Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2011
OR
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o |
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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)
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Delaware
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94-1369354 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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551 Fifth Avenue, Suite 300, New York,
New York
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10176 |
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(Address of principal executive offices)
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(Zip Code) |
212/297-0200
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
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
o
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 o
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.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Class
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Outstanding at March 4, 2011 |
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Common Stock, $0.01 par value per share
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53,019,808 shares |
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
FORM 10-Q
For the quarterly period ended January 31, 2011
Table of Contents
2
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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January 31, |
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October 31, |
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(in thousands, except share amounts) |
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2011 |
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2010 |
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(Unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
31,365 |
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$ |
39,446 |
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Trade accounts receivable, net of allowances
of $15,705 and $10,672 at January 31, 2011 and
October 31, 2010, respectively |
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574,532 |
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450,513 |
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Prepaid income taxes |
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1,516 |
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1,498 |
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Current assets of discontinued operations |
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3,705 |
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4,260 |
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Prepaid expenses |
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49,151 |
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41,306 |
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Notes receivable and other |
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26,525 |
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20,402 |
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Deferred income taxes, net |
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44,820 |
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46,193 |
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Insurance recoverables |
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5,138 |
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5,138 |
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Total current assets |
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736,752 |
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608,756 |
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Non-current assets of discontinued operations |
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830 |
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1,392 |
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Insurance deposits |
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36,177 |
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36,164 |
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Other investments and long-term receivables |
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3,845 |
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4,445 |
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Deferred income taxes, net |
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51,578 |
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51,068 |
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Insurance recoverables |
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70,960 |
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70,960 |
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Other assets |
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67,679 |
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37,869 |
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Investments in auction rate securities |
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20,910 |
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20,171 |
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Investments in unconsolidated affiliates |
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12,016 |
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Property, plant and equipment, net of accumulated
depreciation of $105,252 and $98,884 at
January 31, 2011 and October 31, 2010, respectively |
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66,176 |
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58,088 |
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Other intangible assets, net of accumulated
amortization of $60,236 and $54,889 at
January 31, 2011 and October 31, 2010, respectively |
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162,398 |
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65,774 |
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Goodwill |
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726,518 |
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593,983 |
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Total assets |
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$ |
1,955,839 |
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$ |
1,548,670 |
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See accompanying notes to the condensed consolidated financial statements.
3
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
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January 31, |
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October 31, |
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(in thousands, except share amounts) |
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2011 |
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2010 |
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(Unaudited) |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Trade accounts payable |
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$ |
134,447 |
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$ |
78,928 |
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Accrued liabilities |
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Compensation |
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98,019 |
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89,063 |
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Taxes other than income |
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27,320 |
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17,663 |
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Insurance claims |
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76,500 |
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77,101 |
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Other |
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82,960 |
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70,119 |
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Income taxes payable |
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1,334 |
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977 |
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Total current liabilities |
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420,580 |
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333,851 |
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Income taxes payable |
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30,653 |
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29,455 |
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Line of credit |
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430,000 |
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140,500 |
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Retirement plans and other |
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55,445 |
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34,626 |
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Insurance claims |
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270,272 |
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271,213 |
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Total liabilities |
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1,206,950 |
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809,645 |
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Stockholders equity |
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Commitments and Contingencies |
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Preferred stock, $0.01 par value; 500,000 shares
authorized; none issued |
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Common stock, $0.01 par value; 100,000,000 shares
authorized; 52,989,573 and 52,635,343 shares issued
at January 31, 2011 and October 31, 2010, respectively |
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530 |
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526 |
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Additional paid-in capital |
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200,079 |
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192,418 |
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Accumulated other comprehensive loss, net of taxes |
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(897 |
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(1,863 |
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Retained earnings |
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549,177 |
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547,944 |
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Total stockholders equity |
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748,889 |
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739,025 |
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Total liabilities and stockholders equity |
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$ |
1,955,839 |
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$ |
1,548,670 |
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See accompanying notes to the condensed consolidated financial statements.
4
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended |
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January 31, |
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(in thousands, except per share data) |
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2011 |
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2010 |
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(Unaudited) |
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Revenues |
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$ |
1,029,169 |
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$ |
869,884 |
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Expenses |
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Operating |
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927,760 |
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782,101 |
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Selling, general and administrative |
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79,200 |
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62,802 |
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Amortization of intangible assets |
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5,293 |
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2,775 |
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Total expenses |
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1,012,253 |
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847,678 |
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Operating profit |
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16,916 |
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22,206 |
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Income from unconsolidated affiliates |
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787 |
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Interest expense |
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(4,046 |
) |
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(1,215 |
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Income from continuing operations
before income taxes |
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13,657 |
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20,991 |
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Provision for income taxes |
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(5,252 |
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(8,155 |
) |
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Income from continuing operations |
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8,405 |
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12,836 |
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Loss from discontinued operations,
net of taxes |
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(15 |
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(61 |
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Net income |
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$ |
8,390 |
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$ |
12,775 |
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Net income per common share Basic |
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Income from continuing operations |
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$ |
0.16 |
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$ |
0.25 |
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Loss from discontinued operations |
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Net Income |
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$ |
0.16 |
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$ |
0.25 |
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Net income per common share Diluted |
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Income from continuing operations |
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$ |
0.16 |
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$ |
0.24 |
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Loss from discontinued operations |
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Net Income |
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$ |
0.16 |
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$ |
0.24 |
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Weighted-average common and
common equivalent shares outstanding |
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Basic |
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52,839 |
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51,821 |
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Diluted |
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53,893 |
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52,548 |
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Dividends declared per common share |
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$ |
0.140 |
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$ |
0.135 |
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See accompanying notes to the condensed consolidated financial statements.
5
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
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January 31, |
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(in thousands) |
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2011 |
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2010 |
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(Unaudited) |
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Cash flows from operating activities: |
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Net income |
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$ |
8,390 |
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$ |
12,775 |
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Loss from discontinued operations, net of taxes |
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(15 |
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(61 |
) |
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Income from continuing operations |
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8,405 |
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12,836 |
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Adjustments to reconcile income from continuing operations
to net cash provided by (used in) continuing operating activities: |
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Depreciation and amortization of intangible assets |
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12,674 |
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8,493 |
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Deferred income taxes |
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2,092 |
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4,868 |
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Share-based compensation expense |
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2,174 |
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1,960 |
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Provision for bad debt |
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875 |
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|
606 |
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Discount accretion on insurance claims |
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220 |
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228 |
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Loss (gain) on sale of assets |
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28 |
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(92 |
) |
Income from unconsolidated affiliates |
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(787 |
) |
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Distributions from unconsolidated affiliates |
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157 |
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Changes in operating assets and liabilities, net of effects of acquisitions |
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Trade accounts receivable |
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(37,109 |
) |
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(32,276 |
) |
Prepaid expenses and other current assets |
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(6,860 |
) |
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2,241 |
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Insurance recoverables |
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1,400 |
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Other assets and long-term receivables |
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1,823 |
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1,161 |
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Income taxes payable |
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1,537 |
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4,286 |
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Retirement plans and other non-current liabilities |
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(998 |
) |
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(928 |
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Insurance claims payable |
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(3,887 |
) |
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(498 |
) |
Trade accounts payable and other accrued liabilities |
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19,914 |
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(16,505 |
) |
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Total adjustments |
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(8,147 |
) |
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(25,056 |
) |
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Net cash provided by (used in) continuing operating activities |
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258 |
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(12,220 |
) |
Net cash provided by discontinued operating activities |
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1,039 |
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3,307 |
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Net cash provided by (used in) operating activities |
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1,297 |
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(8,913 |
) |
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Cash flows from investing activities: |
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Additions to property, plant and equipment |
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(5,213 |
) |
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(7,379 |
) |
Proceeds from sale of assets |
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34 |
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1,043 |
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Purchase of businesses, net of cash acquired |
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(292,178 |
) |
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(588 |
) |
Investments in unconsolidated affiliates |
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(630 |
) |
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Net cash used in investing activities |
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(297,987 |
) |
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(6,924 |
) |
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Cash flows from financing activities: |
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Proceeds from exercises of stock options (including income tax benefit) |
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5,731 |
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1,251 |
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Dividends paid |
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(7,398 |
) |
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(6,992 |
) |
Deferred financing costs paid |
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(4,991 |
) |
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Borrowings from line of credit |
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430,500 |
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|
131,000 |
|
Repayment of borrowings from line of credit |
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(141,000 |
) |
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(131,500 |
) |
Changes in book cash overdrafts |
|
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5,767 |
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|
9,102 |
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Net cash provided by financing activities |
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288,609 |
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|
2,861 |
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Net decrease in cash and cash equivalents |
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(8,081 |
) |
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(12,976 |
) |
Cash and cash equivalents at beginning of period |
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|
39,446 |
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|
34,153 |
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Cash and cash equivalents at end of period |
|
$ |
31,365 |
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$ |
21,177 |
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|
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|
See accompanying notes to the condensed consolidated financial statements.
