locations identified for closure. We also apply judgment in estimating asset fair values, including the selection of an appropriate discount rate for fair values determined using an income approach. |
We have not made any changes in the accounting methodology used to evaluate the impairment of long-lived assets during the last three years.
Additionally, we have not made any changes to estimated useful lives of our long-lived assets with the exception of useful lives of certain fixed assets acquired as part of the Air Serv acquisition.
If actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to future impairment losses that could be material. | ||
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| Description |
Judgments and Uncertainties |
Effect if Actual Results Differ from | ||
| Impairment of Goodwill |
||||
| We have elected to make the first day of our fiscal fourth quarter, August 1st, the annual impairment assessment date for goodwill. However, we could be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of one of our businesses.
We test the carrying value of goodwill for impairment at the “reporting unit” level using a two-step approach. The first step of the process is to evaluate whether the fair value of a reporting unit is less than its carrying value, which is an indicator that the goodwill assigned to that reporting unit may be impaired. In this case, a second step of impairment testing is performed to allocate the fair value of the reporting unit to the assets and liabilities of the reporting unit as if it had just been acquired in a business combination, and as if the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. The implied fair value of the reporting unit’s goodwill is then compared to the actual carrying value of goodwill. If the implied fair value is less than the carrying value, we would be required to recognize an impairment loss for that excess. |
We estimate the fair value of each reporting unit using a combination of the income approach and the market approach.
The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal value are calculated for each reporting unit and then discounted to present value using an appropriate discount rate.
In making these estimates, weighted average cost of capital is utilized to calculate the present value of future cash flows and terminal value. Many variables go into estimating future cash flows, including our future sales growth and operating results. When estimating our projected revenue growth and future operating results, we consider industry trends, economic data, and our competitive advantage.
The market approach estimates fair value by using market comparables for reasonably similar public companies.
The valuation of our reporting units requires significant judgment in evaluation of, among other factors, recent indicators of market activity and estimated future cash flows, discount rates and other factors. Our impairment analyses contain inherent uncertainties due to uncontrollable events that could positively or negatively impact the anticipated future economic and operating conditions. |
We have not made any changes in the accounting methodology used to evaluate impairment of goodwill during the last three years other than the creation of new reporting units relative to our acquisition of Air Serv and our segment realignment in 2013.
As of October 31, 2013, we had $872.4 million of goodwill. Our goodwill is included in the following segments:
$469.6 million - Janitorial
$72.6 million - Facility Services
$69.2 million - Parking
$49.9 million - Security
$119.7 million - Building & Energy Solutions
$91.4 million - Other
For recently acquired reporting units, a step one impairment test may indicate an implied fair value that is substantially similar to the reporting unit’s carrying value. Such similarities in value are generally an indication that management’s estimates of future cash flows associated with the recently acquired reporting unit remain relatively consistent with the assumptions that were used to derive its initial fair value.
During the fourth quarter of 2013, a goodwill impairment analysis was performed for each of our reporting units, which indicated that the implied fair value of each of our reporting units, with the exception of the recently acquired Air Serv, was substantially in excess of its carrying value. Therefore, the second step was not necessary. A 10% decrease in the estimated fair value of our reporting units would not result in a goodwill impairment. | ||
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| Description |
Judgments and Uncertainties |
Effect if Actual Results Differ from | ||
| Insurance Reserves |
||||
| We use a combination of insured and self-insurance plans to manage potential liabilities for workers’ compensation, general liability, property damage, automobile liability, health and welfare, and professional liabilities. We retain a substantial portion of the risk related to certain workers’ compensation and medical claims. Liabilities associated with these losses include estimates of both claims filed and “incurred but not reported” claim costs.
With the assistance of third-party professionals, we periodically review our estimate of ultimate losses for “incurred but not reported” and adjust our required self-insurance reserves as appropriate. As part of this evaluation, we review the status of existing and new claim reserves as established by our third-party claims administrators.
Our third-party administrators establish the case reserves based upon known factors related to the type and severity of the claims, demographic factors, legislative matters, and case law, as appropriate. We compare actual trends to expected trends and monitor claim development. The specific case reserves estimated by the third-party administrators are provided to an actuary who assists us in projecting an actuarial estimate of the overall ultimate losses for our self-insured or high deductible programs, which includes the case reserves plus an actuarial estimate of reserves required for additional developments including “incurred but not reported” claim costs. The independent third-party’s actuarial point estimate of the reserves is reviewed by management and is recorded in our Financial Statements. |
Our self-insurance liabilities contain uncertainties due to assumptions required and judgment used. Costs to settle our obligations, including legal and healthcare costs, could increase or decrease and cause estimates of our self-insurance liabilities to change. Incident rates, including frequency and severity, could increase or decrease and cause the estimates in our self-insurance liabilities to change.
These estimates are subject to: changes in the regulatory environment; projected exposures, including payroll, revenues, and the number of vehicle units; and the frequency, lag, and severity of claims.
The full extent of certain claims, especially workers’ compensation and general liability claims, may not become fully determined for several years. In addition, if the reserves related to self-insurance or high deductible programs from acquired businesses are not adequate to cover damages resulting from future accidents or other incidents, we may be exposed to substantial losses arising from future development of the claims. |
We have not made any changes in the accounting methodology used to establish our self-insurance liabilities during the past three years.
After analyzing the historical loss development patterns, comparing the loss development against benchmarks, and applying actuarial projection methods to determine an estimate of ultimate losses, we increased our expected reserves for prior year claims, which resulted in an increase in the related insurance expense of $10.6 million, $7.3 million, and $2.1 million during 2013, 2012, and 2011, respectively. Additionally, current year reserves and the insurance expense allocated to the operating segments reflect results of the most recent actuarial valuations performed in the respective year and have been allocated for operating segments based upon their underlying exposures.
It is possible that actual results could differ from recorded self-insurance liabilities. A 10% change in our projected ultimate losses would have affected net income by approximately $23.2 million for 2013. | ||
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| Description |
Judgments and Uncertainties |
Effect if Actual Results Differ from | ||
| Revenue Recognition |
||||
| We earn revenue primarily under various types of service contracts. In all forms of service provided by us, revenue is recognized when persuasive evidence of an arrangement exists, services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured. The various types of service contracts are described below.
Monthly Fixed-Price Arrangements These arrangements are contracts in which the client agrees to pay a fixed fee every month over the specified contract term. A variation of a fixed-price arrangement is a square-foot arrangement, which consists of fixed monthly billings, less credits given to clients for vacant square footage that is not serviced.
Cost-Plus Arrangements These arrangements are contracts for which the client pays for services received based on an agreed upon rate of wages and benefits, payroll taxes, insurance charges and other expenses, plus a profit margin.
Transaction-Price Arrangements Transaction-price arrangements are agreements in which the clients are billed for each transaction performed on a monthly basis (i.e., wheelchair passengers served, aircrafts cleaned).
Tag Services Tag work generally represents supplemental services requested by clients outside of the standard service specification. Examples are cleanup after tenant moves, construction cleanup, flood cleanup, snow removal, and extermination services.
Fixed-Price Repair and Refurbishment Arrangements Revenue is recognized on certain fixed-price repair and refurbishment contracts using the percentage-of-completion method of accounting, most often based on the cost-to-cost method. Under the percentage-of-completion method, revenues are recognized as the work progresses. The percentage of work completed is determined principally by comparing the actual costs incurred to date with the current estimate of total costs to complete.
|
For our service contracts, the determination of the sales allowance contains uncertainties because it requires management to make assumptions and apply judgment about the amount and timing of unknown billing errors and disputes.
For certain fixed-price repair and refurbishment arrangements for which we recognize revenue under the percentage-of-completion method, recognition of profit is dependent upon the accuracy of a variety of estimates, including but not limited to:
(1) engineering progress; (2) materials quantities; (3) achievement of milestones; (4) incentives; (5) labor productivity; and (6) cost estimates.
Such estimates are based on various professional judgments made with respect to those factors and are subject to change as each project proceeds and new information becomes available. |
We have not made any changes in the accounting methodology used to record our sales allowance or to recognize revenue under the percentage-of-completion method during the past three years.
A 10% difference in our sales allowance as of October 31, 2013 would have affected net income by approximately $0.2 million during the year ended October 31, 2013.
For contracts where the percentage-of-completion method is used to recognize revenue, if actual cost estimates differ from our assumptions, the amount of revenue and the related operating profit recognized will also fluctuate. As the fixed-price repair and refurbishment revenue represents a small portion of our total revenue, any revisions to our estimated costs would not have a significant impact on revenue or operating profit.
| ||
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Table of Contents
| Description |
Judgments and Uncertainties |
Effect if Actual Results Differ
from | ||
| Revenue Recognition (continued) |
||||
| Franchise Revenue We franchise certain engineering services under the Linc Network, TEGG, CurrentSAFE, and GreenHomes America brands through individual and area franchises. Initial franchise fees are recognized when we have performed substantially all initial services required by the franchise agreement. Continuing franchise royalty fees that are based on a percentage of the franchisees’ revenues are recognized in the period in which the revenue is reported to have occurred, whereas franchise fees charged to franchisees on a flat rate are recognized as earned. Direct (incremental) costs related to new franchise sales for which the revenue has not been recognized are deferred until the related revenue is recognized. Costs related to continuing franchise royalty fees are expensed as incurred.
