Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2013

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 1-8929

 

 

ABM INDUSTRIES INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-1369354

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

551 Fifth Avenue, Suite 300,

New York, New York

  10176
(Address of principal executive offices)   (Zip Code)

212-297-0200

(Registrant’s 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at May 30, 2013

Common Stock, $0.01 par value per share   54,737,547 shares

 

 

 


Table of Contents

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Consolidated Financial Statements (Unaudited)

     5   
 

Consolidated Balance Sheets at April 30, 2013 and October 31, 2012

     5   
 

Consolidated Statements of Income for the Three and Six Months Ended April 30, 2013 and 2012

     6   
 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended April  30, 2013 and 2012

     7   
 

Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2013 and 2012

     8   
 

Notes to Consolidated Financial Statements (Unaudited)

     10   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 4.

 

Controls and Procedures

     41   

PART II. OTHER INFORMATION

     42   

Item 1.

 

Legal Proceedings

     42   

Item 1A.

 

Risk Factors

     42   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     42   

Item 3.

 

Defaults Upon Senior Securities

     42   

Item 4.

 

Mine Safety Disclosures

     42   

Item 5.

 

Other Information

     42   

Item 6.

 

Exhibits

     42   

SIGNATURES

     44   

 

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FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q, and in particular statements found in Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are not statements of historical fact constitute forward-looking statements. These statements give current expectations or forecasts of future events and are often identified by the words “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” “seek,” or other words and terms of similar meaning in connection with discussions of future strategy and operating or financial performance. Such statements reflect the current views of ABM Industries Incorporated (“ABM”), and its subsidiaries (collectively, the “Company”), with respect to future events and are based on assumptions and estimates which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. These factors include but are not limited to the following:

 

   

risks relating to our acquisition strategy may adversely impact our results of operations;

 

   

our strategy of moving to an integrated facility solutions provider platform, which focuses on vertical market strategy, may not generate the growth in revenues or profitability that we expect;

 

   

we are subject to intense competition that can constrain our ability to gain business, as well as our profitability;

 

   

increases in costs that we cannot pass on to clients could affect our profitability;

 

   

we have high deductibles for certain insurable risks, and therefore we are subject to volatility associated with those risks;

 

   

we primarily provide our services pursuant to agreements that are cancelable by either party upon 30 to 90 days’ notice;

 

   

our success depends on our ability to preserve our long-term relationships with clients;

 

   

we are at risk of losses and adverse publicity stemming from any accident or other incident involving our airport operations;

 

   

our international business exposes us to additional risks;

 

   

we conduct some of our operations through joint ventures, and our ability to do business may be affected by the failure of our joint venture partners to perform their obligations or the improper conduct of joint venture employees, partners, or agents;

 

   

significant delays or reductions in appropriations for our government contracts may negatively affect our business and could have an adverse effect on our financial position, results of operations, or cash flows;

 

   

we are subject to a number of procurement rules and regulations relating to our business with the U.S. Government and if we fail to comply with those rules, our business and our reputation could be adversely affected;

 

   

negative or unexpected tax consequences could adversely affect our results of operations;

 

   

we are subject to business continuity risks associated with centralization of certain administrative functions;

 

   

a decline in commercial office building occupancy and rental rates could affect our revenues and profitability;

 

   

deterioration in economic conditions in general could reduce the demand for facility services and, as a result, reduce our earnings and adversely affect our financial condition;

 

   

a variety of factors could adversely affect the results of operations of our building and energy solutions business;

 

   

financial difficulties or bankruptcy of one or more of our major clients could adversely affect our results;

 

   

our ability to operate and pay our debt obligations depends upon our access to cash;

 

   

future declines in the fair value of our investments in auction rate securities could negatively impact our earnings;

 

   

uncertainty in the credit markets may negatively impact our costs of borrowing, our ability to collect receivables on a timely basis, and our cash flow;

 

   

we incur accounting and other control costs that reduce profitability;

 

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Table of Contents
   

sequestration under the Budget Control Act of 2011 or alternative measures that may be adopted in lieu of sequestration may negatively impact our business;

 

   

any future increase in our level of debt or in interest rates could 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 class and representative actions and 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;

 

   

changes in immigration laws or enforcement actions or investigations under such laws could significantly adversely affect our labor force, operations, and financial results;

 

   

labor disputes could lead to loss of revenues or expense variations;

 

   

we participate in multiemployer pension plans which, under certain circumstances, could result in material liabilities being incurred; and

 

   

natural disasters or acts of terrorism could disrupt services.

Additional information regarding these and other risks and uncertainties the Company faces is contained in the Company’s Annual Report on Form 10-K for the year ended October 31, 2012 and in other reports the Company files from time to time with the Securities and Exchange Commission.

The Company urges readers to consider these risks and uncertainties in evaluating its forward-looking statements. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

                                                       

(in thousands, except share and per share amounts)

  April 30, 2013     October 31, 2012  

ASSETS

   

Current assets

   

Cash and cash equivalents

  $ 37,906      $ 43,459   

Trade accounts receivable, net of allowances of $10,890 and $11,125 at April 30, 2013 and October 31, 2012, respectively

    638,355        561,317   

Notes receivable and other

    38,058        43,960   

Prepaid expenses

    57,597        46,672   

Prepaid income taxes

    1,270        385   

Deferred income taxes, net

    38,520        43,671   

Insurance recoverables

    9,870        9,870   
 

 

 

   

 

 

 

Total current assets

    821,576        749,334   
 

 

 

   

 

 

 

Insurance deposits

    28,478        31,720   

Other investments and long-term receivables

    3,910        5,666   

Investments in unconsolidated affiliates, net

    15,582        14,863   

Investments in auction rate securities

    12,994        17,780   

Property, plant and equipment, net of accumulated depreciation of $123,574 and $107,771 at April 30, 2013 and October 31, 2012, respectively

    70,396        59,909   

Other intangible assets, net of accumulated amortization of $115,041 and $100,180 at April 30, 2013 and October 31, 2012, respectively

    156,488        109,138   

Goodwill

    863,246        751,610   

Noncurrent deferred income taxes, net

    10,035        17,610   

Noncurrent insurance recoverables

    54,691        54,630   

Other assets

    38,994        38,898   
 

 

 

   

 

 

 

Total assets

  $ 2,076,390      $ 1,851,158   
 

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

Current liabilities

   

Trade accounts payable

  $ 132,423      $ 130,410   

Accrued liabilities

   

Compensation

    129,510        121,855   

Taxes—other than income

    26,312        19,437   

Insurance claims

    82,848        80,192   

Other

    98,930        95,473   

Income taxes payable

    6,434        8,450   
 

 

 

   

 

 

 

Total current liabilities

    476,457        455,817   
 

 

 

   

 

 

 

Noncurrent income taxes payable

    31,286        27,773   

Line of credit

    384,000        215,000   

Retirement plans and other

    42,027        38,558   

Noncurrent insurance claims

    267,887        263,612   
 

 

 

   

 

 

 

Total liabilities

    1,201,657        1,000,760   
 

 

 

   

 

 

 

Commitments and contingencies

   

Stockholders’ Equity

   

Preferred stock, $0.01 par value; 500,000 shares authorized; none issued

    —          —     

Common stock, $0.01 par value; 100,000,000 shares authorized; 54,712,177 and 54,393,907 shares issued and outstanding at April 30, 2013 and October 31, 2012, respectively

    547        544   

Additional paid-in capital

    243,301        234,636   

Accumulated other comprehensive loss, net of taxes

    (2,435     (2,154

Retained earnings

    633,320        617,372   
 

 

 

   

 

 

 

Total stockholders’ equity

    874,733        850,398   
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,076,390      $ 1,851,158   
 

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended April 30,       Six Months Ended April 30,    

(in thousands, except per share amounts)

   2013     2012     2013     2012  

Revenues

   $ 1,173,617      $ 1,057,244      $ 2,355,740      $ 2,131,029   

Expenses

        