6
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
|
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Three Months Ended |
|
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|
January 31, |
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(in thousands) |
|
2011 |
|
|
2010 |
|
|
|
(Unaudited) |
|
Supplemental Data: |
|
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Cash paid (refunded) for income taxes, net of refunds received |
|
$ |
688 |
|
|
$ |
(1,243 |
) |
Tax effect from exercise of options |
|
|
971 |
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|
241 |
|
Cash received from exercise of options |
|
|
4,760 |
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|
1,010 |
|
Interest paid on line of credit |
|
$ |
2,881 |
|
|
$ |
979 |
|
See accompanying notes to the condensed consolidated financial statements.
7
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of ABM Industries Incorporated (ABM)
represent the accounts of ABM and its subsidiaries (collectively, the Company). The financial
statements contained in this report are unaudited and should be read in conjunction with the
consolidated financial statements and accompanying notes filed with the U.S. Securities and
Exchange Commission (SEC) in ABMs Annual Report on Form 10-K for the fiscal year ended October
31, 2010. All references to years are to the Companys fiscal year, which ends on October 31.
The accompanying condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP). The preparation
of financial statements in accordance with GAAP requires management to make estimates and
assumptions that affect the amounts reported in ABMs condensed consolidated financial statements
and the accompanying notes. These estimates are based on information available as of the date of
these financial statements. As future events and their effects cannot be determined with precision,
actual results could differ significantly from these estimates. Changes in those estimates
resulting from continuing changes in the economic environment will be reflected in the financial
statements in future periods. In the opinion of management, the accompanying condensed consolidated
financial statements reflect all normal and recurring adjustments necessary to fairly state the
information for each period contained therein. The results of operations for the three months ended
January 31, 2011 are not necessarily indicative of the operating results that might be expected for
the full fiscal year or any future periods.
Significant Accounting Policies
For a description of the Companys significant accounting policies, see Item 8, Financial
Statements and Supplementary Data, in the Companys Annual Report on Form 10-K for the year ended
October 31, 2010. In connection with the acquisition of The Linc Group, LLC (Linc) on December 1,
2010, the Company has adopted the following additional significant accounting policies:
Revenue Recognition
Linc performs long-term fixed-price repair and refurbishment contracts which are accounted for
under the percentage-of-completion method of accounting. 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 to measure the stage of completion. Revenue and gross profit are adjusted periodically
for revisions in estimated total contract costs and values. Estimated losses are recorded when
identified.
Linc maintains individual and area franchises that permit companies to perform engineering services
under the Linc Network brand. Revenue from franchisees consists of start-up fees (which are
recognized when all material services or conditions relating to the sale have been substantially
performed or satisfied) and continuing franchise royalty fees that are generally based on a
percentage of franchisee revenue (which are recorded as revenue by the Company as the fees are
earned and become receivable from the franchisee). Direct (incremental) costs relating to franchise
sales for which the revenue has not been recognized are deferred until the related revenue is
recognized. Costs relating to continuing franchise fees are expensed as incurred.
Guarantees
Linc offers certain customers guaranteed energy savings on installed equipment under long-term
service and maintenance contracts. The total energy savings guarantees were $24.1 million at
January 31, 2011 and extend from 2012 to 2025. The Company accrues for the estimated cost of
guarantees when it is probable that a liability has been incurred and the amount can be reasonably
estimated based on historical experience. Historically, Linc has not incurred any significant
losses in connection with these guarantees, and the Company does not expect any significant future
losses.
8
Investments in Unconsolidated Affiliates
Linc owns non-controlling interests in certain affiliated entities that provide engineering
services to government and commercial clients, primarily in the United States and the Middle East.
The carrying amount of the investments in unconsolidated affiliates was $12.0 million at January
31, 2011. The Company accounts for such investments, in which it holds a significant interest but
does not exercise controlling influence, under the equity method of accounting. The Company
evaluates its 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.
Parking Revenue Presentation
The Companys Parking segment reports both revenues and expenses, in equal amounts, for costs
directly reimbursed from its managed parking lot clients. Parking revenues related solely to the
reimbursement of expenses totaled $73.4 million and $56.0 million for the three months ended
January 31, 2011 and 2010, respectively.
2. Acquisitions
On December 1, 2010, the Company acquired Linc pursuant to an Agreement and Plan of Merger, dated
as of December 1, 2010 (the Merger Agreement), by and among ABM, Linc, GI Manager LP, as the
Members Representative, and Lightning Services, LLC, a wholly-owned subsidiary of ABM (Merger
Sub). Pursuant to the Merger Agreement, Merger Sub merged with and into Linc, and Linc continued
as the surviving corporation and as a wholly-owned subsidiary of ABM. The aggregate purchase price
for all of the outstanding limited liability company interests of Linc was $300.6 million, subject
to certain adjustments as set forth in the Merger Agreement. Linc provides end-to-end integrated
facilities management services that improve operating efficiencies, reduce energy consumption and
lower overall operational costs for governmental, commercial and residential clients throughout the
United States and in select international markets. Some of these services are performed through
franchisees and other affiliated entities. The operations of Linc are included in the Engineering
segment as of the acquisition date. Revenues and operating profit associated with Linc, and
included in the Companys condensed consolidated statements of income for the three months ended
January 31, 2011, were $93.6 million and $3.1 million, respectively. Pro forma financial
information for this acquisition has not been provided, as such information is not materially
different from the Companys historical results.
This acquisition was accounted for under the acquisition method of accounting. The Company has
performed a preliminary allocation of the purchase price to the underlying net assets acquired and
liabilities assumed based on their estimated fair values as of the acquisition date, with any
excess of the purchase price allocated to goodwill. The Company has not completed the analysis of
certain acquired assets and assumed liabilities, including, but not limited to, other identifiable
intangible assets (customer contracts), investments in unconsolidated affiliates, self-insurance
reserves, certain legal contingencies, and income taxes. However, the Company is continuing its
review of these items during the measurement period, and further changes to the preliminary
allocation will be recognized as the valuations are finalized.
9
The preliminary purchase price and related allocations are summarized as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Purchase price: |
|
|
|
|
|
|
|
|
Total cash consideration |
|
$ |
300,645 |
|
|
|
|
|
|
|
|
|
|
Allocated to: |
|
|
|
|
Cash and cash equivalents |
|
$ |
8,467 |
|
Trade accounts receivable |
|
|
87,785 |
|
Prepaid expenses and other current assets |
|
|
7,108 |
|
Investments in unconsolidated affiliates |
|
|
10,735 |
|
Property, plant and equipment |
|
|
10,337 |
|
Other identifiable intangible assets |
|
|
102,000 |
|
Other assets |
|
|
27,007 |
|
Accounts payable |
|
|
(37,939 |
) |
Insurance claims |
|
|
(2,125 |
) |
Accrued expenses and other current liabilities |
|
|
(23,416 |
) |
Non-current liabilities |
|
|
(21,834 |
) |
Goodwill |
|
|
132,520 |
|
|
|
|
|
Net assets acquired |
|
$ |
300,645 |
|
|
|
|
|
The fair values of the acquired customer contracts will be amortized using the
sum-of-the-years-digits method, over their useful lives of 13 20 years, which is consistent with
the estimated useful life considerations used in the determination of their preliminary fair
values. The amount allocated to goodwill is reflective of the Companys identification of
buyer-specific synergies that the Company anticipates will be 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 the Company receives a carryover basis for tax purposes. Additional deferred taxes may be
recorded as the Company finalizes its assessments of the fair value of the remaining acquired
assets and liabilities. A significant portion of the goodwill associated with the acquisition is
expected to be amortizable for income tax purposes.