Parking Reimbursement We enter into managed locations arrangements within our Parking business whereby we manage the parking lot for the owner in exchange for a management fee. For these arrangements, revenues and expenses are passed through by us to the parking lot owner under the terms and conditions of the management location contract. We report revenues and expenses, in equal amounts, for costs directly reimbursed from our managed parking lot clients.
In connection with our service contracts, we make estimates for potential future losses on client receivables resulting from client credits, which are recorded as a reduction in revenue. Credits result from client vacancy discounts, job cancellations, property damage, and other items. Our sales allowance estimate is based on an analysis of the historical rate of sales adjustments (credit memos, net of re-bills) and considers known current or expected trends. |
||||
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Table of Contents
| Description |
Judgments and Uncertainties |
Effect if Actual Results Differ
from | ||
| Income Taxes |
||||
| We estimate total income tax expense based on statutory tax rates in various jurisdictions in which we operate, permanent differences between financial reporting and tax reporting, and available credits and incentives.
Deferred income taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse.
Valuation allowances are recorded when it is more-likely-than-not that a portion of a tax benefit for a deferred tax asset will not be realized.
We record liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due. These unrecognized tax benefits are retained until the associated uncertainty is resolved. This analysis is performed in accordance with the applicable accounting guidance. |
Our calculations related to income taxes contain uncertainties due to judgment used to calculate tax liabilities in the application of complex tax laws and regulations across the tax jurisdictions where we operate.
Changes in tax laws and rates could affect recorded total income tax expense as well as recorded deferred tax assets and liabilities in the future.
Changes in projected future earnings could affect the recorded valuation allowances in the future.
Our analysis of unrecognized tax benefits contains uncertainties based on judgment used to apply the more-likely-than-not recognition and measurement thresholds.
We may be challenged upon review by the applicable taxing authorities, and positions taken may not be sustained. |
We do not believe there is a reasonable likelihood there will be a material change in our total income tax expense, tax-related balances or valuation allowances. However, due to the complexity of some of these uncertainties, our income tax expense or income tax liabilities may be materially different from the current provision for income tax expense or the current estimate of our income tax liabilities.
To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our recorded liabilities, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement may require use of our cash and result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement could be recognized as a reduction in our effective tax rate in the period of resolution. | ||
|
|
|
| ||
| Contingencies and Litigation |
||||
| We are party to a variety of legal, administrative, and other inquiries arising in the normal course of business relating to labor and employment, contracts, personal injury, and other matters. We accrue for such matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, we accrue at the low end of the range. Expected costs of resolving contingencies, which include the use of third-party service providers, are accrued as the services are rendered. |
Our loss contingencies contain uncertainties because the eventual outcome will result from future events. The determination of current reserves requires estimates and judgments related to future changes in facts and circumstances, differing interpretations of the law, assessments of the amount of damages, and other factors beyond our control. |
We have not made any changes in the accounting methodology used to establish our loss contingencies during the past three years.
Management currently estimates that the range of loss for all reasonably possible losses for which an estimate can be made is between $1.0 million and $98.1 million, including the possible $94.2 million impact of the Augustus case. If actual results are not consistent with our estimates or assumptions, we may be exposed to losses that could be material. | ||
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The update clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. In situations where the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. While early adoption is permitted, we expect to adopt ASU 2013-11 on November 1, 2014. We do not expect the adoption of these new presentation requirements to have a material impact on our consolidated financial position, results of operations, or cash flows.
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In December 2011, the FASB issued Accounting Standards Update 2011-11 (“ASU 2011-11”), Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This amendment requires disclosing and reconciling gross and net amounts for financial instruments that are offset in the balance sheet, and amounts for financial instruments that are subject to master netting arrangements and other similar clearing and repurchase arrangements. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We will adopt ASU 2011-11 on November 1, 2013. The adoption of ASU 2011-11 will not have a material impact on our disclosures.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk Sensitive Instruments
Our primary market risk exposure is interest rate risk. The potential impact of adverse increases in interest rates risk is discussed below. The following sensitivity analysis does not consider the effects that an adverse change may have on the overall economy nor does it consider actions we may take to mitigate our exposure to these changes. Results of changes in actual rates may differ materially from the following hypothetical results.
Interest Rate Risk
Line of Credit
Our exposure to interest rate risk primarily relates to our variable rate borrowings under our $650.0 million five-year syndicated line of credit that expires in September 2016. At October 31, 2013, we had $314.9 million of outstanding LIBOR-based borrowings under our line of credit. We anticipate borrowing similar amounts for periods of one day to three months. A hypothetical 1.0% increase in interest rates would have added additional interest expense of $3.0 million on the average outstanding borrowings under our line of credit, net of the interest rate swap agreements, during the year ended October 31, 2013. See Note 10, “Line of Credit,” in the Notes to Consolidated Financial Statements for additional information regarding our line of credit.
Interest Rate Swaps
At October 31, 2013, we were a counterparty to six interest rate swap agreements totaling an underlying aggregate notional amount of $180.0 million, pursuant to which we receive variable interest payments based on LIBOR and pay fixed interest on such amounts, at rates ranging from 0.44% to 0.89%. These interest rate swap agreements, which are intended to hedge the interest rate risk associated with our LIBOR-based borrowings under our line of credit, mature between February 2014 and April 2016. The swaps were designated and accounted for as cash flow hedges from inception.
As of October 31, 2013, the fair value of our interest rate swap liabilities was $0.2 million, and these were included in “Retirement plans and other” on the accompanying consolidated balance sheets. As of October 31, 2013, the fair value of the interest rate swap asset was insignificant. The effective portion of the derivatives’ mark-to-market gain or loss is initially reported as a component of accumulated other comprehensive loss and subsequently reclassified into earnings when the hedged transactions occur and affect earnings. The ineffective portion of the gain or loss is reported in earnings immediately. The amount included in accumulated other comprehensive loss is $0.1 million ($0.1 million, net of taxes) at October 31, 2013. See Note 10, “Line of Credit,” in the Notes to Consolidated Financial Statements for additional information regarding our interest rate swaps.
Investment in Auction Rate Securities
At October 31, 2013, we held investments in auction rate securities from three different issuers having an aggregate original principal amount of $15.0 million, an adjusted cost basis of $13.0 million, and an estimated fair value of $13.0 million. The investments are not subject to material interest rate risk. These auction rate securities are debt instruments with stated maturities ranging from 2033 to 2050, for which the interest rate is designed to be reset through Dutch auctions approximately every 30 days based on spreads to a base rate (i.e., LIBOR). Auctions for these securities have not occurred since August 2007. A hypothetical 1.0% increase in interest rates during the year ended October 31, 2013 would have added approximately $0.2 million of additional interest income. See Note 6, “Auction Rate Securities,” in the Notes to Consolidated Financial Statements for additional information regarding our auction rate securities.
Exchange Rate Risk
Substantially all of our operations are conducted in the United States, and, as such, are not subject to material foreign currency exchange rate risk.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ABM Industries Incorporated:
We have audited the accompanying consolidated balance sheets of ABM Industries Incorporated and subsidiaries (“the Company”) as of October 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended October 31, 2013. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement Schedule II. We have also audited the Company’s internal control over financial reporting as of October 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, the related financial statement Schedule II, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and the related financial statement Schedule II and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABM Industries Incorporated and subsidiaries as of October 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, ABM Industries Incorporated and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the COSO.