Operating

     1,048,213        947,916        2,116,092        1,914,336   

Selling, general and administrative

     84,482        85,164        172,231        169,184   

Amortization of intangible assets

     7,305        5,301        14,494        10,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,140,000        1,038,381        2,302,817        2,094,370   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     33,617        18,863        52,923        36,659   

Other-than-temporary impairment credit losses on auction rate security recognized in earnings

     —          (313     —          (313

Income from unconsolidated affiliates, net

     1,133        1,501        2,328        4,633   

Interest expense

     (3,033     (2,441     (6,343     (5,275
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     31,717        17,610        48,908        35,704   

Provision for income taxes

     (12,443     (5,863     (16,252     (13,317
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     19,274        11,747        32,656        22,387   

Loss from discontinued operations, net of taxes

     —          (35     —          (45
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 19,274      $ 11,712      $ 32,656      $ 22,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share—Basic

        

Income from continuing operations

   $ 0.35      $ 0.22      $ 0.60      $ 0.42   

Loss from discontinued operations, net of taxes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.35      $ 0.22      $ 0.60      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share—Diluted

        

Income from continuing operations

   $ 0.35      $ 0.21      $ 0.59      $ 0.41   

Loss from discontinued operations, net of taxes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 0.35      $ 0.21      $ 0.59      $ 0.41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common and common equivalent shares outstanding

        

Basic

     54,705        53,944        54,615        53,721   

Diluted

     55,804        54,963        55,650        54,728   

Dividends declared per common share

   $ 0.150      $ 0.145      $ 0.300      $ 0.290   

See accompanying notes to unaudited consolidated financial statements.

 

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

    Three Months Ended April 30,       Six Months Ended April 30,    

(in thousands)

  2013     2012     2013     2012  

Net income

  $ 19,274      $ 11,712      $ 32,656      $ 22,342   

Other comprehensive income:

       

Unrealized gains (losses) on auction rate securities:

       

Unrealized gains (losses) on auction rate securities

    162        (153     214        2,324   

Reclassification adjustment for credit losses recognized in earnings

    —          313        —          313   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on auction rate securities

    162        160        214        2,637   

Unrealized (losses) gains on interest rate swaps:

       

Unrealized losses arising during the period

    (545     (1     (549     (68

Reclassification adjustment for loss included in interest expense

    100        40        143        79   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized (losses) gains on interest rate swaps

    (445     39        (406     11   

Foreign currency translation

    (131     171        (247     69   

Defined and post-retirement benefit plans adjustments:

       

Reclassification adjustment for amortization of actuarial losses

    35        24        70        49   

Reclassification adjustment for settlement losses

    37        —          64        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net defined and post-retirement benefit plans adjustments

    72        24        134        49   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, before tax

    (342     394        (305     2,766   

Income tax benefit (expense) related to other comprehensive income

    87        (92     24        (1,105
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 19,019      $ 12,014      $ 32,375      $ 24,003   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Six Months Ended April 30,  

(in thousands)

  2013     2012  

Cash flows from operating activities:

   

Net income

  $ 32,656      $ 22,342   

Loss from discontinued operations, net of taxes

    —          45   
 

 

 

   

 

 

 

Income from continuing operations

    32,656        22,387   

Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities:

   

Depreciation and amortization

    31,650        25,803   

Deferred income taxes

    1,749        (1,253

Share-based compensation expense

    6,286        5,436   

Provision for bad debt

    1,909        1,548   

Discount accretion on insurance claims

    252        360   

Auction rate security credit loss impairment

    —          313   

Gain on sale of assets

    (67     (1,229

Income from unconsolidated affiliates, net

    (2,328     (4,633

Distributions from unconsolidated affiliates

    1,688        4,311   

Changes in operating assets and liabilities, net of effects of acquisitions:

   

Trade accounts receivable

    (21,993     (13,405

Prepaid expenses and other current assets

    2,594        (6,338

Insurance recoverables

    (61     (85

Other assets and long-term receivables

    4,963        7,652   

Income taxes payable

    612        9,604   

Retirement plans and other non-current liabilities

    (2,950     (313

Insurance claims

    (2,472     6,987   

Trade accounts payable and other accrued liabilities

    (16,662     (2,766
 

 

 

   

 

 

 

Total adjustments

    5,170        31,992   
 

 

 

   

 

 

 

Net cash provided by continuing operating activities

    37,826        54,379   

Net cash provided by discontinued operating activities

    —          1,143   
 

 

 

   

 

 

 

Net cash provided by operating activities

    37,826        55,522   
 

 

 

   

 

 

 

Cash flows from investing activities:

   

Additions to property, plant and equipment

    (10,392     (16,875

Proceeds from sale of assets and other

    476        1,793   

Purchase of businesses, net of cash acquired

    (191,987     —     

Investments in unconsolidated affiliates

    (3     —     

Proceeds from redemption of auction rate security

    5,000        —     
 

 

 

   

 

 

 

Net cash used in investing activities

    (196,906     (15,082
 

 

 

   

 

 

 

Cash flows from financing activities:

   

Proceeds from exercises of stock options (including income tax benefit)

    2,047        8,097   

Dividends paid

    (16,054     (15,579

Deferred financing costs paid

    —          (14

Borrowings from line of credit

    595,000        404,000   

Repayment of borrowings from line of credit

    (426,000     (438,000

Changes in book cash overdrafts

    451        —     

Other

    (1,917     —     
 

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    153,527        (41,496
 

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (5,553     (1,056

Cash and cash equivalents at beginning of year

    43,459        26,467   
 

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 37,906      $ 25,411   
 

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(continued from previous page)

 

    Six Months Ended April 30,  

(in thousands)

  2013     2012  

Supplemental Data:

   

Cash paid for income taxes, net of refunds received

  $ 12,734      $ 5,236   

Tax effect from exercise of options

    54        —     

Cash received from exercise of options

    1,993        8,094   

Interest paid on line of credit

    3,785        2,915   

See accompanying notes to unaudited consolidated financial statements.

 

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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF BUSINESS

ABM Industries Incorporated, together with its consolidated subsidiaries (hereinafter collectively referred to as “ABM,” “we,” “us,” “our,” or the “Company”), is a leading provider of end-to-end integrated facility solutions services to thousands of commercial, governmental, industrial, institutional, retail, and residential facilities located primarily throughout the United States. The Company’s comprehensive capabilities include expansive facility solutions, energy solutions, commercial cleaning, maintenance and repair, HVAC, electrical, landscaping, parking, and security services, provided through stand-alone or integrated solutions. The Company was reincorporated in Delaware on March 19, 1985, as the successor to a business founded in California in 1909.

2. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended, and should be read in conjunction with the Company’s audited consolidated financial statements (and notes thereto) filed with the U.S. Securities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2012. Unless otherwise noted, all references to years are to the Company’s fiscal year, which ends on October 31.

In the opinion of management, our unaudited consolidated financial statements and accompanying notes (the “Financial Statements”) include all normal recurring adjustments considered necessary by management to fairly state the financial position, results of operations, and cash flows for the interim periods presented. Interim results of operations are not necessarily indicative of the results for the full year.

The accounting policies applied in the accompanying Financial Statements are the same as those applied in the Company’s audited consolidated financial statements as of and for the year ended October 31, 2012, contained in the Company’s 2012 Annual Report on Form 10-K, unless indicated otherwise.

Certain amounts in the prior year consolidated balance sheet have been reclassified to conform to the current year presentation.