3. Fair Value Measurements
A fair value measurement is determined based on the assumptions that a market participant would use
in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market
participant assumptions based on (i) observable inputs such as quoted prices in active markets
(Level 1), (ii) inputs other than quoted prices in active markets that are observable either
directly or indirectly (Level 2), and (iii) unobservable inputs that require the Company to use
present value and other valuation techniques in the determination of fair value (Level 3).
10
The following tables present information about assets and liabilities required to be carried at
fair value on a recurring basis as of January 31, 2011 and October 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Fair Value at |
|
|
Using Inputs Considered as |
|
(in thousands) |
|
January 31, 2011 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held in funded deferred
compensation plan |
|
$ |
5,357 |
|
|
$ |
5,357 |
|
|
$ |
|
|
|
$ |
|
|
Investments in auction rate securities |
|
|
20,910 |
|
|
|
|
|
|
|
|
|
|
|
20,910 |
|
Interest rate swap |
|
|
179 |
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
26,446 |
|
|
$ |
5,357 |
|
|
$ |
179 |
|
|
$ |
20,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Fair Value at |
|
|
Using Inputs Considered as |
|
(in thousands) |
|
October 31, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held in funded deferred
compensation plan |
|
$ |
5,717 |
|
|
$ |
5,717 |
|
|
$ |
|
|
|
$ |
|
|
Investments in auction rate securities |
|
|
20,171 |
|
|
|
|
|
|
|
|
|
|
|
20,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
25,888 |
|
|
$ |
5,717 |
|
|
$ |
|
|
|
$ |
20,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
$ |
445 |
|
|
$ |
|
|
|
$ |
445 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
445 |
|
|
$ |
|
|
|
$ |
445 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the assets held in the funded deferred compensation plan is based on quoted
market prices.
For investments in auction rate securities that were not redeemed or had no market activity
indicative of fair market value, the fair value of the investments in auction rate securities is
based on discounted cash flow valuation models, primarily utilizing unobservable inputs. During the
three months ended January 31, 2011, the Company had no transfers of assets or liabilities between
any of the above hierarchy levels. See Note 4, Auction Rate Securities, for the roll-forwards of
assets measured at fair value using significant unobservable Level 3 inputs.
The fair value of the interest rate swaps is 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 London Interbank Offered Rate
forward rates at the end of the period. See Note 7, Line of Credit Facility.
Other Financial Assets and Liabilities
Due to the short-term maturities of the Companys cash, cash equivalents, receivables, payables,
and current assets and liabilities of discontinued operations, the carrying value of these
financial instruments approximates their fair market values. Due to the variable interest rates,
the fair value of outstanding borrowings under the Companys $650.0 million line of credit
approximates its carrying value of $430.0 million. The carrying value of the receivables included
in non-current assets of discontinued operations of $0.8 million and the insurance deposits related
to self-insurance claims of $36.2 million approximates fair market value.
4. Auction Rate Securities
As of January 31, 2011, the Company held investments in auction rate securities from five different
issuers having an original principal amount of $5.0 million each (aggregating $25.0 million). At
January 31, 2011 and October 31, 2010, the estimated fair value of these securities, in total, was
approximately $20.9 million and $20.2 million, respectively. These auction rate securities are debt
instruments with stated maturities ranging from 2025 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. On February 11, 2011, one of the Companys auction
rate securities was redeemed by the issuer at its par value of $5.0 million. As of January 31, 2011
and the redemption date, this security was valued at $5.0 million, therefore, no gain or loss was
recognized upon its redemption.
11
For securities that were not redeemed or had no market activity indicative of fair market value,
the Company estimates the fair values of auction rate securities it holds 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. Since there can be no assurance
that auctions for these securities will be successful in the near future, the Company has
classified its auction rate securities as long-term investments.
The following table presents the significant assumptions used to determine the fair value of
the Companys auction rate securities at January 31, 2011 and October 31, 2010:
|
|
|
|
|
Assumption |
|
January 31, 2011 |
|
October 31, 2010 |
Discount rates |
|
L + 2.24% L + 14.71% |
|
L + 2.50% L + 18.59% |
Yields |
|
L + 2.0% L + 3.5% |
|
L + 2.0% L + 3.5% |
Average expected lives |
|
4 10 years |
|
4 10 years |
|
|
|
|
|
L London Interbank Offered Rate |
|
|
|
|
The Companys determination of whether its 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) the Companys intent to not sell the
securities; (2) the Companys assessment that it is not more likely than not that the Company 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.
The Companys determination of whether an other-than-temporary impairment 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 the Companys 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. There were no other-than-temporary impairments identified during the three months ended
January 31, 2011.
The following table presents the changes in the cost basis and fair value of the Companys auction
rate securities for the three months ended January 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
(in thousands) |
|
Cost Basis |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
23,307 |
|
|
$ |
20,171 |
|
Unrealized gains |
|
|
|
|
|
|
947 |
|
Unrealized losses |
|
|
|
|
|
|
(208 |
) |
|
|
|
|
|
|
|
Balance at January 31, 2011 |
|
$ |
23,307 |
|
|
$ |
20,910 |
|
|
|
|
|
|
|
|
At January 31, 2011 and October 31, 2010, unrealized losses of $2.4 million ($1.5 million net
of taxes) and $3.1 million ($1.9 million net of taxes) were recorded in accumulated other
comprehensive loss, respectively.
12
5. 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 exercise and
conversion of certain stock options, restricted stock units, and performance shares. The
calculation of basic and diluted net income per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
January 31, |
|
(in thousands, except per share data) |
|
2011 |
|
|
2010 |
|
|
|
|
Income from continuing operations |
|
$ |
8,405 |
|
|
$ |
12,836 |
|
Loss from discontinued operations,
net of taxes |
|
|
(15 |
) |
|
|
(61 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
8,390 |
|
|
$ |
12,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding Basic |
|
|
52,839 |
|
|
|
51,821 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options |
|
|
511 |
|
|
|
389 |
|
Restricted stock units |
|
|
372 |
|
|
|
262 |
|
Performance shares |
|
|
171 |
|
|
|
76 |
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding Diluted |
|
|
53,893 |
|
|
|
52,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
0.25 |
|
Diluted |
|
$ |
0.16 |
|
|
$ |
0.24 |
|
The diluted net income per common share excludes certain stock options and restricted stock units
since the effect of including these stock options and restricted stock units would have been
anti-dilutive, as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
January 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
90 |
|
|
|
846 |
|
Restricted stock units |
|
|
573 |
|
|
|
23 |
|
Performance shares |
|
|
68 |
|
|
|
|
|
6. Self-Insurance
The Companys self-insurance reserves during interim periods are based on actuarial rates that
consider the most recently completed actuarial reports and subsequent known or expected trends.
During the remainder of 2011, actuarial reports are expected to be completed for the Companys
significant programs using recent claims data, and may result in adjustments to earnings during the
third and fourth quarters of 2011.
At January 31, 2011, the Company had $106.1 million in standby letters of credit (primarily related
to its workers compensation, general liability, automobile, and property damage programs), $36.2
million in restricted insurance deposits, and $188.8 million in surety bonds supporting insurance
claim liabilities. At October 31, 2010, the Company had $100.8 million in standby letters of
credit, $36.2 million in restricted insurance deposits, and $112.5 million in surety bonds
supporting insurance claim liabilities.
13
7. Line of Credit Facility
On November 30, 2010, the Company terminated its then-existing $450.0 million syndicated line of
credit and replaced it with a $650.0 million five-year syndicated line of credit that is scheduled
to expire on November 30, 2015 (the Facility), with the option to increase the size of the
Facility to $850.0 million at any time prior to the expiration (subject to receipt of commitments
for the increased amount from existing and new lenders). The Facility is available for working
capital, the issuance of standby letters of credit, the financing of capital expenditures, and
other general corporate purposes, including acquisitions.
The Facility includes covenants limiting liens, dispositions, fundamental changes, investments,
indebtedness, and certain transactions and payments. In addition, the Facility also requires that
the Company maintain the following three financial covenants which are described in Note 16,
Subsequent Events, to the Consolidated Financial Statements set forth in the Companys Annual
Report on Form 10-K for 2010: (1) a fixed charge coverage ratio; (2) a leverage ratio; and (3) a
consolidated net worth test. The Company was in compliance with all covenants as of January 31,
2011.