/s/ KPMG LLP
New York, New York
December 18, 2013
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
| October 31, | ||||||||
| (in thousands, except share and per share amounts) |
2013 | 2012 | ||||||
| ASSETS |
||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | 32,639 | $ | 43,459 | ||||
| Trade accounts receivable, net of allowances of $10,217 and $11,125 at |
672,525 | 561,317 | ||||||
| Notes receivable and other |
36,623 | 40,343 | ||||||
| Prepaid expenses |
59,645 | 50,289 | ||||||
| Prepaid income taxes |
5,081 | 385 | ||||||
| Deferred income taxes, net |
47,051 | 43,671 | ||||||
| Insurance recoverables |
11,068 | 9,870 | ||||||
|
|
|
|
|
|||||
| Total current assets |
864,632 | 749,334 | ||||||
|
|
|
|
|
|||||
| Insurance deposits |
28,466 | 31,720 | ||||||
| Other investments and long-term receivables |
5,005 | 5,666 | ||||||
| Investments in unconsolidated affiliates, net |
17,952 | 14,863 | ||||||
| Investments in auction rate securities |
12,994 | 17,780 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $127,492 and $107,771 at |
77,241 | 59,909 | ||||||
| Other intangible assets, net of accumulated amortization of $115,461 and $94,485 at |
144,401 | 109,138 | ||||||
| Goodwill |
872,396 | 751,610 | ||||||
| Noncurrent deferred income taxes, net |
— | 17,610 | ||||||
| Noncurrent insurance recoverables |
57,636 | 54,630 | ||||||
| Other assets |
38,513 | 38,898 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 2,119,236 | $ | 1,851,158 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities |
||||||||
| Trade accounts payable |
$ | 157,806 | $ | 130,410 | ||||
| Accrued liabilities |
||||||||
| Compensation |
138,430 | 121,855 | ||||||
| Taxes—other than income |
25,737 | 19,437 | ||||||
| Insurance claims |
84,546 | 80,192 | ||||||
| Other |
101,860 | 95,473 | ||||||
| Income taxes payable |
145 | 8,450 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
508,524 | 455,817 | ||||||
|
|
|
|
|
|||||
| Noncurrent income taxes payable |
50,426 | 27,773 | ||||||
| Line of credit |
314,870 | 215,000 | ||||||
| Retirement plans and other |
41,417 | 38,558 | ||||||
| Deferred income tax liability, net |
13,074 | — | ||||||
| Noncurrent insurance claims |
273,418 | 263,612 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
1,201,729 | 1,000,760 | ||||||
|
|
|
|
|
|||||
| Commitments and contingencies |
||||||||
| Stockholders’ Equity |
||||||||
| Preferred stock, $0.01 par value; 500,000 shares authorized; none issued |
— | — | ||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized; 55,477,813 and 54,393,907 shares issued and outstanding at October 31, 2013 and 2012, respectively |
555 | 544 | ||||||
| Additional paid-in capital |
261,828 | 234,636 | ||||||
| Accumulated other comprehensive loss, net of taxes |
(1,651) | (2,154) | ||||||
| Retained earnings |
656,775 | 617,372 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
917,507 | 850,398 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 2,119,236 | $ | 1,851,158 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended October 31, | ||||||||||||
| (in thousands, except per share amounts) | 2013 | 2012 | 2011 | |||||||||
| Revenues |
$ | 4,809,281 | $ | 4,300,265 | $ | 4,246,842 | ||||||
| Expenses |
||||||||||||
| Operating |
4,313,429 | 3,854,380 | 3,781,264 | |||||||||
| Selling, general and administrative |
348,274 | 327,855 | 324,762 | |||||||||
| Amortization of intangible assets |
28,553 | 21,464 | 23,248 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total expenses |
4,690,256 | 4,203,699 | 4,129,274 | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating profit |
119,025 | 96,566 | 117,568 | |||||||||
| Other-than-temporary impairment credit losses on |
— | (313) | — | |||||||||
| Income from unconsolidated affiliates, net |
6,319 | 6,395 | 3,915 | |||||||||
| Interest expense |
(12,892) | (9,999) | (15,805) | |||||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations before income taxes |
112,452 | 92,649 | 105,678 | |||||||||
| Provision for income taxes |
(39,552) | (29,931) | (36,980) | |||||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations |
72,900 | 62,718 | 68,698 | |||||||||
| Loss from discontinued operations, net of taxes |
— | (136) | (194) | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income |
$ | 72,900 | $ | 62,582 | $ | 68,504 | ||||||
|
|
|
|
|
|
|
|||||||
| Net income per common share—Basic |
||||||||||||
| Income from continuing operations |
$ | 1.33 | $ | 1.16 | $ | 1.29 | ||||||
| Loss from discontinued operations, net of taxes |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income per common share—Basic |
$ | 1.33 | $ | 1.16 | $ | 1.29 | ||||||
|
|
|
|
|
|
|
|||||||
| Net income per common share—Diluted |
||||||||||||
| Income from continuing operations |
$ | 1.30 | $ | 1.14 | $ | 1.27 | ||||||
| Loss from discontinued operations, net of taxes |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income per common share—Diluted |
$ | 1.30 | $ | 1.14 | $ | 1.27 | ||||||
|
|
|
|
|
|
|
|||||||
| Weighted-average common and common |
||||||||||||
| Basic |
54,877 | 53,987 | 53,121 | |||||||||
| Diluted |
56,067 | 54,914 | 54,103 | |||||||||
| Dividends declared per common share |
$ | 0.60 | $ | 0.58 | $ | 0.56 | ||||||
See accompanying notes to consolidated financial statements.
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended October 31, | ||||||||||||||||||||||||||||||||||||
|
2013 |
2012 | 2011 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Pre-tax amounts |
Tax |
After- tax amounts |
Pre-tax amounts |
Tax expense / (benefit) |
After- tax amounts |
Pre-tax amounts |
Tax expense / (benefit) |
After- tax amounts |
|||||||||||||||||||||||||||
| Net income |
$ | 72,900 | $ | 62,582 | $ | 68,504 | ||||||||||||||||||||||||||||||
| Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
| Unrealized gains on auction rate securities: |
||||||||||||||||||||||||||||||||||||
| Unrealized gains on auction rate securities |
$ | 214 | $ | 88 | $ | 126 | $ | 2,110 | $ | 866 | $ | 1,244 | $ | 499 | $ | 193 | $ | 306 | ||||||||||||||||||
| Reclassification adjustment for credit losses recognized in earnings |
— | — | — | 313 | 126 | 187 | — | — | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net unrealized gains on auction rate securities |
214 | 88 | 126 | 2,423 | 992 | 1,431 | 499 | 193 | 306 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Unrealized (losses) gains on interest rate swaps: |
||||||||||||||||||||||||||||||||||||
| Unrealized losses arising during the period |
(381) | (156) | (225) | (125) | (51) | (74) | (245) | (101) | (144) | |||||||||||||||||||||||||||
| Reclassification adjustment for loss included in interest expense |
445 | 182 | 263 | 164 | 67 | 97 | 436 | 177 | 259 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net unrealized gains on interest rate swaps |
64 | 26 | 38 | 39 | 16 | 23 | 191 | 76 | 115 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Foreign currency translation |
(183) | — | (183) | (85) | — | (85) | 214 | — | 214 | |||||||||||||||||||||||||||
| Defined and postretirement benefit plans adjustments: |
||||||||||||||||||||||||||||||||||||
| Actuarial gains (losses) arising during the current year |
675 | 276 | 399 | (1,660) | (678) | (982) | (2,669) | (1,094) | (1,575) | |||||||||||||||||||||||||||
| Reclassification adjustment for amortization of actuarial losses |
138 | 56 | 82 | 97 | 40 | 57 | 114 | 46 | 68 | |||||||||||||||||||||||||||
| Reclassification adjustment for settlement losses |
70 | 29 | 41 | 107 | 44 | 63 | 126 | 52 | 74 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net defined and postretirement |
883 | 361 | 522 | (1,456) | (594) | (862) | (2,429) | (996) | (1,433) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total other comprehensive income |
$ | 978 | $ | 475 | $ | 503 | $ | 921 | $ | 414 | $ | 507 | $ | (1,525) | $ | (727) | $ | (798) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Comprehensive income |
$ | 73,403 | $ | 63,089 | $ | 67,706 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Year Ended October 31, | ||||||||||||||||||||||||
| 2013 | 2012 | 2011 | ||||||||||||||||||||||
| (in thousands) | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||
| Common Stock: |
||||||||||||||||||||||||
| Balance, beginning of year |
54,394 | $ | 544 | 53,333 | $ | 533 | 52,635 | $ | 526 | |||||||||||||||
| Stock issued under employee stock purchase and share-based compensation plans |
1,084 | 11 | 1,061 | 11 | 698 | 7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance, end of year |
55,478 | 555 | 54,394 | 544 | 53,333 | 533 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Additional Paid-in Capital |
||||||||||||||||||||||||
| Balance, beginning of year |
234,636 | 211,389 | 192,418 | |||||||||||||||||||||
| Tax effect from share-based awards |
— | (156) | (467) | |||||||||||||||||||||
| Stock issued under employee stock purchase and share-based compensation plans |
13,910 | 13,167 | 10,247 | |||||||||||||||||||||
| Share-based compensation expense |
13,282 | 10,236 | 9,191 | |||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, end of year |
261,828 | 234,636 | 211,389 | |||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Accumulated Other Comprehensive Loss, net of taxes: |
||||||||||||||||||||||||
| Balance, beginning of year |
(2,154) | (2,661) | (1,863) | |||||||||||||||||||||
| Other comprehensive income (loss) |
503 | 507 | (798) | |||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, end of year |
(1,651) | (2,154) | (2,661) | |||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Retained Earnings: |
||||||||||||||||||||||||
| Balance, beginning of year |
617,372 | 586,625 | 547,944 | |||||||||||||||||||||
| Net income |
72,900 | 62,582 | 68,504 | |||||||||||||||||||||
| Dividends: |
||||||||||||||||||||||||
| Common stock |
(32,873) | (31,309) | (29,744) | |||||||||||||||||||||
| Stock issued under share-based compensation plans |
(624) | (526) | (79) | |||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, end of year |
656,775 | 617,372 | 586,625 | |||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Total Stockholders’ Equity |
$ | 917,507 | $ | 850,398 | $ | 795,886 | ||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
See accompanying notes to consolidated financial statements.