 

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2013 Changes in Reportable Segments

In periods prior to the first quarter of 2013, our reportable segments consisted of Janitorial, Parking, Security, and Facility Solutions. Effective in the first quarter of 2013, we revised our reportable segments to align them with the reorganization of our operational structure to an onsite, mobile, and on-demand market-based structure. Our Onsite Services include the Janitorial, Parking, and Security reportable segments and a portion of our prior Facility Solutions segment. As a result, we have separated our previous Facility Solutions reportable segment into two new reportable segments, Facility Services and Building & Energy Solutions. The Building & Energy Solutions measurement of segment operating profit also includes the results of certain investments in unconsolidated affiliates that provide facility solutions primarily to the U.S. Government. Services provided by those affiliates complement services provided by our other business operations included in the Building & Energy Solutions segment. Air Serv Corporation (“Air Serv”), which was acquired on November 1, 2012, is reported in a new segment, Other. Refer to Note 4, “Acquisitions,” for further details on this acquisition.

Our segments and their activities are as follows:

 

Segment

  

Activities

Janitorial

  

Provides a wide range of essential janitorial services for clients in a variety of facilities, including commercial office buildings, industrial buildings, retail stores, shopping centers, warehouses, airport terminals, health facilities, educational institutions, stadiums and arenas, and government buildings. These services include, among others: floor cleaning and finishing; window washing; furniture polishing; and carpet cleaning and dusting.

Facility Services

  

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

Parking

  

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

Security

  

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

Building & Energy Solutions

  

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

  

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

  

The Building & Energy Solutions segment also includes the Company’s franchised operations under the Linc Network, TEGG, CurrentSAFE, and GreenHomes America brands, the recently acquired HHA Services, Inc. (“HHA”), and the assets and business of Calvert-Jones Company, Inc. (“Calvert-Jones”).

Other

  

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

 

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Parking Revenue Presentation

The Company’s 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 $76.2 million and $76.3 million for the three months ended April 30, 2013 and 2012, respectively, and $152.1 million and $154.1 million for the six months ended April 30, 2013 and 2012, respectively.

3. NET INCOME PER COMMON SHARE

Basic net income per common share is net income divided by the weighted-average number of shares outstanding during the period. Diluted net income per common share is based on the weighted-average number of shares outstanding during the period, adjusted to include the assumed conversion of certain restricted stock units (“RSUs”), vesting of performance shares, and exercise of stock options. The calculations of basic and diluted net income per common share are as follows:

 

                                                   
     Three Months Ended April 30,     Six Months Ended April 30,  

(in thousands, except per share amounts)

   2013      2012     2013      2012  

Income from continuing operations

   $ 19,274       $ 11,747      $ 32,656       $ 22,387   

Loss from discontinued operations, net of taxes

     —           (35     —           (45
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 19,274       $ 11,712      $ 32,656       $ 22,342   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average common and common equivalent shares outstanding—Basic

     54,705         53,944        54,615         53,721   

Effect of dilutive securities:

          

RSUs

     448         358        435         369   

Performance shares

     353         259        353         280   

Stock options

     298         402        247         358   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average common and common equivalent shares outstanding—Diluted

     55,804         54,963        55,650         54,728   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income per common share

          

Basic

   $ 0.35       $ 0.22      $ 0.60       $ 0.42   

Diluted

   $ 0.35       $ 0.21      $ 0.59       $ 0.41   

The diluted net income per common share excludes certain stock options, RSUs, and performance shares, since the effect of including these awards would have been anti-dilutive as follows:

 

                                                   
     Three Months Ended April 30,      Six Months Ended April 30,  

(in thousands)

   2013      2012      2013      2012  

Stock options

     711         825         1,091         1,092   

RSUs

     26         21         26         63   

Performance shares

     —           —           37         —     

 

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4. ACQUISITIONS

Air Serv Acquisition

On November 1, 2012, the Company acquired all of the outstanding stock of Air Serv, for an aggregate purchase price of $162.9 million in cash, including a $4.1 million working capital adjustment paid in the second quarter of 2013 (the “Air Serv Acquisition”). Approximately $11.9 million of the cash consideration was placed in an escrow account to satisfy any applicable indemnification claims, pursuant to the terms of the purchase agreement. The final purchase price allocation is subject to, among other items, further analysis of tax accounts, insurance balances, plant and equipment, and capital leases.

Air Serv provides integrated facility solutions services for airlines and freight companies at airports primarily in the United States. The operations of Air Serv are included in the Other segment as of November 1, 2012, the acquisition date. Included in the Company’s consolidated statements of income were revenues of $79.8 million and operating profit of $2.9 million for the three months ended April 30, 2013, and revenues of $163.7 million and operating profit of $4.9 million for the six months ended April 30, 2013.

HHA Acquisition

On November 1, 2012, the Company acquired all of the outstanding stock of HHA, for an aggregate purchase price of $33.7 million in cash, including a $0.6 million working capital adjustment received in the third quarter of 2013 (the “HHA Acquisition”). Approximately $2.0 million of the cash consideration was placed in an escrow account to satisfy any applicable indemnification claims and working capital shortfalls of which $0.6 million was released in the third quarter of 2013 in connection with the working capital adjustment.

HHA provides facility solutions, including housekeeping, laundry, patient assist, plant maintenance, and food services, to hospitals, healthcare systems, long-term care facilities, and retirement communities. The operations of HHA are included in the Building & Energy Solutions segment as of November 1, 2012, the acquisition date. Included in the Company’s consolidated statements of income were revenues of $13.1 million and operating profit of $0.4 million for the three months ended April 30, 2013, and revenues of $25.9 million and operating profit of $0.3 million for the six months ended April 30, 2013.

Calvert-Jones Acquisition

On November 1, 2012, the Company acquired substantially all of the assets and assumed certain liabilities of Calvert-Jones for a cash purchase price of $6.3 million, which is subject to an additional working capital adjustment (the “Calvert-Jones Acquisition”). Approximately $0.7 million of the cash consideration was placed in an escrow account to satisfy any applicable indemnification claims, pursuant to the terms of the purchase agreement.

Calvert-Jones provides mechanical and energy efficient products and solutions in the Washington, D.C. area. The operations of Calvert-Jones are included in the Building & Energy Solutions segment as of November 1, 2012, the acquisition date. Included in the Company’s consolidated statements of income were revenues of $4.8 million and operating loss of $0.2 million for the three months ended April 30, 2013, and revenues of $8.4 million and operating loss of $0.1 million for the six months ended April 30, 2013.

 

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Preliminary Allocation of Consideration Transferred to Acquire Air Serv, HHA, and Calvert-Jones

The following table summarizes the preliminary allocation of consideration transferred to acquire Air Serv, HHA, and Calvert-Jones and the amounts of identified assets acquired and liabilities assumed at the acquisition date:

 

                                                                    

(in thousands)

  Air Serv     HHA     Calvert-Jones  

Purchase price:

     
 

 

 

   

 

 

   

 

 

 

Total cash consideration

  $ 162,881      $ 33,680      $ 6,250   
 

 

 

   

 

 

   

 

 

 

Allocated to:

     

Cash and cash equivalents

  $ 10,686      $ 832      $ —     

Trade accounts receivable

    52,552        3,161        1,241   

Prepaid expenses and other

    5,559        942        441   

Property, plant and equipment

    17,488        123        49   

Other intangible assets

    44,612        15,000        2,600   

Goodwill

    83,585        23,728        4,284   

Other assets

    27        468        —     

Trade accounts payable

    (4,609     (667     (1,200

Accrued liabilities

    (26,019     (4,452     (861

Insurance claims

    (9,151     —          —     

Net deferred income tax liabilities

    (5,563     (5,438     —     

Other

    (6,286     (17     (304
 

 

 

   

 

 

   

 

 

 

Net assets acquired

  $ 162,881      $ 33,680      $ 6,250   
 

 

 

   

 

 

   

 

 

 

The amount allocated to goodwill for Air Serv and HHA is reflective of the Company’s identification of buyer-specific synergies that the Company anticipates will be realized by, among other things, reducing duplicative positions and back office functions and by reducing professional fees and other services. Goodwill is also attributable to the expected long-term business growth through the Company’s expansion of its vertical market expertise in servicing the end-to-end needs of airlines, airport authorities, and healthcare service markets. None of the goodwill associated with the acquisitions of Air Serv and HHA will be amortizable for income tax purposes as the Company acquired all of the outstanding stock of these companies.