As of January 31, 2011, the total outstanding amount under the Facility in the form of cash
borrowings was $430.0 million. Available credit under the line of credit was up to $113.9 million
at January 31, 2011. The Companys ability to draw down available amounts under its line of
credit is subject to compliance with the covenants described above.
Interest Rate Swaps
On February 19, 2009, the Company entered into a two-year interest rate swap agreement with an
underlying notional amount of $100.0 million, pursuant to which the Company receives variable
interest payments based on LIBOR and pays fixed interest at a rate of 1.47%.
On October 19, 2010, the Company entered into a three-year forward starting interest rate swap
agreement with an underlying notional amount of $25.0 million, pursuant to which the Company
receives variable interest payments based on LIBOR and pays fixed interest at a rate of 0.89%. The
effective date of this hedge is February 24, 2011.
These swaps are intended to hedge the interest risk associated with the Companys forecasted
floating-rate, LIBOR-based debt. As of January 31, 2011, the critical terms of the swaps match the
terms of the debt, resulting in no hedge ineffectiveness. On an ongoing basis (no less than once
each quarter), the Company assesses whether its LIBOR-based interest payments are probable of being
paid during the life of the hedging relationship. The Company also assesses the counterparty credit
risk, including credit ratings and potential non-performance of the counterparties, when
determining the fair value of the swaps.
As of January 31, 2011, the fair value of the interest rate swaps was $0.2 million, which was
included in other investments and long-term receivables on the accompanying condensed consolidated
balance sheet. The effective portion of these cash flow hedges is recorded within accumulated other
comprehensive loss and reclassified into interest expense in the same period during which the
hedged transactions affect earnings. Any ineffective portion of the hedges is recorded immediately
to interest expense. No ineffectiveness existed at January 31, 2011. The amount included in
accumulated other comprehensive loss is $0.2 million ($0.1 million, net of taxes) at January 31,
2011.
14
8. Benefit Plans
The components of net periodic benefit cost of the Companys defined benefit plans and
post-retirement benefit plans, for participants associated with continuing operations, for the
three months ended January 31, 2011 and 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
January 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
Defined Benefit Plans |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
12 |
|
|
$ |
11 |
|
Interest |
|
|
142 |
|
|
|
148 |
|
Expected return on plan assets |
|
|
(93 |
) |
|
|
(100 |
) |
Amortization of actuarial loss |
|
|
28 |
|
|
|
18 |
|
|
|
|
|
|
|
|
Net expense |
|
$ |
89 |
|
|
$ |
77 |
|
|
|
|
|
|
|
|
Post-Retirement Benefit Plan |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
3 |
|
|
$ |
4 |
|
Interest |
|
|
64 |
|
|
|
70 |
|
|
|
|
|
|
|
|
Net expense |
|
$ |
67 |
|
|
$ |
74 |
|
|
|
|
|
|
|
|
9. Contingencies
The Company is a defendant in certain proceedings arising in the ordinary course of business,
including class actions and purported class actions. Litigation outcomes are often difficult to
predict and are often resolved over long periods of time. Estimating probable losses requires the
analysis of multiple possible outcomes that often depend on judgments about potential actions by
third parties. Loss contingencies are recorded as liabilities if both: (1) it is probable or known
that a liability has been incurred and (2) the amount of the loss is reasonably estimable. If the
reasonable estimate of the loss is a range and no amount within the range is a better estimate, the
minimum amount of the range is recorded as a liability. Legal costs associated with loss
contingencies are expensed as incurred.
The Company is a defendant in the consolidated cases of Augustus, Hall and Davis v. American
Commercial Security Services filed July 12, 2005, in the Superior Court of California, Los Angeles
County (the Augustus case). The Augustus case involves allegations that the Company violated
certain state laws relating to meal and rest breaks. On January 8, 2009, the Augustus case was
certified as a class action by the Superior Court of California, Los Angeles County. On October 6,
2010, the Company moved to decertify the class and for summary judgment. Plaintiffs also moved for
summary judgment on the rest break claim. On December 28, 2010, the Superior Court de-certified
the portion of the class related to the meal break claims and granted summary judgment for the
plaintiffs with respect to the rest break issue. On January 21, 2011, the Company filed a writ
challenging the Courts decision, which writ was denied. No trial court date has been set. The
Company intends to challenge the Courts decision. An estimate of the potential exposure, if any,
cannot be made at this time.
The Company is a defendant in the case of Villacres v. ABM Security filed on August 15, 2007, in
the U.S. District Court of California, Central District (the Villacres case). On January 15,
2009, a federal court judge denied with prejudice class certification status in the Villacres case.
That case and the companion state court case filed April 3, 2008, in Los Angeles Superior Court
were both subsequently dismissed with prejudice on summary judgment. On June 17, 2010, the United
States Court of Appeals for the Ninth Circuit affirmed the decision of the district court, which
had summarily dismissed with prejudice the Villacres case. The state court companion case, filed
April 3, 2008 in Los Angeles Superior Court, has also been dismissed with prejudice by the judge of
the Los Angeles Superior Court. On October 22, 2010, the State Appellate
Court affirmed the decision of the judge of the Los Angeles Superior Court. The plaintiffs filed a
petition for review with the California Supreme Court. On February 16, 2011, the California Supreme
Court denied the petition for review.
The Company is a defendant in the case of Diaz/Morales/Reyes v. Ampco System Parking filed on
December 5, 2006, in Los Angeles Superior Court (the Diaz case). On January 19, 2011, a
previously scheduled mediation between the parties took place, which concluded without the parties
reaching agreement. A trial date has not yet been set.
The Company accrues amounts it believes are adequate to address any liabilities related to
litigation and arbitration proceedings and to other contingencies that the Company believes will
result in a probable loss. However, the ultimate resolution of such matters is always uncertain. It
is possible that any such proceeding brought against the Company could have a material adverse
impact on its financial condition and results of operations. The total amount accrued for all
probable losses at January 31, 2011 was $6.4 million.
15
10. Share-Based Compensation Plans
On January 10, 2011, the following grants were approved: 186,563 stock options and 58,043
restricted stock units, each under the terms of the Companys 2006 Equity Incentive Plan, as
amended and restated. The fair value of the awards granted on January 10, 2011 was approximately
$3.0 million, and these awards vest 100% on the fifth anniversary of the grant date. The Company
estimates the fair value of stock options on the date of grant using the Black-Scholes option
valuation model. The fair value of stock options granted was $8.04 per share. The assumptions used
in the option valuation model for the stock options granted on January 10, 2011 were: (1) expected
life from date of grant of 5.6 years; (2) expected stock price volatility of 39.2%; (3) expected
dividend yield of 2.3%; and (4) a risk-free interest rate of 2.1%. The fair value of the restricted
stock units granted was determined using the closing stock price on the date of grant.
On January 11, 2011, grants of 299,628 performance share awards under the terms of the Companys
2006 Equity Incentive Plan, as amended and restated, were approved. The fair value of the
performance share awards granted on January 11, 2011 and valued as of January 25, 2011 was
approximately $7.6 million. These awards are earned over a period of three years and vest, to the
extent certain performance targets are achieved, on January 11, 2014.
11. Comprehensive Income
The following table presents the components of comprehensive income for the three months ended
January 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
January 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,390 |
|
|
$ |
12,775 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Unrealized gains on auction rate securities, net of
taxes of $301 and $49 for January 31, 2011 and 2010, respectively |
|
|
438 |
|
|
|
71 |
|
Unrealized gains (losses) on interest rate swap agreement, net of taxes
of $254 and $20 for January 31, 2011 and 2010, respectively |
|
|
370 |
|
|
|
(29 |
) |
Foreign currency translation |
|
|
148 |
|
|
|
20 |
|
Actuarial gains adjustments to pension and other
post-retirement plans, net of taxes of $7 and $7 for
January 31, 2011 and 2010, respectively |
|
|
10 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
9,356 |
|
|
$ |
12,848 |
|
|
|
|
|
|
|
|
12. Income Taxes
The effective tax rates on income from continuing operations for the three months ended January 31,
2011 and 2010 were 38.5% and 38.8%, respectively.