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended October 31, | ||||||||||||
| (in thousands) | 2013 | 2012 | 2011 | |||||||||
| Cash flows from operating activities: |
||||||||||||
| Net income |
$ | 72,900 | $ | 62,582 | $ | 68,504 | ||||||
| Loss from discontinued operations, net of taxes |
— | 136 | 194 | |||||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations |
72,900 | 62,718 | 68,698 | |||||||||
| Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities: |
||||||||||||
| Depreciation and amortization |
60,390 | 50,897 | 52,658 | |||||||||
| Deferred income taxes |
12,476 | 9,772 | 24,227 | |||||||||
| Share-based compensation expense |
13,282 | 10,236 | 9,191 | |||||||||
| Provision for bad debt |
2,836 | 2,551 | 3,142 | |||||||||
| Discount accretion on insurance claims |
504 | 715 | 874 | |||||||||
| Auction rate security credit loss impairment |
— | 313 | — | |||||||||
| Gain on sale of assets |
(210) | (2,015) | (150) | |||||||||
| Income from unconsolidated affiliates, net |
(6,319) | (6,395) | (3,915) | |||||||||
| Distributions from unconsolidated affiliates |
2,959 | 5,802 | 2,539 | |||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||||||
| Trade accounts receivable |
(50,763) | (11,359) | (18,432) | |||||||||
| Prepaid expenses and other current assets |
1,960 | (14,188) | (7,786) | |||||||||
| Insurance recoverables |
(4,204) | 6,110 | 5,488 | |||||||||
| Other assets and long-term receivables |
4,895 | 9,390 | 5,962 | |||||||||
| Income taxes payable |
8,742 | 4,542 | 4,396 | |||||||||
| Retirement plans and other non-current liabilities |
(5,138) | (1,584) | (4,085) | |||||||||
| Insurance claims |
3,909 | 1,688 | (11,950) | |||||||||
| Trade accounts payable and other accrued liabilities |
17,094 | 19,754 | 25,943 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total adjustments |
62,413 | 86,229 | 88,102 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by continuing operating activities |
135,313 | 148,947 | 156,800 | |||||||||
| Net cash provided by discontinued operating activities |
— | 1,665 | 3,190 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
135,313 | 150,612 | 159,990 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities: |
||||||||||||
| Additions to property, plant and equipment |
(32,593) | (28,052) | (22,124) | |||||||||
| Proceeds from sale of assets and other |
1,214 | 4,177 | 912 | |||||||||
| Purchase of businesses, net of cash acquired |
(199,326) | (5,963) | (290,985) | |||||||||
| Investments in unconsolidated affiliates |
(183) | — | (215) | |||||||||
| Proceeds from redemption of auction rate securities |
5,000 | — | 5,000 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in investing activities |
(225,888) | (29,838) | (307,412) | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from financing activities: |
||||||||||||
| Proceeds from exercises of stock options |
13,297 | 12,496 | 9,708 | |||||||||
| Dividends paid |
(32,873) | (31,309) | (29,744) | |||||||||
| Deferred financing costs paid |
— | (14) | (5,021) | |||||||||
| Borrowings from line of credit |
1,006,000 | 773,000 | 885,500 | |||||||||
| Repayment of borrowings from line of credit |
(906,130) | (858,000) | (726,000) | |||||||||
| Changes in book cash overdrafts |
2,968 | 45 | — | |||||||||
| Other |
(3,507) | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) financing activities |
79,755 | (103,782) | 134,443 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net (decrease) increase in cash and cash equivalents |
(10,820) | 16,992 | (12,979) | |||||||||
| Cash and cash equivalents at beginning of year |
43,459 | 26,467 | 39,446 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents at end of year |
$ | 32,639 | $ | 43,459 | $ | 26,467 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying notes to consolidated financial statements.
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
| Year Ended October 31, | ||||||||||||
| (in thousands) | 2013 | 2012 | 2011 | |||||||||
| Supplemental Data: |
||||||||||||
| Cash paid for income taxes, net of refunds received |
$ | 18,719 | $ | 15,545 | $ | 9,651 | ||||||
| Interest paid on line of credit |
7,713 | 5,331 | 10,055 | |||||||||
See accompanying notes to consolidated financial statements.
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND NATURE OF OPERATIONS
ABM Industries Incorporated, together with its consolidated subsidiaries (hereinafter collectively referred to as “ABM,” “we,” “us,” “our,” or the “Company”), 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. The Company was reincorporated in Delaware on March 19, 1985, as the successor to a business founded in California in 1909.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements and accompanying notes (the “Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain amounts in the prior year consolidated balance sheet have been reclassified to conform to the current year presentation. Unless otherwise noted, all references to years are to our fiscal year, which ends on October 31.
Principles of Consolidation
The Financial Statements include the accounts of ABM and all of our consolidated subsidiaries. The consolidated financial statements also include ABM’s investments in unconsolidated affiliates, as discussed in the following significant accounting policies. These investments are accounted for using the equity method of accounting. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates that affect the reported amounts. We base our estimates on historical experience, known or expected trends, independent valuations, and various other assumptions that are believed to be reasonable under the circumstances based on information available as of the date of the issuance of these Financial Statements. Actual results could differ from the estimates used.
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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. 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. 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 Corporation (“Air Serv”).
Prior period segment results have been restated to conform to the new segment reporting structure.
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Our segments and their activities are as follows:
| Segment |
Activities | |
| Janitorial |
Provides a wide range of essential janitorial services for a variety of client facilities, including airports and other transportation centers, commercial office buildings, educational institutions, government buildings, health facilities, industrial buildings, retail stores, shopping centers, stadiums and arenas, and warehouses. | |
| Facility Services |
Provides onsite mechanical engineering and technical services and solutions for facilities and infrastructure systems for a variety of client facilities, including airports and other transportation centers, commercial infrastructure, corporate office buildings, data centers, educational institutions, high technology manufacturing facilities, museums, resorts, and shopping centers. | |
| Parking |
Provides parking and transportation services for clients at many facilities, including airports and other transportation centers, educational institutions, health facilities, hotels, municipalities, office buildings, retail centers, and stadiums and arenas. | |
| Security |
Provides security services for clients in a wide range of facilities, including Class “A” high rise, commercial, health, industrial, petro-chemical, residential, and retail 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 heating, ventilation, air-conditioning, electrical, lighting and other general maintenance and repair services. These services include preventative maintenance, retro-commissioning, installations, retrofits and upgrades, environmental services, systems start-ups, performance testing, energy audits, and bundled energy solutions for a wide variety of clients in both the private and public sectors. | |
| This segment also provides support to U.S. Government entities for specialty service solutions, such as military base operations, leadership development, education and training, energy efficiency management, medical support services, and construction management. | ||
| This segment also includes our franchised operations under the Linc Network, TEGG, and CurrentSAFE brands, which provide mechanical and electrical preventive and predictive maintenance solutions. Our GreenHomes America brand provides home energy efficiency solutions. The operations of the recently acquired HHA Services, Inc. (“HHA”) business, and the acquisition of certain assets and liabilities of Calvert-Jones Company, Inc. (“Calvert-Jones”), and BEST Infrared Services, Inc. (“BEST”) are also included within this segment. | ||
| Other |
Air Serv provides facility solutions services to clients in our aviation vertical related to passenger assistance, including wheelchair operations, aircraft cabin cleaning, janitorial services, shuttle bus operations, and access control, among others. Air Serv also includes certain assets and certain liabilities of Blackjack Promotions Limited (“Blackjack”), which was acquired on August 1, 2013. | |
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Significant Accounting Policies
Cash and Cash Equivalents
We consider all investments purchased with an original maturity of three months or less to be cash and cash equivalents. We present the change in book cash overdrafts (i.e., negative book cash balances that have not been presented to the bank for payment) as cash flows from financing activities.
Allowance for Doubtful Accounts
Trade accounts receivable arise from services provided to our clients and are generally due and payable on terms varying from receipt of the invoice to net thirty days, excluding receivables from U.S. Government contracts, which generally have longer collection periods. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We determine the past due status of trade accounts receivable based on contractual terms with each client. We evaluate the collectability of accounts receivable and determine the appropriate allowance for doubtful accounts based on a variety of factors, including an analysis of the historical rate of credit losses or write-offs, specific client concerns, and known or expected trends. We do not believe that we have any material exposure due to either industry or regional concentrations of credit risk. Further, no client accounted for more than 10% of our consolidated revenues during any of the years ended October 31, 2013, 2012, or 2011. Our trade accounts receivable are written off once an account is deemed uncollectible or after a period of 12 months, whichever is earlier, unless management believes such amounts will ultimately be collectible.
Investments in Unconsolidated Affiliates
We own non-controlling interests (generally 20% to 50%) in certain affiliated entities that predominantly provide facility solutions services to governmental and commercial clients, primarily in the United States and the Middle East. We account for such investments under the equity method of accounting. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The differences between the carrying amounts and the estimated fair values of equity method investments are recognized as an impairment loss when the loss is deemed to be other-than-temporary. We did not have impairment losses in 2013, 2012, or 2011.