Goodwill for the Calvert-Jones acquisition is attributable to the projected long-term business growth through the Company’s expansion of existing vertical and geographic market offerings in building and energy solutions. A significant portion of the goodwill associated with the Calvert-Jones acquisition is expected to be amortizable for income tax purposes.

Other intangible assets primarily consist of customer contracts and relationships with a weighted average life of 15 years for Air Serv, 13 years for HHA, and 12 years for Calvert-Jones.

The preliminary estimated fair value of trade accounts receivable acquired in the Air Serv acquisition reflects gross contractual amounts of $53.0 million, of which $0.4 million is expected to be uncollectable. The preliminary estimated fair value of trade accounts receivable acquired in the HHA and Calvert-Jones acquisitions approximates the contractual amounts.

We have incurred combined acquisition-related costs of $1.1 million, of which $0.3 million have been incurred in the six months ended April 30, 2013. These expenses are included in selling, general and administrative expenses in the unaudited consolidated statements of income.

Assuming these acquisitions were made at November 1, 2011, the consolidated pro forma results would not be materially different from reported results.

 

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TEGG and CurrentSAFE Acquisition

On May 1, 2012, we acquired substantially all of the assets and assumed certain liabilities of TEGG Corporation (“TEGG”) and CurrentSAFE Corporation (“CurrentSAFE”) and also acquired certain software technology from TEGG’s shareholder, for an aggregate purchase price of $5.5 million in cash, net of cash acquired. The purchase price reflects a $0.1 million working capital adjustment received in the fourth quarter of 2012. Approximately $0.5 million of the cash consideration was placed in an escrow account to satisfy any applicable indemnification claims, pursuant to the terms of the purchase agreement. The assets acquired represent the franchise operations of TEGG and CurrentSAFE, and through this acquisition the Company expanded its electrical services to include electrical preventive and predictive maintenance solutions. The acquired net assets and results from operations have been included in the Company’s Building & Energy Solutions segment since May 1, 2012, the acquisition date. Assuming this acquisition was made at November 1, 2011, the consolidated pro forma results would not be materially different from reported results.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the fair value hierarchy, carrying amounts, and fair values of the Company’s financial instruments measured on a recurring basis and other select significant financial instruments as of April 30, 2013 and October 31, 2012:

 

                                                                                                             
        April 30, 2013     October 31, 2012  

(in thousands)

  Fair Value
Hierarchy
  Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

Financial assets measured at fair value on a recurring basis

         

Assets held in funded deferred compensation plan (1)

  1   $ 5,122      $ 5,122      $ 5,029      $ 5,029   

Investments in auction rate securities (2)

  3     12,994        12,994        17,780        17,780   
   

 

 

   

 

 

   

 

 

   

 

 

 
      18,116        18,116        22,809        22,809   
   

 

 

   

 

 

   

 

 

   

 

 

 

Other select financial asset

         

Cash and cash equivalents (3)

  1     37,906        37,906        43,459        43,459   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 56,022      $ 56,022      $ 66,268      $ 66,268   
   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liability measured at fair value on a recurring basis

         

Interest rate swaps (4)

  2   $ 620      $ 620      $ 214      $ 214   

Other select financial liability

         

Line of credit (5)

  2     384,000        384,000        215,000        215,000   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 384,620      $ 384,620      $ 215,214      $ 215,214   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Represents investments held in a Rabbi Trust associated with our OneSource Deferred Compensation Plan, which we include in “Other assets” on the accompanying unaudited consolidated balance sheets. The fair value of the assets held in the funded deferred compensation plan is based on quoted market prices.

(2)

For investments in auction rate securities, the fair values were based on discounted cash flow valuation models, primarily utilizing unobservable inputs. See Note 6, “Auction Rate Securities,” for the roll-forwards of assets measured at fair value using significant unobservable Level 3 inputs and the sensitivity analysis of significant inputs.

(3)

Cash and cash equivalents are stated at nominal value, which equals fair value.

(4)

Includes derivatives designated as hedging instruments. The fair values of the interest rate swaps are estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rates and the expected cash flows at current market interest rates using observable benchmarks for London Interbank Offered Rate (“LIBOR”) forward rates at the end of the period. See Note 8, “Line of Credit,” for more information.

(5)

Represents outstanding borrowings under the Company’s $650.0 million five-year syndicated line of credit. Due to variable interest rates, the carrying value of outstanding borrowings under the Company’s line of credit approximates its fair value. See Note 8, “Line of Credit,” for more information.

 

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The Company’s non-financial assets, which include goodwill and long lived assets held and used, are not required to be measured at fair value on a recurring basis. However, if certain trigger events occur, or if an annual impairment test is required, the Company would evaluate the non-financial assets for impairment. If an impairment were to occur, the asset or liability would be recorded at the estimated fair value.

During the six months ended April 30, 2013, the Company had no transfers of assets or liabilities between any of the above hierarchy levels.

6. AUCTION RATE SECURITIES

At October 31, 2012, the Company held investments in auction rate securities from four different issuers having an original principal amount of $5.0 million each (aggregating $20.0 million). During the second quarter of 2013, one of the auction rate securities was redeemed by the issuer at its par value of $5.0 million. No gain or loss was recognized upon its redemption. These auction rate securities are debt instruments with stated maturities ranging from 2033 to 2050, for which the interest rate is designed to be reset through Dutch auctions approximately every 30 days. Auctions for these securities have not occurred since August 2007.

At April 30, 2013 and October 31, 2012, the estimated fair values of these securities, in total, were approximately $13.0 million and $17.8 million, respectively.

As of April 30, 2013, none of the Company’s auction rate securities were in an unrealized loss position. As of October 31, 2012, two of the Company’s auction rate securities, with an aggregate fair value of $7.8 million, were in a continuous unrealized loss position for less than twelve months and the remaining two auction rate securities, with an aggregate fair value of $10.0 million, were not in an unrealized loss position.

The following table presents the significant assumptions used to determine the fair values of the Company’s auction rate securities at April 30, 2013 and October 31, 2012:

 

Assumption

   April 30, 2013    October 31, 2012

Discount rates

   L + 0.44% - L + 3.43%    L + 1.37% - L + 6.86%

Yields

   2.15%, L + 2.00%    2.15%, L + 2.00% - L + 3.50%

Average expected lives

   4 - 10 years    4 - 10 years

L - One Month LIBOR

The fair values of our auction rate securities are affected most significantly by the changes in the average expected lives of the securities, but are also impacted by the specific discount rate used to adjust the outcomes to their present values. If the average expected lives of the securities increase or decrease, the fair values of the securities will decrease or increase accordingly, in amounts that will vary based on the timing of the projected cash flows and the specific discount rate used to calculate the present value of the expected cash flows.

 

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The following tables present the changes in the cost basis and fair values of the Company’s auction rate securities as of April 30, 2013 and October 31, 2012:

 

                                                             

(in thousands)

  Cost Basis     Fair Value
(Level 3)
 

Balance at November 1, 2012

  $ 17,994      $ 17,780   

Unrealized gains included in accumulated other comprehensive loss

    —          214   

Redemption of security by issuer

    (5,000     (5,000
 

 

 

   

 

 

 

Balance at April 30, 2013

  $ 12,994      $ 12,994   
 

 

 

   

 

 

 

 

                                                             

(in thousands)

  Cost Basis     Fair Value
(Level 3)
 

Balance at November 1, 2011

  $ 18,307      $ 15,670   

Unrealized gains included in accumulated other comprehensive loss

    —          2,110   

Other-than-temporary credit loss recognized in earnings

    (313     —     
 

 

 

   

 

 

 

Balance at October 31, 2012

  $ 17,994      $ 17,780   
 

 

 

   

 

 

 

At April 30, 2013, there were no unrealized gains or losses recorded in accumulated other comprehensive loss. At October 31, 2012, unrealized losses of $0.2 million ($0.1 million net of taxes) were recorded in accumulated other comprehensive loss.