At January 31, 2011, the Company had unrecognized tax benefits of $101.8 million, all of which, if
recognized in the future, would affect its effective tax rate. The Company includes interest and
penalties related to unrecognized tax benefits in income tax expense. As of January 31, 2011, the
Company had accrued interest related to uncertain tax positions of $0.8 million. The Company has
recorded $1.2 million of the unrecognized tax benefits as a current liability.
The Companys major tax jurisdiction is the United States. ABM, OneSource Services, Inc. and the
Linc C Corporations U.S. federal income tax returns remain open for examination for the periods
ending October 31, 2006 through October 31, 2010, March 31, 2000 through November 14, 2007 and
December 31, 2007 through December 31, 2010, respectively. ABM is currently being examined by the
Internal Revenue Service for the tax years 2006 2008. The Company does business in all 50
states, significantly in California, Texas and New York, as well as in Puerto Rico and Canada. In
major state jurisdictions, the tax years 2006 2010 remain open and subject to examination by the
appropriate tax authorities. The Company is currently being examined by Illinois, Maryland, Utah,
New Jersey, Massachusetts, New York, California, Texas, and Puerto Rico.
16
13. Segment Information
The Company is organized into four reportable operating segments, Janitorial, Engineering, Parking
and Security, which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
January 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
Janitorial |
|
$ |
594,606 |
|
|
$ |
576,058 |
|
Engineering |
|
|
192,648 |
|
|
|
97,372 |
|
Parking |
|
|
152,866 |
|
|
|
112,588 |
|
Security |
|
|
88,756 |
|
|
|
83,597 |
|
Corporate |
|
|
293 |
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
$ |
1,029,169 |
|
|
$ |
869,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
|
|
|
|
|
|
Janitorial |
|
$ |
29,864 |
|
|
$ |
33,801 |
|
Engineering |
|
|
7,450 |
|
|
|
5,275 |
|
Parking |
|
|
4,734 |
|
|
|
5,026 |
|
Security |
|
|
1,301 |
|
|
|
1,346 |
|
Corporate |
|
|
(26,433 |
) |
|
|
(23,242 |
) |
|
|
|
|
|
|
|
Operating profit |
|
|
16,916 |
|
|
|
22,206 |
|
Income from unconsolidated affiliates |
|
|
787 |
|
|
|
|
|
Interest expense |
|
|
(4,046 |
) |
|
|
(1,215 |
) |
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
$ |
13,657 |
|
|
$ |
20,991 |
|
|
|
|
|
|
|
|
Effective November 1, 2010, the Company changed the management reporting responsibility for a
subsidiary from the Janitorial segment to the Engineering segment. Amounts for the three months
ended January 31, 2010 have been retrospectively adjusted to reflect this organizational change.
The impact of the organizational change on the reported results for the three months ended January
31, 2010 was a reclassification of $8.0 million of revenues and $0.3 million of operating profit
from the Janitorial segment to the Engineering segment.
Most Corporate expenses are not allocated. Such expenses include current actuarial developments of
self-insurance reserves relating to claims incurred in prior years, certain legal costs and
settlements, certain information technology costs, share-based compensation costs, direct
acquisition costs, severance costs associated with acquisitions, and certain chief executive
officer and other finance and human resource department costs.
17
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the accompanying unaudited condensed
consolidated financial statements of ABM Industries Incorporated (ABM) and its subsidiaries
(collectively the Company) included in this Quarterly Report on Form 10-Q and with the
consolidated financial statements and accompanying notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations included in the Companys Annual Report
on Form 10-K for the fiscal year ended October 31, 2010. All information in the discussion and
references to years are based on the Companys fiscal year, which ends on October 31.
Overview
The Company provides janitorial, engineering, parking and security services to thousands of
commercial, governmental, industrial, institutional, residential and retail client facilities in
hundreds of cities, primarily throughout the United States. The Companys business is impacted by,
among other things, commercial and government office building occupancy and rental rates,
industrial activity, air travel levels, tourism, and transportation needs at colleges, universities
and health care service facilities.
On December 1, 2010, the Company acquired The Linc Group, LLC (Linc) pursuant to an Agreement and
Plan of Merger, dated as of December 1, 2010 (the Merger Agreement), by and among ABM, Linc, GI
Manager LP, as the Members Representative, and Lightning Services, LLC, a wholly-owned subsidiary
of ABM (Merger Sub). Pursuant to the Merger Agreement, Merger Sub merged with and into Linc, and
Linc continued as the surviving corporation and as a wholly-owned subsidiary of ABM. The aggregate
purchase price for all of the outstanding limited liability company interests of Linc was $300.6
million, subject to certain adjustments as set forth in the Merger Agreement. Linc provides
end-to-end integrated facilities management services that improve operating efficiencies, reduce
energy consumption and lower overall operational costs for governmental, commercial and residential
clients throughout the United States and in select international markets. Some of these services
are performed through franchisees and other affiliated entities. The operations of Linc are
included in the Engineering segment as of the acquisition date. Revenues and operating profit
associated with Linc, and included in the Companys condensed consolidated statements of income for
the three months ended January 31, 2011, were $93.6 million and $3.1 million, respectively.
Revenues at the Companys Janitorial, Engineering and Security segments are primarily based on the
performance of labor-intensive services at contractually specified prices. Revenues at the Parking
segment relate to parking and transportation services, which are less labor-intensive. In addition
to services defined within the scope of client contracts, the Janitorial segment also generates
revenues from extra services (or tags) such as, but not limited to, flood cleanup and extermination
services, which generally provide higher margins. Total revenues increased $159.3 million in the
three months ended January 31, 2011, as compared to the three months ended January 31, 2010, which
was primarily related to revenues of $156.1 million associated with the Linc, Diversco, Inc.
(Diversco), Five Star Parking, Network Parking Company Ltd. and System Parking, Inc.
(collectively, L&R) acquisitions. Despite the increase in revenues, operating profit decreased
$5.3 million in the three months ended January 31, 2011, as compared to the three months ended
January 31, 2010, which was primarily related to higher labor expenses in the Janitorial segment
(resulting from one additional working day in the three months ended January 31, 2011) and an
increase in transaction costs (resulting from the Linc acquisition).
In addition to revenues and operating profit, the Companys 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 timing of collections and payments to suppliers and other vendors, the quality
of receivables, the timing and amount of income tax payments, and the timing and amount of payments
on self-insured claims. The Companys net cash provided by operating activities was $1.3 million
for the three months ended January 31, 2011, compared to net cash used of $8.9 million in the three
months ended January 31, 2010. The increase in cash flows from operating activities was primarily
related to the year-over-year increase in the changes in trade accounts payable and accrued
liabilities (resulting from the timing of payments made on vendor invoices), partially offset by
the year-over-year decrease in the changes in prepaid expenses and other current assets.
18
The Company believes that achieving desired levels of revenues and profitability in the future will
depend upon, among other things, its ability to attract and retain clients at desirable profit
margins, to pass on cost increases to clients, and to keep overall costs low. In the short-term,
the Company is focused on integrating recent acquisitions and plans to remain competitive by, among
other things, continued cost control strategies. The Company will continue to monitor, and in some
cases exit, client arrangements where the Company believes the client is financially at risk or
which produce low profit margins and focus on client arrangements that may generate less revenues
but produce higher profit margins. In the long-
term, the Company expects to continue to grow organically, and through acquisitions, in response to
the growing global demand from clients for integrated, outsourced facility services capable of
serving a wide range of domestic and international markets, industries, and facilities.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
October 31, |
|
|
|
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
Change |
|
Cash and cash equivalents |
|
$ |
31,365 |
|
|
$ |
39,446 |
|
|
$ |
(8,081 |
) |
Working capital |
|
$ |
316,172 |
|
|
$ |
274,905 |
|
|
$ |
41,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, |
|
|
|
|
(in thousands) |
|
2011 |
|
|
2010 |
|
|
Change |
|
Net cash provided by (used in) operating activities |
|
$ |
1,297 |
|
|
$ |
(8,913 |
) |
|
$ |
10,210 |
|
Net cash used in investing activities |
|
$ |
(297,987 |
) |
|
$ |
(6,924 |
) |
|
$ |
(291,063 |
) |
Net cash provided by financing activities |
|
$ |
288,609 |
|
|
$ |
2,861 |
|
|
$ |
285,748 |
|
In connection with the acquisition of Linc, on November 30, 2010 the Company terminated its
then-existing $450.0 million syndicated line of credit and replaced it with a new $650.0 million
five-year syndicated line of credit, which the Company has the option to increase to $850.0 million
at any time prior to the expiration (subject to receipt of commitments for the increased amount
from existing and new lenders). The Company believes that the cash generated from operations and
amounts available under its $650.0 million line of credit will be sufficient to fund the Companys
operations and cash requirements in the foreseeable future. As of January 31, 2011, the total
outstanding amounts under the Companys line of credit in the form of cash borrowings and standby
letters of credit were $430.0 million and $106.1 million, respectively. Available credit under the
line of credit was up to $113.9 million as of January 31, 2011. The Companys ability to draw down
available amounts under its $650.0 million line of credit is subject to compliance with certain
financial covenants, including covenants relating to consolidated net worth, a fixed charge
coverage ratio and a leverage ratio. In addition, other covenants under the line of credit include
limitations on liens, dispositions, fundamental changes, investments, and certain transactions and
payments. As of January 31, 2011, the Company was in compliance with all financial covenants.