Investments in Auction Rate Securities
Our auction rate securities are classified as available for sale. Auction rate securities are presented at fair value with changes in fair value recorded in accumulated other comprehensive loss (“AOCL”), unless a decline in fair value is determined to be other-than-temporary. The credit loss component of an other-than-temporary decline in fair value is recorded in earnings in the period identified.
We estimate the fair values utilizing a discounted cash flow model, which considers, among other factors, assumptions about: (1) the underlying collateral; (2) credit risks associated with the issuer; (3) contractual maturity; (4) credit enhancements associated with financial insurance guarantees, if any; and (5) assumptions about when, if ever, the security might be re-financed by the issuer or have a successful auction. We have classified all our auction rate security investments as non-current as we do not reasonably expect to liquidate the securities for cash within the next 12 months.
Our determination of whether our auction rate securities are other-than-temporarily impaired is based on an evaluation of several factors, circumstances, and known or reasonably supportable trends including, but not limited to: (1) our intent to hold the securities; (2) our assessment that it is not more likely than not that we will be required to sell the securities before recovering our cost basis; (3) expected defaults; (4) available ratings for the securities or the underlying collateral; (5) the rating of the associated guarantor (where applicable); (6) the nature and value of the underlying collateral expected to service the investment; (7) actual historical performance of the security in servicing its obligations; and (8) actuarial experience of the underlying re-insurance arrangement (where applicable), which in certain circumstances may have preferential rights to the underlying collateral.
Our determination of whether an other-than-temporary impairment (“OTTI”) represents a credit loss is based upon the difference between the present value of the expected cash flows to be collected and the amortized cost basis of the security. Significant assumptions used in estimating the credit loss include: (1) default rates for the security and the mono-line insurer, if any (which are based on published historical default rates of similar securities and consideration of current market trends); and (2) the expected life of the security (which represents our view of when market efficiencies for securities may be restored). Adverse changes in any of these factors could result in additional declines in fair value and further other-than-temporary impairments in the future. See Note 6, “Auction Rate Securities,” for additional information.
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Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the remaining lease term. Depreciation and amortization is determined for financial reporting purposes by using the straight-line method over the following estimated useful lives:
| Years |
||||
| Computer equipment and software |
3 - 5 | |||
| Machinery and other equipment |
3 - 5 | |||
| Buildings |
25 - 40 | |||
| Furniture and fixtures |
5 | |||
| Transportation equipment |
1.5 - 10 |
Repairs and maintenance are charged directly to expense as they are incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated.
When assets are sold or retired, their cost and accumulated depreciation are removed from the accounts, and any gain or loss is reflected in the consolidated financial statements.
Leases
We enter into various noncancelable lease agreements for premises and equipment used in the normal course of business. We evaluate the lease agreement at the inception of the lease to determine whether the lease is an operating or capital lease. Certain of these leases include escalation clauses that adjust rental expense to reflect changes in price indices, as well as renewal options exercisable at our option. For operating leases, when such items are included in a lease agreement, we record rent expense evenly over the term of the lease. For leases with renewal options, we generally record rent expense and amortize the leasehold improvements on a straight-line basis over the initial non-cancelable lease term (in instances where the lease term is shorter than the economic life of the asset).
Contingent rentals are applicable to leases of parking lots and garages and are primarily based on percentages of the gross receipts or other financial parameters attributable to the related facilities. Contingent rental expense is recorded in the period it becomes probable.
We may also be required to make additional payments to reimburse the lessors for operating expenses such as real estate taxes, maintenance, utilities, and insurance, which are expensed as incurred.
Impairment of Long-Lived Assets and Costs Associated With Exit Activities
We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying amount. If the projected undiscounted cash flows are less than the carrying amount, an impairment is recorded for the excess of the carrying amount over the estimated fair value, which is generally determined using discounted future cash flows. The present value of costs associated with abandoned facilities, primarily future lease costs (net of expected sublease income), are charged to earnings when we have ceased using the specific location or when we terminate a lease contract in accordance with contractual terms.
Other Intangible Assets
Other intangible assets primarily consist of acquired customer contracts and relationships that are amortized using the sum-of-the-years’-digits method over their useful lives, consistent with the estimated useful life considerations used in the determination of their fair values. The accelerated method of amortization reflects the pattern in which the economic benefits of the customer relationship intangible assets are expected to be realized. Other non-customer acquired intangibles are amortized using a straight-line method of amortization.
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Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values of the assets acquired and liabilities assumed. We have elected to make the first day of our fiscal fourth quarter, August 1st, the annual impairment assessment date for goodwill. However, we could be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of one of our businesses.
We test the carrying value of goodwill for impairment at a “reporting unit” level using a two-step approach. The first step of the process is to evaluate whether the fair value of a reporting unit is less than its carrying value, which is an indicator that the goodwill assigned to that reporting unit may be impaired. In this case, a second step of impairment testing is performed to allocate the fair value of the reporting unit to the assets and liabilities of the reporting unit as if it had just been acquired in a business combination, and as if the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. The implied fair value of the reporting unit’s goodwill is then compared to the actual carrying value of goodwill. If the implied fair value is less than the carrying value, we would be required to recognize an impairment loss for that excess.
Fair Value of Financial Instruments
We account for certain assets and liabilities at fair value. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants. Authoritative guidance specifies a hierarchy of valuation techniques depending on whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect our own assumptions of market participant valuation (unobservable inputs). The fair value hierarchy consists of three levels:
Level 1 – Quoted prices for identical assets or liabilities in active markets;
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets; and
Level 3 – Unobservable inputs for the asset or liability.
The authoritative guidance requires the use of observable market data if such data is available without undue cost and effort. When available, we use unadjusted quoted market prices to measure fair value and classify such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based or independently-sourced market parameters, such as interest and currency rates and comparable transactions. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be inputs that are readily observable. If quoted market prices are not available, the valuation model used generally depends on the specific asset or liability being valued.
Some assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis. See Note 5, “Fair Value of Financial Instruments,” for the fair value hierarchy table and for details on how we measure fair value for financial assets and liabilities.
Acquisitions
On the date of acquisition, the assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the purchase price over the amount allocated to the identifiable assets acquired less liabilities assumed is recorded as goodwill. The operating results generated by the acquired businesses have been included in the consolidated statements of income from their respective dates of acquisition. Acquisition-related costs are expensed as incurred. Acquired intangible assets are recorded at fair value and amortized over their estimated useful lives.
Our acquisitions may include a contingent consideration liability, which requires us to recognize the fair value of the estimated liability at the time of the acquisition. Subsequent changes in the estimate of the amount to be paid under the contingent consideration liability arrangement are recognized in the accompanying consolidated statements of income.
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Amounts paid in excess of the amount recorded on the acquisition date are classified as cash flows used in operating activities because the difference has entered into the determination of net income. Payments not exceeding the acquisition-date fair value of the contingent consideration liability arrangement are classified as cash flows used in financing activities.
Other Accrued Liabilities
Other accrued liabilities as of October 31, 2013 and 2012 primarily consist of employee benefits, dividends payable, loss contingencies, and rent payable.
Insurance Reserves
We use a combination of insured and self-insurance plans to manage the potential liabilities for workers’ compensation, general liability, property damage, automobile liability, health and welfare, and professional liabilities. Insurance claim liabilities represent our estimate of retained risks without regard to insurance coverage. Such risks consist of estimates of the loss that will ultimately be incurred on reported claims, as well as estimates of claims that have been incurred but not yet reported.
With the assistance of third-party professionals, we periodically review our estimate of ultimate losses for all incurred claims and adjust our required self-insurance reserves as appropriate. As part of this evaluation, we review the status of existing and new claim reserves as established by our third-party claims administrators. Our third-party administrators establish case reserves based upon known factors related to the type and severity of the claims, demographic factors, legislative matters, and case law, as appropriate. We compare actual trends to expected trends and monitor claims developments. The specific case reserves estimated by our third-party administrators are provided to an actuary who assists us in projecting an actuarial estimate of the overall ultimate losses for self-insurance, which includes the case reserves plus an actuarial estimate of reserves required for additional developments including “incurred but not reported” claim costs. The independent third-party’s actuarial point estimate of the reserves is reviewed by management and is recorded in our Financial Statements.
In general, our reserves are recorded on an undiscounted basis. Self-insurance liabilities assumed in acquisitions are recorded at fair value and are accreted to their notional amount with non-cash charges to interest expense over the period that they are expected to be settled. We allocate current-year insurance expense to our operating segments based upon their underlying exposures, while actuarial adjustments related to prior year claims are recorded within Corporate expenses. Claims are classified as current or long-term based on the expected settlement date. Estimated insurance recoveries related to recorded liabilities are reflected as current or long-term “recoverables” in our consolidated balance sheets when we believe that the receipt of such amounts is probable.
Revenue Recognition
We earn revenue primarily under various types of service contracts. In all forms of service provided by us, revenue is recognized when persuasive evidence of an arrangement exists, services have been rendered, the fee is fixed or determinable, and collectability is reasonably assured. The various types of service contracts are described below.