7. INSURANCE

The Company uses a combination of insurance and self-insurance programs to cover workers’ compensation, general liability, property damage, and other insurable risks. For the majority of these insurance programs, the Company retains the initial $1.0 million of exposure on a per-claim basis either through deductibles or self-insurance retentions. Beyond the retained exposures, the Company has varying primary policy limits between $1.0 million and $5.0 million per occurrence. As of April 30, 2013, to cover general liability losses above these limits, the Company maintained commercial insurance umbrella policies that provide $200.0 million of coverage. Workers’ compensation liability losses have unlimited coverage due to statutory regulations. Additionally, to cover property damage risks above its retention limits, the Company maintained policies that provide $75.0 million of coverage. The Company is also self-insured for certain employee medical and dental plans. The Company retains up to $0.4 million of exposure on a per claim basis under medical plans.

The adequacy of workers’ compensation, general liability, automotive, and property damage insurance claims reserves is based upon actuarial estimates of required reserves considering the most recently completed actuarial reports in 2012 and known events. Actuarial reports are expected to be completed for the Company’s significant programs using recent claims data and may result in adjustments to earnings during the third and fourth quarters of 2013.

The Company had insurance claims reserves totaling $350.7 million and $343.8 million at April 30, 2013 and October 31, 2012, respectively. The balance at April 30, 2013 and October 31, 2012 includes $7.8 million and $13.0 million in reserves, respectively, related to the Company’s medical and dental self-insured plans. The Company also had insurance recoverables totaling $64.6 million and $64.5 million at April 30, 2013 and October 31, 2012.

The Company had the following standby letters of credit, surety bonds, and restricted insurance deposits outstanding at April 30, 2013 and October 31, 2012, to collateralize its self-insurance obligations:

 

                                                             

(in thousands)

  April 30, 2013     October 31, 2012  

Standby letters of credit

  $ 103,799      $ 104,968   

Surety bonds

    46,292        34,933   

Restricted insurance deposits

    28,478        31,720   
 

 

 

   

 

 

 

Total

  $ 178,569      $ 171,621   
 

 

 

   

 

 

 

 

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8. LINE OF CREDIT

On November 30, 2010, the Company entered into a five-year syndicated credit agreement (“Credit Agreement”) that replaced the Company’s then-existing $450.0 million syndicated credit agreement dated November 14, 2007. The Credit Agreement provides for revolving loans, swing line loans, and letters of credit up to an aggregate amount of $650.0 million (the “Facility”). The Company, at its option, may 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). During the year ended October 31, 2011, the Credit Agreement was amended to reduce the borrowing spread interest on loans, extend the maturity date to September 8, 2016, and revise certain defined terms.

Borrowings under the Facility bear interest at a rate equal to an applicable margin plus, at the Company’s option, either a (a) eurodollar rate (generally LIBOR) or (b) base rate determined by reference to the highest of (1) the federal funds rate plus 0.50%, (2) the prime rate announced by Bank of America, N.A. from time to time, and (3) the eurodollar rate plus 1.00%. The applicable margin is a percentage per annum varying from 0.00% to 0.75% for base rate loans and 1.00% to 1.75% for eurodollar loans, based upon the Company’s leverage ratio. The Company also pays a commitment fee, based on the leverage ratio, payable quarterly in arrears, ranging from 0.225% to 0.300% on the average daily unused portion of the Facility. For purposes of this calculation, irrevocable standby letters of credit, issued primarily in conjunction with the Company’s self-insurance program, and cash borrowings are included as outstanding under the Facility.

The Credit Agreement contains certain leverage and liquidity covenants that require us to maintain a maximum leverage ratio of 3.25x at the end of each fiscal quarter, a minimum fixed charge coverage ratio of 1.50x at any time, and a consolidated net worth in an amount not less than the sum of (i) $570.0 million, (ii) 50% of our consolidated net income (with no deduction for net loss), and (iii) 100% of our aggregate increases in stockholder’s equity, beginning on November 30, 2010, each as further described in the Credit Agreement, as amended. The Company was in compliance with all covenants as of April 30, 2013.

If an event of default occurs under the Credit Agreement, including certain cross-defaults, insolvency, change in control, and violation of specific covenants, among others, the lenders can terminate or suspend the Company’s access to the Facility, declare all amounts outstanding under the Facility, including all accrued interest and unpaid fees, to be immediately due and payable, and may also require that the Company cash collateralize the outstanding standby letters of credit obligations.

The Facility is available for working capital, the issuance of up to $300.0 million for standby letters of credit, the issuance of up to $50.0 million in swing line advances, the financing of capital expenditures, and other general corporate purposes, including acquisitions. As of April 30, 2013, the total outstanding amounts under the Facility in the form of cash borrowings and standby letters of credit were $384.0 million and $103.8 million, respectively. As of October 31, 2012, the total outstanding amounts under the Facility in the form of cash borrowings and standby letters of credit were $215.0 million and $105.0 million, respectively. At April 30, 2013 and October 31, 2012, the Company had up to $162.2 million and $330.0 million borrowing capacity, respectively, under the Facility, the availability of which is subject to and may be limited by compliance with the covenants described above.

Interest Rate Swaps

During the three months ended April 30, 2013, the Company entered into a series of interest rate swap agreements with effective start dates of March 18, 2013 and April 11, 2013 and an aggregate notional amount of $155.0 million, pursuant to which the Company receives variable interest payments based on LIBOR and pays fixed interest at rates ranging from 0.44% to 0.47%. These interest rate swaps will mature between March 18, 2016 and April 11, 2016 and are structured to hedge the interest rate risk associated with our floating-rate, LIBOR-based borrowings under the Facility. The swaps were designated and accounted for as cash flow hedges from inception.

On October 19, 2010, the Company entered into a three-year forward starting interest rate swap agreement with an effective start date of February 24, 2011 and 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%. This interest rate swap will mature on February 24, 2014 and is structured to hedge the interest rate risk associated with our floating-rate, LIBOR-based borrowings under the Facility. The swap was designated and accounted for as a cash flow hedge from inception.

The Company recognizes all interest rate swaps on the balance sheet at fair value. The fair values of the interest rate swaps are estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rates and the expected cash flows at current market interest rates using observable benchmarks for LIBOR forward rates at the end of the period. The Company includes its own credit risk for liability financial instruments and counterparty credit risks for asset financial instruments when measuring the fair values of derivative financial instruments. See Note 5, “Fair Value of Financial Instruments,” for

 

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more information. Each of the swap derivatives is designated as a cash flow hedge, and the effective portion of the derivative’s mark-to-market gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”) and subsequently reclassified into earnings when the hedged transactions occur and affect earnings. The ineffective portion of the gain or loss is reported in earnings immediately. Interest payables and receivables under the swap agreements are accrued and recorded as an adjustment to interest expense.

As of April 30, 2013 and October 31, 2012, the fair value of the interest rate swaps were liabilities of $0.6 million and $0.2 million, respectively, which were included in “Retirement plans and other” on the accompanying unaudited consolidated balance sheets. The amounts included in AOCI were $0.6 million ($0.3 million, net of taxes) and $0.2 million ($0.1 million, net of taxes) at April 30, 2013 and October 31, 2012.

Unrealized net losses related to the interest rate swap contracts that are expected to be reclassified from AOCI to earnings during the next 12 months were $0.3 million at April 30, 2013.