Working Capital. Working capital increased by $41.3 million to $316.2 million at January 31, 2011
from $274.9 million at October 31, 2010. Excluding the effects of discontinued operations, working
capital increased by $41.8 million to $312.5 million at January 31, 2011 from $270.7 million at
October 31, 2010. The increase in working capital was primarily related to the working capital of
$38.3 million related to Linc, which was acquired on December 1, 2010.
Cash Flows from Operating Activities. Net cash provided by operating activities was $1.3 million
for the three months ended January 31, 2011, compared to net cash used of $8.9 million for the
three months ended January 31, 2010. The increase in cash flows from operating activities was
primarily related to the year-over-year increase in the changes in trade accounts payable and
accrued liabilities (resulting from the timing of payments made on vendor invoices), partially
offset by the year-over-year decrease in the changes in prepaid expenses and other current assets.
Net cash provided by discontinued operating activities was $1.0 million for the three months ended
January 31, 2011, compared to $3.3 million for the three months ended January 31, 2010. The cash
provided by discontinued operating activities primarily related to cash collections from the
transferred client contracts that contained deferred charges for services performed by the Company
prior to the sale.
Cash Flows from Investing Activities. Net cash used in investing activities for the three months
ended January 31, 2011 was $298.0 million, compared to $6.9 million for the three months ended
January 31, 2010. The increase in cash used in investing activities was primarily related to $292.2
million cash paid, net of cash acquired, for the Linc acquisition in the three months ended January
31, 2011.
Cash Flows from Financing Activities. Net cash provided by financing activities was $288.6 million
for the three months ended January 31, 2011, compared to $2.9 million for the three months ended
January 31, 2010. The increase in cash provided by financing activities was primarily related to
$306.8 million of cash borrowed to finance the Linc acquisition, which was partially offset by
repayments made on the Companys line of credit.
19
Results of Operations
Three Months Ended January 31, 2011 vs. Three Months Ended January 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Increase |
|
|
Increase |
|
|
|
Ended |
|
|
Ended |
|
|
(Decrease) |
|
|
(Decrease) |
|
($ in thousands) |
|
January 31, 2011 |
|
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,029,169 |
|
|
$ |
869,884 |
|
|
$ |
159,285 |
|
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
927,760 |
|
|
|
782,101 |
|
|
|
145,659 |
|
|
|
18.6 |
% |
Selling, general and administrative |
|
|
79,200 |
|
|
|
62,802 |
|
|
|
16,398 |
|
|
|
26.1 |
% |
Amortization of intangible assets |
|
|
5,293 |
|
|
|
2,775 |
|
|
|
2,518 |
|
|
|
90.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,012,253 |
|
|
|
847,678 |
|
|
|
164,575 |
|
|
|
19.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
16,916 |
|
|
|
22,206 |
|
|
|
(5,290 |
) |
|
|
(23.8 |
)% |
Income from unconsolidated affiliates |
|
|
787 |
|
|
|
|
|
|
|
787 |
|
|
NM |
* |
Interest expense |
|
|
(4,046 |
) |
|
|
(1,215 |
) |
|
|
2,831 |
|
|
|
233.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
13,657 |
|
|
|
20,991 |
|
|
|
(7,334 |
) |
|
|
(34.9 |
)% |
Provision for income taxes |
|
|
(5,252 |
) |
|
|
(8,155 |
) |
|
|
(2,903 |
) |
|
|
(35.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
8,405 |
|
|
|
12,836 |
|
|
|
(4,431 |
) |
|
|
(34.5 |
)% |
Loss from discontinued operations,
net of taxes |
|
|
(15 |
) |
|
|
(61 |
) |
|
|
(46 |
) |
|
NM |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,390 |
|
|
$ |
12,775 |
|
|
$ |
(4,385 |
) |
|
|
(34.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income. Net income in the three months ended January 31, 2011 decreased by $4.4 million,
or 34.3%, to $8.4 million ($0.16 per diluted share) from $12.8 million ($0.24 per diluted share) in
the three months ended January 31, 2010.
Income from Continuing Operations. Income from continuing operations in the three months ended
January 31, 2011 decreased by $4.4 million, or 34.5%, to $8.4 million ($0.16 per diluted share)
from $12.8 million ($0.24 per diluted share) in the three months ended January 31, 2010.
The decrease in income from continuing operations was primarily related to:
|
|
|
a $3.4 million increase in transaction costs, primarily related to the Linc acquisition, |
|
|
|
|
a $2.8 million increase in interest expense due to an increase in average borrowings and
average interest rates under the $650.0 million line of credit as a result of financing the
Linc acquisition, and |
|
|
|
|
a $3.9 million decrease in operating profit at Janitorial, primarily related to
increased labor expenses due to one additional working day in the three months ended
January 31, 2011; |
partially offset by:
|
|
|
a $2.9 million decrease in income taxes, primarily related to the decrease in income
from continuing operations before income taxes; and |
|
|
|
|
a $2.2 million increase in operating profit at Engineering, primarily related to the
Linc acquisition. |
Revenues. Revenues increased $159.3 million, or 18.3%, in the three months ended January 31, 2011,
as compared to the three months ended January 31, 2010. The Companys growth in revenues was
primarily related to the revenues associated with the Linc, Diversco and L&R acquisitions, which
accounted for $156.1 million of the increase.
20
Operating Expenses. As a percentage of revenues, gross margin was 9.9% and 10.1% in the three
months ended January 31, 2011 and 2010, respectively. The decrease in the gross margin was
primarily related to an increase in labor expenses in the Janitorial segment as a result of one
additional working day in the three months ended January 31, 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $16.4 million, or 26.1%, in the three months ended January 31, 2011 compared to the three
months ended January 31, 2010. The increase was primarily related to selling, general and
administrative expenses attributable to Linc and a $3.4 million increase in transaction costs,
primarily related to the Linc acquisition. Selling, general and administrative expenses associated
with Linc was $13.1 million in the three months ended January 31, 2011.
Interest Expense. Interest expense in the three months ended January 31, 2011 increased $2.8
million, or 233.0%, to $4.0 million from $1.2 million in the three months ended January 31, 2010.
The increase was primarily related to an increase in average borrowings and average interest rates
under the line of credit as a result of financing the Linc acquisition. The average outstanding
balances under the Companys line of credit were $337.0 million and $169.6 million in the three
months ended January 31, 2011 and 2010, respectively.
Amortization of Intangible Assets. Amortization of intangible assets in the three months ended
January 31, 2011 increased $2.5 million, or 90.7%, to $5.3 million from $2.8 million in the three
months ended January 31, 2010. The increase was primarily related to the amortization of intangible
assets acquired from the Linc acquisition.
Provision for Income Taxes. The effective tax rates on income from continuing operations for the
three months ended January 31, 2011 and 2010 were 38.5% and 38.8%, respectively.