Monthly Fixed-Price Arrangements
These arrangements are contracts in which the client agrees to pay a fixed fee every month over the specified contract term. A variation of a fixed-price arrangement is a square-foot arrangement, which consists of fixed monthly billings, less credits given to clients for vacant square footage that is not serviced.
Cost-Plus Arrangements
These arrangements are contracts in which the client pays for services received based on an agreed upon rate of wages and benefits, payroll taxes, insurance charges, and other expenses, plus a profit margin.
Transaction-Price Arrangements
Transaction-price arrangements are agreements in which the clients are billed for each transaction performed on a monthly basis (i.e., wheelchair passengers served, aircrafts cleaned).
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Tag Services
Tag work generally represents supplemental services requested by clients outside of the standard service specification. Examples are cleanup after tenant moves, construction cleanup, flood cleanup, snow removal, and extermination services.
Fixed-Price Repair and Refurbishment Arrangements
Revenue is recognized on certain fixed-price repair and refurbishment contracts using the percentage-of-completion method of accounting, most often based on the cost-to-cost method. Under the percentage-of-completion method, revenues are recognized as the work progresses. The percentage of work completed is determined principally by comparing the actual costs incurred to date with the current estimate of total costs to complete. Under the percentage-of-completion method, recognition of profit is dependent upon the accuracy of a variety of estimates, including engineering progress, materials quantities, and achievement of milestones, incentives, labor productivity, cost estimates, and others. Such estimates are based on various professional judgments made with respect to those factors and are subject to change as each project proceeds and new information becomes available. Revenue and gross profit are adjusted periodically for revisions in estimated total contract costs and values. Estimated losses are recorded when identified.
Franchise Revenue
We franchise certain engineering services under the Linc Network, TEGG, CurrentSAFE, and GreenHomes America brands through individual and area franchises. Initial franchise fees are recognized when we have performed substantially all initial services required by the franchise agreement. Continuing franchise royalty fees that are based on a percentage of the franchisees’ revenues are recognized in the period in which the revenue is reported to have occurred, whereas franchise fees charged to franchisees on a flat rate are recognized as earned. Direct (incremental) costs related to new franchise sales for which the revenue has not been recognized are deferred until the related revenue is recognized. Costs related to continuing franchise royalty fees are expensed as incurred.
Parking Reimbursement
We enter into managed locations arrangements within our Parking business, whereby we manage the parking lot for the owner in exchange for a management fee. For these arrangements, revenues and expenses are passed through by us to the parking lot owner under the terms and conditions of the management location contract. We report revenues and expenses, in equal amounts, for costs directly reimbursed from our managed parking lot clients. Such amounts totaled $302.4 million, $305.7 million, and $299.4 million in the years ended October 31, 2013, 2012, and 2011, respectively.
Sales Allowance
Our sales allowance is an estimate for losses on client receivables resulting from client credits. Our sales allowance is recorded as a reduction to revenues and an increase to the allowance for billing adjustments. Credits can result from client vacancy discounts, job cancellations, property damage, and other items. Our sales allowance estimate is based on an analysis of the historical rate of sales adjustments (credit memos, net of re-bills) and considers known current or expected trends. Our earnings will be impacted in the future to the extent that actual credit experience differs from amounts estimated.
Advertising
Advertising costs, which include marketing expenses related to our rebranding initiative, are expensed as incurred. Advertising expense was $8.0 million, $5.9 million, and $3.5 million for the years ended October 31, 2013, 2012, and 2011, respectively.
Share-Based Compensation
Our outstanding share-based awards principally consist of restricted stock units (“RSUs”), performance share awards, and stock options. The fair value of RSUs and stock options are expensed over the requisite service period. Performance-based awards are expensed over the requisite service period based on achievement of performance criteria. We use the Black-Scholes option pricing model to determine the fair value of our stock option grants. The fair value of RSUs is determined based on the fair value of our stock price on the date of grant. The fair value of performance shares is determined based on the fair value of our stock price on the date of grant as adjusted over time for our performance against pre-established financial performance targets. We record share-based compensation expense within selling, general and administrative expenses.
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Stock option exercises and restricted stock and performance award issuances are expected to be fulfilled with new shares of common stock.
Taxes Collected from Clients and Remitted to Governmental Agencies
We record taxes on client transactions due to governmental agencies as receivables and liabilities on the consolidated balance sheets.
Income Taxes
Our provision for income taxes is based on domestic and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting, and available credits and incentives. Our most significant income tax jurisdiction is the United States. Differences in the timing of recognition of certain income and expenses for financial statements and for tax returns create temporary differences between financial reporting and tax filings. The tax effect of such temporary differences is reported as deferred income taxes. The deferred income taxes are classified as current or long-term based on the classification of the related asset or liability. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. All or a portion of the benefit of income tax positions is recognized only when we have made a determination that it is more-likely-than-not that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as more-likely-than-not to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Net Income Per Common Share
Basic net income per common share is net income divided by the weighted-average number of shares outstanding during the period. Diluted net income per common share is based on the weighted-average number of shares outstanding during the period, adjusted to include the assumed conversion of certain RSUs, vesting of performance shares, and exercise of stock options.
Contingencies and Litigation
We are party to a variety of legal, administrative, and other inquiries arising in the normal course of business relating to labor and employment, contracts, personal injury, and other matters. We accrue for such matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, we accrue at the low end of the range. Expected costs of resolving contingencies, which include the use of third-party service providers, are accrued as the services are rendered. The assessment of the likelihood of a potential loss and the estimation of the amount of a loss are subjective and require significant judgment.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11 (“ASU 2013-11”), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The update clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. In situations where the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. While early adoption is permitted, we expect to adopt ASU 2013-11 on November 1, 2014. We do not expect the adoption of these new presentation requirements to have a material impact on our consolidated financial position, results of operations, or cash flows.
In December 2011, the FASB issued Accounting Standards Update 2011-11 (“ASU 2011-11”), Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This amendment requires disclosing and reconciling gross and net amounts for financial instruments that are offset in the balance sheet, and amounts for financial instruments that are subject to master netting arrangements and other similar clearing and repurchase arrangements.
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ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We will adopt ASU 2011-11 on November 1, 2013. The adoption of ASU 2011-11 will not have a material impact on our disclosures.
3. NET INCOME PER COMMON SHARE
The calculations of basic and diluted net income per common share are as follows:
| Years Ended October 31, | ||||||||||||
| (in thousands, except per share amounts) | 2013 | 2012 | 2011 | |||||||||
| Income from continuing operations |
$ | 72,900 | $ | 62,718 | $ | 68,698 | ||||||
| Loss from discontinued operations, net of taxes |
— | (136) | (194) | |||||||||
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| Net income |
$ | 72,900 | $ | 62,582 | $ | 68,504 | ||||||
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| Weighted-average common and common equivalent shares outstanding—Basic |
54,877 | 53,987 | 53,121 | |||||||||
| Effect of dilutive securities: |
||||||||||||
| RSUs |
473 | 369 | 293 | |||||||||
| Performance shares |
403 | 281 | 221 | |||||||||
| Stock options |
314 | 277 | 468 | |||||||||
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| Weighted-average common and common equivalent shares outstanding—Diluted |
56,067 | 54,914 | 54,103 | |||||||||
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| Net income per common share |
||||||||||||
| Basic |
1.33 | 1.16 | 1.29 | |||||||||
| Diluted |
1.30 | 1.14 | 1.27 | |||||||||
The diluted net income per common share excludes certain stock options, performance shares, and RSUs, since the effect of including these awards would have been anti-dilutive as follows:
| Years Ended October 31, | ||||||||||||
| (in thousands) | 2013 | 2012 | 2011 | |||||||||
| Stock options |
765 | 1,317 | 879 | |||||||||
| Performance shares |
19 | — | 17 | |||||||||
| RSUs |
13 | 90 | 60 | |||||||||
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4. ACQUISITIONS
2013 Acquisitions
Air Serv Acquisition
On November 1, 2012, we acquired all of the outstanding stock of Air Serv for an aggregate purchase price of $162.9 million in cash, including a $4.1 million working capital adjustment paid in the second quarter of 2013 (the “Air Serv Acquisition”). Approximately $11.9 million of the cash consideration was placed in an escrow account to satisfy any applicable indemnification claims, pursuant to the terms of the purchase agreement.
Air Serv provides facility solutions services for airlines, airports, and freight companies at airports primarily in the United States. The operations of Air Serv are included in the Other segment as of November 1, 2012, the acquisition date. Revenues and operating profit associated with Air Serv were $336.2 million and $12.4 million, respectively, since the acquisition date and are included in our consolidated statement of income.
HHA Acquisition
On November 1, 2012, we acquired all of the outstanding stock of HHA for an aggregate purchase price of $33.7 million in cash, including a $0.6 million working capital adjustment received in the third quarter of 2013 (the “HHA Acquisition”). Approximately $1.4 million of the cash consideration remains in an escrow account to satisfy any applicable indemnification claims pursuant to the terms of the purchase agreement.