The following tables set forth the effect of the Company’s interest rate swap contracts on the Financial Statements for the three and six months ended April 30, 2013 and 2012:

 

                                                   
     Amount of loss recognized in AOCI on
derivative (effective portion)
 

(in thousands)

   Three Months Ended April 30,          Six Months Ended April 30,    
Derivatives designated as cash flow hedging relationships    2013      2012        2013      2012  

Interest rate swap

   $ 545       $ 1         $ 549       $ 68   
     Amount of loss reclassified from AOCI
into income (effective portion)
 

(in thousands)

   Three Months Ended April 30,        Six Months Ended April 30,  
Location of loss reclassified from AOCI into income    2013      2012        2013      2012  

Interest expense

   $ 100       $ 40         $ 143       $ 79   

 

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9. BENEFIT PLANS

The components of net periodic benefit cost of the defined benefit and other post-retirement benefit plans for the three and six months ended April 30, 2013 and 2012 were as follows:

 

    Three Months Ended April 30,           Six Months Ended April 30,    

(in thousands)

  2013     2012         2013     2012  

Defined Benefit Plans

         

Service cost

  $ —        $ 12        $ —        $ 24   

Interest

    100        124          200        248   

Expected return on assets

    (103     (122       (206     (243

Amortization of actuarial loss

    34        24          68        49   

Settlement loss recognized

    37        —            37        —     
 

 

 

   

 

 

     

 

 

   

 

 

 

Net expense

  $ 68      $ 38        $ 99      $ 78   
 

 

 

   

 

 

     

 

 

   

 

 

 

Post-Retirement Benefit Plans

         

Service cost

  $ 3      $ 3        $ 6      $ 6   

Interest

    51        62          102        123   

Settlement loss recognized

    —          —            27        —     

Amortization of actuarial loss

    1        —            2        —     
 

 

 

   

 

 

     

 

 

   

 

 

 

Net expense

  $ 55      $ 65        $ 137      $ 129   
 

 

 

   

 

 

     

 

 

   

 

 

 

10. COMMITMENTS AND CONTINGENCIES

Letters of Credit and Bonds

The Company uses letters of credit and surety bonds to secure certain commitments related to insurance programs and for other purposes. At April 30, 2013, these surety bonds and letters of credit totaled approximately $345.7 million and $104.0 million, respectively. Included in the total amount of surety bonds is $9.1 million of bonds with an effective date starting after April 30, 2013.

Legal Matters

The Company has been named a defendant in various proceedings arising in the ordinary course of business, including class actions and purported class actions. Litigation outcomes are 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. In accordance with FASB Accounting Standards Codification 450-20, Loss Contingencies, the Company accrues for loss contingencies when losses become probable and are 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. At April 30, 2013, the total amount accrued for all probable litigation losses where a reasonable estimate of the loss could be made was $1.4 million.

The Company does not accrue for contingent losses that, in the judgment of the Company, are considered to be reasonably possible but not probable. Management currently estimates that the range of loss for all reasonably possible losses for which an estimate can be made is between $0.0 million and $96.4 million, including the possible $94.2 million impact of the Augustus case noted below. Factors underlying this estimated range of loss will change from time to time, and actual results may vary significantly from this estimate. Those matters for which the Company cannot reasonably estimate potential losses are not included within this estimated range and, therefore, this range does not represent the Company’s maximum potential loss exposure.

The Company is a defendant in a number of lawsuits, including but not limited to the following lawsuits related to alleged violations of federal and/or state wage-and-hour laws or allegations of sexual harassment, discrimination, or retaliation:

 

   

the consolidated cases of Augustus, Hall and Davis v. American Commercial Security Services (ACSS) filed July 12, 2005, in the Superior Court of California, Los Angeles County (the “Augustus case”);

 

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Bojorquez v. ABM Industries Incorporated and ABM Janitorial Services—Northern California, Inc. filed on January 13, 2010, in the San Francisco Superior Court (the “Bojorquez case”); and

 

   

the consolidated cases of Bucio and Martinez v. ABM Janitorial Services filed on April 7, 2006, in the Superior Court of California, County of San Francisco (the “Bucio case”).

Augustus

The Augustus case is a certified class action involving allegations that the Company violated certain state laws relating to rest breaks. On February 8, 2012, the plaintiffs filed a motion for summary judgment on the rest break claim, which sought damages in the amount of $103.1 million, and the Company filed a motion for decertification of the class. On July 6, 2012, the Superior Court of California, Los Angeles County (the “Superior Court”) heard plaintiffs’ motion for damages on the rest break claim and the Company’s motion to decertify the class. On July 31, 2012, the Superior Court denied the Company’s motion and entered judgment in favor of plaintiffs in the amount of approximately $89.7 million. This amount did not include plaintiffs’ attorneys’ fees. The Company filed a notice of appeal on August 29, 2012. The plaintiffs filed three separate motions for attorneys’ fees. One motion sought attorneys’ fees from the common fund. The common fund refers to the approximately $89.7 million judgment entered in favor of the plaintiffs. The other two motions sought attorneys’ fees from the Company in an aggregate amount of approximately $12.4 million. On October 12, 2012, the Company filed oppositions to the two fee motions seeking attorneys’ fees from the Company. On January 14, 2013, the Superior Court heard all three fee motions. It granted plaintiffs’ fee motion with respect to the common fund in full. The Superior Court denied one fee motion in its entirety and reduced the other fee motion to approximately $4.5 million. This $4.5 million is included in the range of loss for all reasonably possible losses noted above. The Company has appealed the Superior Court’s rulings and on April 30, 2013, the Court agreed to consolidate the appeals. The Company strongly disagrees with the decisions of the Superior Court both with respect to the underlying case and with respect to the award of attorneys’ fees and costs. The Company firmly believes that it has complied with applicable law.

Bojorquez

The Company is a defendant in the Bojorquez case. Plaintiff brought suit for sexual harassment, retaliation, and failure to prevent harassment and discrimination. On May 17, 2012, a jury awarded the plaintiff approximately $0.8 million in damages. The Company has appealed this decision. On April 11, 2013, the Court awarded plaintiff attorneys’ fees in the amount of $2.5 million. If the Company prevails in its appeal of the jury’s verdict, the Court’s award of plaintiffs attorneys’ fees will be reversed.

Bucio

The Bucio case is a purported class action involving allegations that the Company failed to track work time and provide breaks. On April 19, 2011, the trial court held a hearing on plaintiffs’ motion to certify the class. At the conclusion of that hearing, the trial court denied plaintiffs’ motion to certify the class. On May 11, 2011, the plaintiffs filed a motion to reconsider, which was denied. The plaintiffs have appealed the class certification issues. The trial court stayed the underlying lawsuit pending the decision in the appeal. On August 30, 2012, the plaintiffs filed their appellate brief on the class certification issues. The Company filed its responsive brief on November 15, 2012. Oral argument relating to the appeal has not been scheduled.

The Company expects to prevail in these ongoing cases. However, as litigation is inherently unpredictable, there can be no assurance in this regard. If the plaintiffs in one or more of these cases, or other cases, do prevail, the results may have a material effect on our financial position or cash flows.

Other

During October 2011, the Company began an internal investigation into matters relating to compliance with the U.S. Foreign Corrupt Practices Act and the Company’s internal policies in connection with services provided by a foreign entity affiliated with a former joint venture partner of The Linc Group, LLC (“Linc”). Such services commenced prior to the acquisition of Linc. As a result of the investigation, the Company caused Linc to terminate its association with the arrangement. In December 2011, the Company contacted the U.S. Department of Justice and the SEC to voluntarily disclose the results of its internal investigation to date, and it is cooperating with the government’s investigation. The Company cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, the Company does not believe that these matters will have a material adverse effect on its business, financial condition, results of operations, or cash flows.