Segment Information. Amounts for the three months ended January 31, 2010 have been retrospectively
adjusted to reflect a change in the management reporting responsibility for a subsidiary, effective
November 1, 2010, that moved the operations of that subsidiary from the Janitorial segment to the
Engineering segment. The impact of the organizational change on the reported results for the three
months ended January 31, 2010 was a reclassification of $8.0 million of revenues and $0.3 million
of operating profit from the Janitorial segment to the Engineering segment. The revenues and
operating profits for the Companys reportable segments (Janitorial, Engineering, Parking and
Security) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Increase |
|
|
Increase |
|
|
|
Ended |
|
|
Ended |
|
|
(Decrease) |
|
|
(Decrease) |
|
($ in thousands) |
|
January 31, 2011 |
|
|
January 31, 2010 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Janitorial |
|
$ |
594,606 |
|
|
$ |
576,058 |
|
|
$ |
18,548 |
|
|
|
3.2 |
% |
Engineering |
|
|
192,648 |
|
|
|
97,372 |
|
|
|
95,276 |
|
|
|
97.8 |
% |
Parking |
|
|
152,866 |
|
|
|
112,588 |
|
|
|
40,278 |
|
|
|
35.8 |
% |
Security |
|
|
88,756 |
|
|
|
83,597 |
|
|
|
5,159 |
|
|
|
6.2 |
% |
Corporate |
|
|
293 |
|
|
|
269 |
|
|
|
24 |
|
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,029,169 |
|
|
$ |
869,884 |
|
|
$ |
159,285 |
|
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Janitorial |
|
$ |
29,864 |
|
|
$ |
33,801 |
|
|
$ |
(3,937 |
) |
|
|
(11.6 |
)% |
Engineering |
|
|
7,450 |
|
|
|
5,275 |
|
|
|
2,175 |
|
|
|
41.2 |
% |
Parking |
|
|
4,734 |
|
|
|
5,026 |
|
|
|
(292 |
) |
|
|
(5.8 |
)% |
Security |
|
|
1,301 |
|
|
|
1,346 |
|
|
|
(45 |
) |
|
|
(3.3 |
)% |
Corporate |
|
|
(26,433 |
) |
|
|
(23,242 |
) |
|
|
(3,191 |
) |
|
|
(13.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
16,916 |
|
|
|
22,206 |
|
|
|
(5,290 |
) |
|
|
(23.8 |
)% |
Income from unconsolidated affiliates |
|
|
787 |
|
|
|
|
|
|
|
787 |
|
|
NM |
* |
Interest expense |
|
|
(4,046 |
) |
|
|
(1,215 |
) |
|
|
2,831 |
|
|
|
233.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
$ |
13,657 |
|
|
$ |
20,991 |
|
|
$ |
(7,334 |
) |
|
|
(34.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Janitorial. Janitorial revenues increased $18.5 million, or 3.2%, during the three months
ended January 31, 2011 compared to the three months ended January 31, 2010. The increase was
primarily related to the revenues associated
with the acquisition of Diversco, which was acquired on June 30, 2010. The revenues attributable to
Diversco in the three months ended January 31, 2011 were $17.5 million.
Operating profit decreased $3.9 million, or 11.6%, during the three months ended January 31, 2011
compared to the three months ended January 31, 2010. The decrease was primarily related to higher
labor expenses as a result of one additional working day in the three months ended January 31, 2011
and increases in payroll related expenses associated with an increase in state unemployment
insurance rates that went into effect January 1, 2011.
Engineering. Engineering revenues increased $95.3 million, or 97.8%, during the three months ended
January 31, 2011 compared to the three months ended January 31, 2010. The increase was primarily
related to the revenues associated with the acquisition of Linc, which was acquired on December 1,
2010. The revenues attributable to Linc in the three months ended January 31, 2011 were $93.6
million.
Operating profit increased by $2.2 million, or 41.2%, in the three months ended January 31, 2011
compared to the three months ended January 31, 2010. The increase was primarily related to the
increase in revenues.
Parking. Parking revenues increased $40.3 million, or 35.8%, during the three months ended January
31, 2011 compared to the three months ended January 31, 2010. The increase was primarily related to
the revenues associated with the acquisition of L&R, which was acquired on October 1, 2010. The
revenues attributable to L&R in the three months ended January 31, 2011 were $41.9 million.
Operating profit decreased $0.3 million, or 5.8%, during the three months ended January 31, 2011
compared to the three months ended January 31, 2010. The decrease was primarily related to
transition costs associated with the integration of the L&R acquisition.
Security. Security revenues increased $5.2 million, or 6.2%, during the three months ended January
31, 2011 compared to the three months ended January 31, 2010. The increase was primarily related to
the revenues associated with the acquisition of Diversco which was acquired on June 30, 2010, and
additional revenues from new client contracts. The revenues attributable to Diversco in the three
months ended January 31, 2011 were $3.1 million.
Operating profit remained relatively flat in the three months ended January 31, 2011 compared to
the three months ended January 31, 2010. The slight decrease was primarily related to margin
compression from new clients.
Corporate. Corporate expense increased $3.2 million, or 13.7%, in the three months ended January
31, 2011 compared to the three months ended January 31, 2010. The increase in Corporate expense was
primarily related to a $3.4 million increase in transaction costs during the three months ended
January 31, 2011, as compared to the three months ended January 31, 2010, as a result of the Linc
acquisition.
Contingencies
The Company has been named a defendant in certain proceedings arising in the ordinary course of
business, including class actions and purported class actions. Litigation outcomes are often
difficult to predict and are often resolved over long periods of time. Estimating probable losses
requires the analysis of multiple possible outcomes that often depend on judgments about potential
actions by third parties. Loss contingencies are recorded as liabilities in the accompanying
consolidated financial statements if both: (1) it is probable or known that a liability has been
incurred and (2) the amount of the loss is reasonably estimable. If the reasonable estimate of the
loss is a range and no amount within the range is a better estimate, the minimum amount of the
range is recorded as a liability. Legal costs associated with loss contingencies are expensed as
incurred.
The Company accrues amounts it believes are adequate to address any liabilities related to
litigation and arbitration proceedings and to other contingencies that the Company believes will
result in a probable loss. However, the ultimate resolution of such matters is always uncertain. It
is possible that any such proceeding brought against the Company could have a material adverse
impact on its financial condition and results of operations. The total amount accrued for all
probable losses at January 31, 2011 was $6.4 million.
22
Critical Accounting Policies and Estimates
The Companys accompanying condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States, which require the Company to
make estimates in the application of its
accounting policies based on the best assumptions, judgments, and opinions of management. For a
description of the Companys critical accounting policies, see Item 7, Managements Discussion and
Analysis of Financial Conditions and Results of Operations, in the Companys Annual Report on Form
10-K for the year ended October 31, 2010. In connection with the acquisition of Linc on December 1,
2010, the Company has adopted the following additional critical accounting policies:
Revenue Recognition
Linc performs long-term fixed-price repair and refurbishment contracts which are accounted for
under the percentage-of-completion method of accounting. 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 to measure the stage of completion. Revenue and gross profit are adjusted periodically
for revisions in estimated total contract costs and values. Estimated losses are recorded when
identified.
Linc maintains individual and area franchises that permit companies to perform engineering services
under the Linc Network brand. Revenue from franchisees consists of start-up fees (which are
recognized when all material services or conditions relating to the sale have been substantially
performed or satisfied) and continuing franchise royalty fees that are generally based on a
percentage of franchisee revenue (which are recorded as revenue by the Company as the fees are
earned and become receivable from the franchisee). Direct (incremental) costs relating to franchise
sales for which the revenue has not been recognized are deferred until the related revenue is
recognized. Costs relating to continuing franchise fees are expensed as incurred.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, and in particular, statements found in
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical in nature, constitute forward-looking statements. These statements are often
identified by the words, will, may, should, continue, anticipate, believe, expect,
plan, appear, project, estimate, intend, and words of a similar nature. Such statements
reflect the current views of the Company with respect to future events and are subject to risks and
uncertainties that could cause actual results to differ materially from those expressed or implied
in these statements. We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise.