HHA provides facility solutions, including housekeeping, laundry, patient assist, plant maintenance, and food services, to hospitals, healthcare systems, long-term care facilities, and retirement communities. The operations of HHA are included in the Building & Energy Solutions segment as of November 1, 2012, the acquisition date. Revenues and operating profit associated with HHA were $53.5 million and $1.4 million, respectively, since the acquisition date and are included in our consolidated statement of income.
Calvert-Jones Acquisition
On November 1, 2012, we acquired substantially all of the assets and assumed certain liabilities of Calvert-Jones for a cash purchase price of $6.1 million (the “Calvert-Jones Acquisition”), including a $0.2 million working capital adjustment received subsequent to October 31, 2013.
Calvert-Jones provides mechanical and energy efficient products and solutions in the Washington, D.C. area. The operations of Calvert-Jones are included in the Building & Energy Solutions segment as of November 1, 2012, the acquisition date. Revenues and operating profit associated with Calvert-Jones were $18.4 million and $1.0 million, respectively, since the acquisition date and are included in our consolidated statement of income.
Blackjack Acquisition
On August 1, 2013, we acquired certain assets and assumed certain liabilities of Blackjack for a cash purchase price of $5.3 million, subject to certain post-closing adjustments (the “Blackjack Acquisition”). Blackjack provides specialized staffing and marketing services to airport operators, retailers, and other clients in the United Kingdom and Europe. The operations of Blackjack are included in the Other segment as of August 1, 2013, the acquisition date. Revenues and operating profit associated with Blackjack were $5.3 million and $0.2 million, respectively, since the acquisition date and are included in our consolidated statement of income.
BEST Acquisition
On September 1, 2013, we acquired certain assets and assumed certain liabilities of BEST for an aggregate purchase price of $4.6 million, consisting of $2.6 million of cash consideration, $1.6 million of contingent consideration liability, and $0.4 million in holdback liability (the “BEST Acquisition”). The purchase price is subject to certain post-closing adjustments, including a working capital true-up adjustment. The final contingent consideration liability amount will be determined at the end of the third year following the consummation date of the acquisition. This amount will be based on a pre-defined adjusted income from operations for BEST for the trailing twelve months ended August 31, 2016. The contingent consideration liability will be in the form of a cash payment and could be as high as $2.0 million upon final settlement. See Note 5, “Fair Value of Financial Instruments,” regarding the valuation of the contingent consideration liability.
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BEST is an electrical testing and maintenance firm that provides a broad range of specialized commercial and industrial electrical solutions, such as inspections, system testing, power quality monitoring, hazard detection services, repairs, and ongoing predictive maintenance in commercial and industrial buildings, primarily in the southwest region of the United States. The operations of BEST are included in the Building & Energy Solutions segment as of September 1, 2013, the acquisition date. Revenues and operating profit associated with BEST were $1.1 million and zero, respectively, since the acquisition date and are included in our consolidated statement of income.
Allocation of consideration transferred to acquire Air Serv, HHA, Calvert-Jones, Blackjack, and BEST
The following table summarizes the allocation of consideration transferred to acquire Air Serv, HHA, Calvert-Jones, Blackjack, and BEST and the amounts of identified assets acquired and liabilities assumed at the acquisition dates. The purchase price allocations have been finalized for Air Serv, HHA, and Calvert-Jones. For the Blackjack and BEST acquisitions, initial purchase price allocations are preliminary and subject to adjustment within the measurement period, generally not to exceed one year from the acquisition date. For these acquisitions, consideration and purchase price allocations are subject to, among other items: an additional working capital adjustment; further analysis of tax accounts; and final valuation of identifiable intangible assets.
| (in thousands) |
Air Serv | HHA | Calvert-Jones | Blackjack | BEST | Total | ||||||||||||||||||
| Purchase price: |
||||||||||||||||||||||||
| Cash consideration |
$ | 162,881 | $ | 33,680 | $ | 6,055 | $ | 5,286 | $ | 2,600 | $ | 210,502 | ||||||||||||
| Fair value of contingent consideration liability |
— | — | — | — | 1,642 | 1,642 | ||||||||||||||||||
| Holdback liability |
— | — | — | — | 400 | 400 | ||||||||||||||||||
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| Total consideration |
$ | 162,881 | $ | 33,680 | $ | 6,055 | $ | 5,286 | $ | 4,642 | $ | 212,544 | ||||||||||||
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| Allocated to: |
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| Other current and noncurrent assets |
$ | 68,915 | $ | 5,403 | $ | 1,750 | $ | 4,635 | $ | 1,565 | $ | 82,268 | ||||||||||||
| Property, plant and equipment |
16,658 | 123 | 49 | 261 | 490 | 17,581 | ||||||||||||||||||
| Other intangible assets |
44,610 | 15,000 | 2,600 | 870 | 1,430 | 64,510 | ||||||||||||||||||
| Goodwill (1) |
89,271 | 23,796 | 4,021 | 1,968 | 1,607 | 120,663 | ||||||||||||||||||
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| Total assets acquired |
219,454 | 44,322 | 8,420 | 7,734 | 5,092 | 285,022 | ||||||||||||||||||
| Liabilities assumed |
(56,573) | (10,642) | (2,365) | (2,448) | (450) | (72,478) | ||||||||||||||||||
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| Net assets acquired |
$ | 162,881 | $ | 33,680 | $ | 6,055 | $ | 5,286 | $ | 4,642 | $ | 212,544 | ||||||||||||
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(1) The total amount of goodwill that is deductible for tax purposes is $18.4 million.
The amount allocated to goodwill for Air Serv, HHA, and Blackjack is reflective of our identification of buyer-specific synergies that we anticipate will be realized by, among other things, reducing duplicative positions and back office functions and by reducing professional fees and other services. Goodwill is also attributable to expected long-term business growth through the expansion of our vertical market expertise in servicing the end-to-end needs of airlines, airport authorities, and healthcare service markets. Goodwill for the Calvert-Jones and BEST acquisitions are attributable to projected long-term business growth through our expansion of existing vertical and geographic market offerings in building and energy solutions.
The following table summarizes the weighted-average useful lives in years of the acquired other intangible assets, consisting primarily of customer contracts and relationships for each respective acquisition:
| Air Serv |
HHA |
Calvert-Jones |
Blackjack |
BEST | ||||
| 14 | 13 | 12 | 11 | 9 |
The fair value of trade accounts receivable acquired in the Air Serv Acquisition reflects gross contractual amounts of $53.1 million, of which $0.4 million is expected to be uncollectible. The fair value of trade accounts receivable acquired in the HHA and Calvert-Jones acquisitions were $3.2 million and $1.4 million, respectively and approximate their respective contractual amounts. The preliminary estimated fair value of trade accounts receivable acquired in the Blackjack and BEST acquisitions were $4.4 million and $1.5 million, respectively and approximate their respective contractual amounts.
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We have incurred combined acquisition-related costs of $1.5 million, of which $0.5 million have been incurred during the year ended October 31, 2013. These expenses are included in selling, general and administrative expenses in our accompanying consolidated statements of income.
Assuming these acquisitions were made at November 1, 2011, the consolidated pro forma results would not be materially different from reported results.
2012 Acquisition
TEGG and CurrentSAFE Acquisition
On May 1, 2012, we acquired substantially all of the assets and assumed certain liabilities of TEGG Corporation (“TEGG”) and CurrentSAFE Corporation (“CurrentSAFE”) and also acquired certain software technology from TEGG’s shareholder, for an aggregate purchase price of $5.5 million in cash, net of cash acquired (the “TEGG Acquisition”). The purchase price reflects a $0.1 million working capital adjustment received in the fourth quarter of 2012. The assets acquired represent the franchise operations of TEGG and CurrentSAFE, and through this acquisition we expanded our electrical services to include electrical preventive and predictive maintenance solutions. The acquired net assets and results from operations have been included in the Building & Energy Solutions segment since May 1, 2012, the acquisition date. The final purchase price and related allocations are summarized as follows:
| (in thousands) | ||||
| Purchase price: |
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| Total consideration |
$ | 5,667 | ||
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| Allocated to: |
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| Other current and noncurrent assets |
$ | 3,408 | ||
| Other intangible assets |
2,200 | |||
| Goodwill |
1,988 | |||
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| Total assets acquired |
7,596 | |||
| Liabilities assumed |
(1,929) | |||
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| Net assets acquired |
$ | 5,667 | ||
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Costs of $0.2 million related to the TEGG Acquisition were expensed as incurred and were recorded in selling, general and administrative expenses. Other identifiable intangible assets primarily consist of customer contracts and relationships with a weighted average life of 14 years.
Goodwill represents the excess cost over the fair value of the net tangible and intangible assets acquired. Factors that contributed to a purchase price resulting in the recognition of goodwill include our strategic initiative to expand the scope and product range of our facility solutions franchise offerings into the electrical services solutions business, which will provide for further expansion of this business and enhance comprehensive service offerings. The amount of goodwill for tax purposes that is expected to be deductible is $2.0 million.
Revenues from the TEGG Acquisition were approximately $3.9 million for the year ending October 31, 2012. Assuming these acquisitions were made at November 1, 2011, the consolidated pro forma results would not be materially different from reported results.