 

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11. INCOME TAXES

The quarterly provision for income taxes is calculated using an estimated annual effective income tax rate, adjusted for discrete items that occur during the reporting period. The effective tax rate on income from continuing operations for the three months ended April 30, 2013 and 2012 were 39.2% and 33.3%, respectively. The effective tax rate for the quarter ended April 30, 2013 increased over the quarter ended April 30, 2012 primarily due to discrete adjustments for employment-based tax credits of $1.2 million during 2012. The effective tax rates on income from continuing operations for the six months ended April 30, 2013 and 2012 were 33.2% and 37.3%, respectively. The effective tax rate for the six months ended April 30, 2013 decreased over the six months ended April 30, 2012 primarily due to discrete tax benefits of $2.9 million related to a retroactive reinstatement of federal employment-based tax credits during 2013 offset by discrete adjustments of $1.2 million for employment-based tax credits during 2012. Without the discrete items, our estimated annual effective tax rate for 2013 is expected to be 39.0%.

At April 30, 2013, the Company had unrecognized tax benefits of $88.8 million, all of which, if recognized in the future, would affect its effective tax rate. Approximately $0.6 million of the Company’s unrecognized tax benefits have been recorded as a current liability. The Company includes interest and penalties related to uncertain tax positions in income tax expense. As of April 30, 2013, the Company had accrued interest related to uncertain tax positions of $1.5 million.

The Company’s major tax jurisdiction is the United States. The U.S. federal income tax returns for ABM, OneSource Services Inc., and Linc entities that are taxable as corporations remain open for examination for the periods ending October 31, 2006 through October 31, 2012; March 31, 2000 through November 14, 2007; and December 31, 2009 through December 31, 2010, respectively. The Company does business in all 50 states, significantly in California, Texas, and New York, as well as in various foreign jurisdictions. In major state jurisdictions, the tax years 2008-2012 remain open and subject to examination by the appropriate tax authorities. The Company is currently being examined by the taxing authorities in the states of Illinois, Utah, New Jersey, and Florida and in the Commonwealth of Puerto Rico.

 

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12. SEGMENT INFORMATION

Effective in the first quarter of 2013, we have six reportable segments: Janitorial, Facility Services, Parking, Security, Building & Energy Solutions, and Other. See Note 2, “Basis of Presentation,” for additional information regarding our new segment structure. Prior period segment results have been restated to conform to the new segment reporting structure.

Corporate expenses not allocated to segments, among other items, include:

 

   

certain CEO and other finance and human resource departmental costs;

 

   

certain information technology costs;

 

   

share-based compensation costs;

 

   

certain legal costs and settlements;

 

   

current actuarial developments of self-insurance reserves related to claims incurred in prior years; and

 

   

direct acquisition costs.

Financial information for each segment is summarized below:

 

                                                                                   
     Three Months Ended April 30,       Six Months Ended April 30,    

(in thousands)

   2013     2012     2013     2012  

Revenues:

        

Janitorial

   $ 609,229      $ 593,447      $ 1,214,748      $ 1,187,787   

Facility Services

     147,383        135,911        303,830        280,516   

Parking

     151,626        152,680        302,863        306,130   

Security

     91,536        88,890        188,209        180,872   

Building & Energy Solutions

     93,901        86,639        181,883        175,807   

Other

     79,767        —          163,747        —     

Corporate

     175        (323     460        (83
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,173,617        1,057,244        2,355,740        2,131,029   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit:

        

Janitorial

     37,079        33,494        66,153        64,002   

Facility Services

     6,134        4,399        12,275        10,486   

Parking

     6,134        6,092        10,957        10,842   

Security

     2,100        1,012        3,768        1,857   

Building & Energy Solutions

     2,523        2,643        3,319        3,933   

Other

     2,914        —          4,902        —     

Corporate

     (22,070     (28,116     (46,014     (52,788

Adjustment for income from unconsolidated affiliates, net included in Building & Energy Solutions

     (1,197     (661     (2,437     (1,673
  

 

 

   

 

 

   

 

 

   

 

 

 
     33,617        18,863        52,923        36,659   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other-than-temporary impairment credit losses on auction rate security recognized in earnings

     —          (313     —          (313

Income from unconsolidated affiliates, net

     1,133        1,501        2,328        4,633   

Interest expense

     (3,033     (2,441     (6,343     (5,275
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 31,717      $ 17,610      $ 48,908      $ 35,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

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

Business Overview

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

Strategy and Outlook

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

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

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

 

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2013 Changes in Reportable Segments

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

Our segments and their activities are as follows:

 

Segment

  

Activities

Janitorial

  

Provides a wide range of essential janitorial services for clients in a variety of facilities, including commercial office buildings, industrial buildings, retail stores, shopping centers, warehouses, airport terminals, health facilities, educational institutions, stadiums and arenas, and government buildings. These services include, among others: floor cleaning and finishing; window washing; furniture polishing; and carpet cleaning and dusting.

Facility Services

  

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

Parking

  

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

Security

  

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

Building & Energy Solutions

  

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

  

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

  

The Building & Energy Solutions segment also includes the Company’s franchised operations under the Linc Network, TEGG, CurrentSAFE, and GreenHomes America brands, the recently acquired HHA, and the assets and business of Calvert-Jones Company, Inc. (“Calvert-Jones”).

Other

  

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

Air Serv, headquartered in Atlanta, Georgia, provides integrated facility solutions services for airlines and freight companies at airports primarily in the United States. Air Serv operates in forty-four airports in the United States and six in the United Kingdom. Clients include most domestic air carriers, such as Delta, United, American, US Airways, Jet Blue, and Southwest, as well as airport authorities in certain locations. As of April 30, 2013, Air Serv had approximately twelve thousand employees worldwide. Most of Air Serv’s revenues are derived under long-term contracts that average approximately three years in duration.

 

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As a result of the acquisition, the Company expects to significantly expand its vertical market expertise in servicing the end-to-end needs of airlines and airport authorities. We anticipate that over the next 18 to 24 months, Air Serv could be integrated with the Company’s existing aviation services businesses, which includes airport and airline janitorial, parking, and engineering services, under one brand, thereby positioning it as the platform for the Company’s aviation vertical going forward.

Key Operating and Financial Highlights

Significant operating and financial highlights during the first half of 2013 included the following:

 

   

As a result of the Air Serv, HHA, and Calvert-Jones acquisitions on November 1, 2012 (collectively, the “November Acquisitions”), revenues increased by $97.7 million and $198.0 million, respectively, during the three and six months ended April 30, 2013.

 

   

The Company experienced organic growth of $29.9 million and $57.6 million, respectively, during the three and six months ended April 30, 2013, in the Janitorial, Facility Services, and Security segments as a result of new business and increases in scope of work from existing clients.

 

   

Operating profit increased by $14.8 million and $16.3 million, respectively, during the three and six months ended April 30, 2013. The November Acquisitions contributed $3.1 million and $5.1 million of operating profit in the three and six months ended April 30, 2013, respectively. Overall improvement in operating profit, excluding the November Acquisitions, for the three and six months ended April 30, 2013 was primarily a result of organic growth in the Janitorial, Facility Services, and Security segments, the impact of one less working day, and lower legal fees.

 

   

Net cash provided by operating activities was $37.8 million in the six months ended April 30, 2013.

 

   

Dividends of $0.30 per common share were declared to shareholders.

 

   

As of April 30, 2013, total outstanding borrowings under the Company’s line of credit were $384.0 million and the Company had up to $162.2 million borrowing capacity under the line of credit.