Any number of factors could cause the Companys actual results to differ materially from those
anticipated. These factors include but are not limited to the following:
|
|
|
risks relating to our acquisition of Linc, including risks relating to reductions in
government spending on outsourced services as well as payment delays may adversely affect a
significant portion of revenues generated by government contracts, and political and
compliance risks in the non-U.S. areas in which it operates, may adversely impact our
operations; |
|
|
|
|
risks related to our acquisition strategy may adversely impact our results of
operations; |
|
|
|
|
intense competition can constrain our ability to gain business, as well as our
profitability; |
|
|
|
|
we are subject to volatility associated with high deductibles for certain insurable
risks; |
|
|
|
|
an increase in costs that we cannot pass on to clients could affect our profitability; |
|
|
|
|
we provide our services pursuant to agreements which are generally cancelable by either
party upon 30 to 60 days notice; |
|
|
|
|
our success depends on our ability to preserve our long-term relationships with clients; |
|
|
|
|
we incur significant accounting and other control costs that reduce profitability; |
|
|
|
|
a decline in commercial office building occupancy and rental rates could affect our
revenues and profitability; |
|
|
|
|
deterioration in economic conditions in general could further reduce the demand for
facility services and, as a result, reduce our earnings and adversely affect our financial
condition; |
|
|
|
|
financial difficulties or bankruptcy of one or more of our major clients could adversely
affect results; |
|
|
|
|
our ability to operate and pay our debt obligations depends upon our access to cash; |
|
|
|
|
future declines or fluctuations in the fair value of our investments in auction rate
securities that are deemed other-than-temporarily impaired could negatively impact our
earnings; |
|
|
|
|
uncertainty in the credit markets may negatively impact our costs of borrowings, our
ability to collect receivables on a timely basis, and our cash flow; |
23
|
|
|
any future increase in the level of debt or in interest rates can affect our results of
operations; |
|
|
|
|
an impairment charge could have a material adverse effect on our financial condition and
results of operations; |
|
|
|
|
we are defendants in several class and representative actions or other lawsuits alleging
various claims that could cause us to incur substantial liabilities; |
|
|
|
|
federal health care reform legislation may adversely affect our business and results of
operations; |
|
|
|
|
since we are an attractive employer for recent émigrés to this country and many of our
jobs are filled by such, changes in immigration laws or enforcement actions or
investigations under such laws could significantly adversely affect our labor force,
operations and financial results as well as our reputation; |
|
|
|
|
labor disputes could lead to loss of revenues or expense variations; |
|
|
|
|
we participate in multi-employer defined benefit plans that could result in substantial
liabilities being incurred; and |
|
|
|
|
natural disasters or acts of terrorism could disrupt our services. |
Additional information regarding these and other risks and uncertainties the Company faces is
contained in the Companys Annual Report on Form 10-K for the year ended October 31, 2010 and in
other reports it files from time to time with the Securities and Exchange Commission.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Market Risk Sensitive Instruments
The Companys primary market risk exposure is interest rate risk. The potential impact of adverse
increases in this 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 the
Company may take to mitigate its exposure to these changes. Results of changes in actual rates may
differ materially from the following hypothetical results.
Interest Rate Risk
Line of Credit
The Companys exposure to interest rate risk primarily relates to its cash equivalents and London
Interbank Offered Rate (LIBOR) and Interbank Offered Rate (IBOR) based borrowings under the
$650.0 million five-year syndicated line of credit that expires in November 2015. At January 31,
2011, outstanding LIBOR and IBOR based borrowings of $430.0 million represented 100% of the
Companys total debt obligations. While these borrowings mature over the next 90 days, the line of
credit extends through November 2015, subject to the terms of the line of credit. The Company
anticipates borrowing similar amounts for periods of one week to three months. A hypothetical 1%
increase in interest rates would add an additional interest expense of $2.1 million on the average
outstanding borrowings under the Companys line of credit, net of the interest rate swap agreement,
in the three months ended January 31, 2011.
Interest Rate Swaps
On February 19, 2009, the Company entered into a two-year interest rate swap agreement with an
underlying notional amount of $100.0 million, pursuant to which the Company receives variable
interest payments based on LIBOR and pays fixed interest at a rate of 1.47%.
On October 19, 2010, the Company entered into a three-year forward starting interest rate swap
agreement with an underlying notional amount of $25.0 million, pursuant to which the Company
receives variable interest payments based on LIBOR and pays fixed interest at a rate of 0.89%. The
effective date of this hedge is February 24, 2011.
These swaps are intended to hedge the interest risk associated with the Companys forecasted
floating-rate, LIBOR-based debt. As of January 31, 2011, the critical terms of the swaps match the
terms of the debt, resulting in no hedge ineffectiveness. On an ongoing basis (no less than once
each quarter), the Company assesses whether its LIBOR-based interest payments are probable of being
paid during the life of the hedging relationship. The Company also assesses the counterparty credit
risk, including credit ratings and potential non-performance of the counterparties, when
determining the fair value of the swaps.
As of January 31, 2011, the fair value of the interest rate swaps was $0.2 million, which was
included in other investments and long-term receivables on the accompanying condensed consolidated
balance sheet. The effective portion of these cash flow hedges is recorded within accumulated other
comprehensive loss and reclassified into interest expense in the same period during which the
hedged transactions affect earnings. Any ineffective portion of the hedges is recorded immediately
to interest expense. No ineffectiveness existed at January 31, 2011. The amount included in
accumulated other comprehensive loss is $0.2 million ($0.1 million, net of taxes) at January 31,
2011.
24
Investment in Auction Rate Securities
At January 31, 2011, the Company held investments in auction rate securities from five different
issuers having an aggregate original principal amount of $25.0 million. The investments are not
subject to material interest rate risk. These auction rate securities are debt instruments with
stated maturities ranging from 2025 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). A
hypothetical 1% increase in interest rates during the three months
ended January 31, 2011 would have added approximately $0.3 million
of additional interest income in the three months ended January 31, 2011.
On February 11, 2011, one of the Companys auction rate securities was redeemed by the issuer at
its par value of $5.0 million.
Foreign Currency
Substantially all of the operations of the Company are conducted in the United States, and, as
such, are not subject to material foreign currency exchange rate risk.
|
|
|
Item 4. |
|
Controls and Procedures |
a. Disclosure Controls and Procedures. As required by paragraph (b) of Rule 13a-15 or 15d-15 under
the Securities Exchange Act of 1934 (the Exchange Act), the Companys principal executive officer
and principal financial officer evaluated the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered
by this Quarterly Report on Form 10-Q. Based on this evaluation, these officers concluded that as
of the end of the period covered by this Quarterly Report on Form 10-Q, these disclosure controls
and procedures were effective to ensure that the information required to be disclosed by the
Company in reports it files or submits under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission and include controls and procedures designed to ensure that such information is
accumulated and communicated to the Companys management, including the Companys principal
executive officer and principal financial officer, to allow timely decisions regarding required
disclosure. Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues within the Company, if any, have been
detected. These inherent limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
b. Changes in Internal Control Over Financial Reporting. There were no changes in the Companys
internal control over financial reporting during the quarter ended January 31, 2011 that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting, other than the controls associated with the recently acquired Linc
business. Linc integration activities, including an assessment of the effectiveness of internal
controls over financial reporting and related remediation, are expected to be conducted over the
course of the Companys fiscal year 2011 assessment cycle.
PART II. OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
A discussion of material developments in the Companys litigation occurring in the period covered
by this report can be found in Note 9, Contingencies, to the Financial Statements in this
Quarterly Report on Form 10-Q.
There have been no material changes to the risk factors identified in our Annual Report on Form
10-K for the year ended October 31, 2010, in response to Item 1A, Risk Factors, to Part I of the
Annual Report.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
25
|
|
|
Item 3. |
|
Defaults Upon Senior Securities |
None.
|
|
|
Item 5. |
|
Other Information |
None.
(a) Exhibits
|
|
|
10.1*
|
|
Senior Executive Severance Pay Policy adopted March 7, 2011. |
31.1
|
|
Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2
|
|
Certification of principal financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
32
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS
|
|
XBRL Report Instance Document |
101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
101.CAL
|
|
XBRL Taxonomy Calculation Linkbase Document |
101.LAB
|
|
XBRL Taxonomy Label Linkbase Document |
101.PRE
|
|
XBRL Taxonomy Presentation Linkbase Document |
|
|
|
* |
|
Indicates management contract or compensatory plan, contract or
arrangement |
|
|
|
Indicates filed herewith |
|
|
|
Indicates furnished herewith |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ABM Industries Incorporated
|
|
March 10, 2011 |
/s/ James S. Lusk
|
|
|
James S. Lusk |
|
|
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer) |
|
|
|
|
March 10, 2011 |
/s/ Dean A. Chin
|
|
|
Dean A. Chin |
|
|
Senior Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer) |
|
27