2011 Acquisition
The Linc Group, LLC Acquisition
On December 1, 2010, we acquired all of the outstanding limited liability company interests of The Linc Group, LLC (“Linc”) for an aggregate purchase price of $298.7 million (the “Linc Acquisition”). Linc provides end-to-end integrated facility 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 customers 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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In connection with the acquisition, we incurred $5.2 million in direct acquisition costs, which were expensed as incurred and classified as selling, general and administrative expenses. Revenues and operating profit associated with Linc and included in our consolidated statements of income were $512.9 million and $11.1 million, respectively, for the year ending October 31, 2011.
The final purchase price and related allocations are summarized as follows:
| (in thousands) | ||||
| Purchase price: |
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| Total consideration |
$ | 298,720 | ||
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| Allocated to: |
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| Other current and noncurrent assets |
$ | 139,720 | ||
| Property, plant and equipment |
9,462 | |||
| Other intangible assets |
87,000 | |||
| Goodwill |
154,487 | |||
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| Total assets acquired |
390,669 | |||
| Liabilities assumed |
(91,949) | |||
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| Net assets acquired |
$ | 298,720 | ||
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The acquired intangible assets are being amortized using the sum-of-the-years’-digits method or, where appropriate, the straight-line method. The weighted-average amortization periods for the acquired intangible assets are 14 years for customer contracts and relationships and 4 years for trademarks and trade names, which is consistent with the estimated useful life considerations used in the determination of their fair values. The amount allocated to goodwill is reflective of our identification of buyer-specific synergies realized by, among other things, reducing duplicative positions and back office functions, consolidating facilities, and reducing professional fees and other services.
The transaction was a taxable asset acquisition of the Linc organization for U.S. income tax purposes, and no deferred taxes have been recorded on a significant portion of the acquired assets and liabilities. However, deferred taxes have been recorded for certain assets and liabilities where we receive a carryover basis for tax purposes. At the date of acquisition, the goodwill balance was assigned to our former Facility Solutions segment. The amount of goodwill for tax purposes that is expected to be deductible is $144.1 million.
The following unaudited pro forma financial information shows our combined results of continuing operations, including Linc, as if the acquisition occurred at the beginning of the periods presented. The unaudited pro forma financial information is not intended to present or be indicative of our consolidated financial results of continuing operations that would have been reported had the business combination been completed as of the beginning of the period presented and should not be taken as indicative of our future consolidated results of continuing operations. The unaudited pro forma financial information for the year ended October 31, 2011 has not been provided since the amounts are not significantly different from actual results.
| (in thousands, except per share data) | Year Ended October 31, 2010 |
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| Revenues |
$ | 4,062,610 | ||
| Operating profit |
111,788 | |||
| Net income |
$ | 62,109 | ||
| Net income per common share |
||||
| Basic |
$ | 1.19 | ||
| Diluted |
$ | 1.17 | ||
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5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the fair value hierarchy, carrying amounts, and fair values of our financial instruments that are measured on a recurring basis and other select significant financial instruments as of October 31, 2013 and 2012:
| October 31, 2013 | October 31, 2012 | |||||||||||||||||
| (in thousands) | Fair Value Hierarchy |
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||
| Financial assets measured at fair value on a recurring basis |
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| Assets held in funded deferred compensation plan (1) |
1 | $ | 5,359 | $ | 5,359 | $ | 5,029 | $ | 5,029 | |||||||||
| Investments in auction rate securities (2) |
3 | 12,994 | 12,994 | 17,780 | 17,780 | |||||||||||||
| Interest rate swaps (3) |
2 | 4 | 4 | — | — | |||||||||||||
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| 18,357 | 18,357 | 22,809 | 22,809 | |||||||||||||||
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| Other select financial assets |
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| Cash and cash equivalents (4) |
1 | 32,639 | 32,639 | 43,459 | 43,459 | |||||||||||||
| Insurance deposits (5) |
1 | 28,466 | 28,466 | 31,720 | 31,720 | |||||||||||||
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| Total |
$ | 79,462 | $ | 79,462 | $ | 97,988 | $ | 97,988 | ||||||||||
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| Financial liabilities measured at fair value on a recurring basis |
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| Interest rate swap (3) |
2 | $ | 154 | $ | 154 | $ | 214 | $ | 214 | |||||||||
| Contingent consideration liability (6) |
3 | 1,642 | 1,642 | — | — | |||||||||||||
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| 1,796 | 1,796 | 214 | 214 | |||||||||||||||
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| Other select financial liability |
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| Line of credit (7) |
2 | 314,870 | 314,870 | 215,000 | 215,000 | |||||||||||||
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| Total |
$ | 316,666 | $ | 316,666 | $ | 215,214 | $ | 215,214 | ||||||||||
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(1) Represents investments held in a Rabbi Trust associated with our OneSource Deferred Compensation Plan, which we include in “Other assets” on the accompanying consolidated balance sheets. The fair value of the assets held in the funded deferred compensation plan is based on quoted market prices. See Note 11, “Employee Benefit Plans,” for more information.
(2) For investments in auction rate securities, the fair values were based on discounted cash flow valuation models, primarily utilizing unobservable inputs. See Note 6, “Auction Rate Securities,” for the roll-forwards of assets measured at fair value using significant unobservable Level 3 inputs and the sensitivity analysis of significant inputs.
(3) Includes derivatives designated as hedging instruments. The fair values of the interest rate swaps are estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rates and the expected cash flows at current market interest rates using observable benchmarks for LIBOR forward rates at the end of the period. The fair value of the interest rate swap asset and liabilities were included in “Other investments and long-term receivables” and “Retirement plans and other,” respectively, on the accompanying consolidated balance sheets. See Note 10, “Line of Credit,” for more information.
(4) Cash and cash equivalents are stated at nominal value, which equals fair value.
(5) Represents restricted insurance deposits that are used to collateralize our self-insurance obligations and are stated at nominal value, which equals fair value. These insurance deposits relate to the OneSource Services Inc. (“OneSource”) acquisition.
(6) Our contingent consideration liability was incurred in connection with the acquisition of BEST. The contingent consideration liability is measured at fair value and is included in “Retirement plans and other” on the accompanying consolidated balance sheet. The fair value is based on a pre-defined forecasted adjusted income from operations for BEST using a probability weighted income approach and discounted using a proxy of our fixed borrowing rate. See Note 4, “Acquisitions,” for further information.
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(7) Represents outstanding borrowings under our $650.0 million five-year syndicated line of credit. Due to variable interest rates, the carrying value of outstanding borrowings under our line of credit approximates the fair value. See Note 10, “Line of Credit,” for more information.
Our non-financial assets, which include goodwill and long-lived assets held and used, are not required to be measured at fair value on a recurring basis. However, if certain trigger events occur, or if an annual impairment test is required, we would evaluate the non-financial assets for impairment. If an impairment was to occur, the asset would be recorded at the estimated fair value, which is generally determined using discounted future cash flows.
During the years ended October 31, 2013 and October 31, 2012, we had no transfers of assets or liabilities between any of the above hierarchy levels.
6. AUCTION RATE SECURITIES
At October 31, 2013, we held investments in auction rate securities from three different issuers having an aggregate original principal amount of $15.0 million and an amortized cost basis of $13.0 million. During the year ended October 31, 2013, one of the auction rate securities was redeemed by the issuer at its par value of $5.0 million. No gain or loss was recognized upon its redemption. At October 31, 2012, we held investments in auction rate securities from four different issuers having an aggregate original principal amount of $20.0 million and an amortized cost basis of $18.0 million.
Our auction rate securities are debt instruments with stated maturities ranging from 2033 to 2050, for which the interest rate is designed to be reset through Dutch auctions approximately every 30 days. Auctions for these securities have not occurred since August 2007. We have classified all our auction rate security investments as non-current as we do not reasonably expect to liquidate the securities for cash within the next 12 months.
As of October 31, 2013, none of our auction rate securities were in an unrealized loss position. As of October 31, 2012, two of our auction rate securities, with an aggregate fair value of $7.8 million, were in a continuous unrealized loss position for less than twelve months and the remaining two auction rate securities, with an aggregate fair value of $10.0 million, were not in an unrealized loss position.
The following table presents the significant assumptions used to determine the fair values of our auction rate securities at October 31, 2013 and 2012:
| Assumption |
October 31, 2013 |
October 31, 2012 | ||
| Discount rates |
L + 0.33% - L + 3.01% | L + 1.37% - L + 6.86% | ||
| Yields |
2.15%, L + 2.00% | 2.15%, L + 2.00% - L + 3.50% | ||
| Average expected lives |
4 - 10 years | 4 - 10 years |
L - One Month LIBOR
The following tables present the changes in the cost basis and fair value of our auction rate securities as of October 31, 2013 and 2012:
| (in thousands) | Amortized Cost Basis |
Fair Value (Level 3) |
||||||
| Balance at November 1, 2012 |
$ | 17,994 | $ | 17,780 | ||||
| Unrealized gains recorded in AOCL |
— | |||||||