 

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RESULTS OF OPERATIONS

Three Months Ended April 30, 2013 Compared with the Three Months Ended April 30, 2012

Consolidated

 

                                                       
    Three Months Ended April 30,      

($ in thousands)

  2013     2012     Increase /(Decrease)

Revenues

  $ 1,173,617      $ 1,057,244      $ 116,373      11.0%  

Expenses

       

Operating

    1,048,213        947,916        100,297      10.6%  

Gross margin as a % of revenues

    10.7     10.3     0.4  

Selling, general and administrative

    84,482        85,164        (682   (0.8)%  

As a % of revenues

    7.2     8.1     (0.9 )%   

Amortization of intangible assets

    7,305        5,301        2,004      37.8%  
 

 

 

   

 

 

   

 

 

   

Total expenses

    1,140,000        1,038,381        101,619      9.8%  
 

 

 

   

 

 

   

 

 

   

Operating profit

    33,617        18,863        14,754      78.2%  

Other-than-temporary impairment credit losses on auction rate security recognized in earnings

    —          (313     313      NM*    

Income from unconsolidated affiliates, net

    1,133        1,501        (368   (24.5)%  

Interest expense

    (3,033     (2,441     (592   24.3%  
 

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

    31,717        17,610        14,107      80.1%  

Provision for income taxes

    (12,443     (5,863     (6,580   NM*    
 

 

 

   

 

 

   

 

 

   

Income from continuing operations

    19,274        11,747        7,527      64.1%  

Loss from discontinued operations, net of taxes

    —          (35     35      NM*    
 

 

 

   

 

 

   

 

 

   

Net income

  $ 19,274      $ 11,712      $ 7,562      64.6%  
 

 

 

   

 

 

   

 

 

   

 

*

Not meaningful

Revenues

Revenues increased by $116.4 million, or 11.0%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The increase was primarily related to revenues from the November Acquisitions, which contributed $97.7 million in the second quarter of 2013. The remaining increase in revenues was related to new business and increased scope of work within the Janitorial, Facility Services, and Security segments, which contributed $29.9 million in additional revenues in the second quarter of 2013. The increase in revenues was partially offset by the impact of lower sales in the Building & Energy Solutions segment of $10.6 million, excluding revenues related to the HHA and Calvert-Jones acquisitions, primarily as a result of the comparative mix and timing of certain awarded and completed U.S. Government contracts during 2012 and 2013. This decrease was partially offset by an increase in revenues from new bundled energy solution contracts in 2013.

Operating Expenses

Operating expenses increased by $100.3 million, or 10.6%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The increase in operating expenses was primarily related to the November Acquisitions. As a percentage of revenues, gross margin increased by 0.4%, to 10.7% in the three months ended April 30, 2013 from 10.3% in the three months ended April 30, 2012. The increase in gross profit percentage was primarily related to lower payroll and payroll-related expenses as a result of one less working day in the three months ended April 30, 2013.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $0.7 million, or 0.8%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. As a percentage of revenues, selling, general and administrative expenses decreased by 0.9%, to 7.2% in the three months ended April 30, 2013 from 8.1% in the three months ended April 30, 2012.

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

 

   

a $6.5 million reduction in legal fees and costs associated with the settlement of certain legal cases in 2012;

 

   

$0.8 million lower IT costs as a result of the centralization of our IT datacenters in 2012;

 

   

a $0.7 million reduction in legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture; and

 

   

a $0.4 million reduction in costs associated with the Company’s rebranding initiative;

partially offset by:

 

   

$4.5 million incremental selling, general and administrative expense of acquired businesses;

 

   

a $2.8 million increase in sales and marketing expenses associated with new growth and sales initiatives; and

 

   

a $0.5 million increase in restructuring costs associated with the realignment of our operational structure.

Amortization of Intangible Assets

Amortization of intangible assets increased by $2.0 million, or 37.8%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The increase was primarily related to the amortization of acquired intangible assets associated with the November Acquisitions.

Income from Unconsolidated Affiliates, Net

Income from unconsolidated affiliates, net, decreased by $0.4 million, or 24.5%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The decrease was primarily related to the Company’s share of gain recognized in 2012 in connection with property sales completed by one of the Company’s investments in a low income housing partnership.

Interest Expense

Interest expense increased by $0.6 million, or 24.3%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The increase was primarily related to an increase in average borrowings under the Company’s line of credit to fund the November Acquisitions. The average outstanding balances under the Company’s line of credit were $425.9 million and $300.1 million in the three months ended April 30, 2013 and 2012, respectively.

Provision for Income Taxes

The effective tax rate on income from continuing operations for the three months ended April 30, 2013 and 2012 was 39.2% and 33.3%, respectively. The effective tax rate for the three months ended April 30, 2013 increased primarily due to discrete adjustments for employment-based tax credits of $1.2 million during 2012.

 

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Segment Information

Segment revenues and operating profits for the three months ended April 30, 2013 and 2012 were as follows:

 

               
    Three Months Ended April 30,      

($ in thousands)

  2013     2012     Increase / (Decrease)

Revenues

       

Janitorial

  $ 609,229      $ 593,447      $ 15,782      2.7%  

Facility Services

    147,383        135,911        11,472      8.4%  

Parking

    151,626        152,680        (1,054   (0.7)%  

Security

    91,536        88,890        2,646      3.0%  

Building & Energy Solutions

    93,901        86,639        7,262      8.4%  

Other

    79,767        —          79,767      NM*    

Corporate

    175        (323     498      NM*    
 

 

 

   

 

 

   

 

 

   
  $ 1,173,617      $ 1,057,244      $ 116,373      11.0%  
 

 

 

   

 

 

   

 

 

   

Operating profit

       

Janitorial

  $ 37,079      $ 33,494      $ 3,585      10.7%  

Operating profit as a % of revenues

    6.1     5.6     0.5  

Facility Services

    6,134        4,399        1,735      39.4%  

Operating profit as a % of revenues

    4.2     3.2     1.0  

Parking

    6,134        6,092        42      0.7%  

Operating profit as a % of revenues

    4.0     4.0         

Security

    2,100        1,012        1,088      NM*    

Operating profit as a % of revenues

    2.3     1.1     1.2  

Building & Energy Solutions

    2,523        2,643        (120   (4.5)%  

Operating profit as a % of revenues

    2.7     3.1     (0.4 )%   

Other

    2,914        —          2,914      NM*    

Operating profit as a % of revenues

    3.7     —          3.7  

Corporate

    (22,070     (28,116     6,046      21.5%  

Adjustment for income from unconsolidated affiliates, net included in Building & Energy Solutions

    (1,197     (661     (536   (81.1)%  
 

 

 

   

 

 

   

 

 

   
  $ 33,617      $ 18,863      $ 14,754      78.2%  
 

 

 

   

 

 

   

 

 

   

*  Not meaningful

       
Janitorial        
    Three Months Ended April 30,      

($ in thousands)

  2013     2012     Increase

Revenues

  $ 609,229      $ 593,447      $ 15,782      2.7%  

Operating profit

    37,079        33,494        3,585      10.7%  

Operating profit as a % of revenues

    6.1     5.6     0.5  

Janitorial revenues increased by $15.8 million, or 2.7%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The increase was primarily related to additional revenues from new business and increases in the scope of work for existing clients that exceeded contract losses.

Operating profit increased by $3.6 million, or 10.7%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. Operating profit margins increased by 0.5%, to 6.1% in the three months ended April 30, 2013 from 5.6% in the three months ended April 30, 2012. The increase in operating profit margins was primarily related to lower payroll and payroll-related expenses as a result of one less working day in the three months ended April 30, 2013. Also contributing to the increase in operating profit margins were lower legal expenses as a result of prior year settlements. The increase in operating profit margins was partially offset by higher initial costs incurred on new contracts, including higher labor costs, in the three months ended April 30, 2013.

 

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Table of Contents

Facility Services

 

    Three Months Ended April 30,        

($ in thousands)

  2013     2012     Increase  

Revenues

  $ 147,383      $ 135,911      $         11,472        8.4%   

Operating profit

    6,134        4,399        1,735        39.4%   

Operating profit as a % of revenues

    4.2     3.2     1.0  

Facility Services revenues increased by $11.5 million, or 8.4%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The increase was primarily related to additional revenues from increases in the scope of work from existing clients and new business that exceeded contract losses.

Operating profit increased by $1.7 million, or 39.4%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. Operating profit margins increased by 1.0%, to 4.2% in the three months ended April 30, 2013 from 3.2% in the three months ended April 30, 2012. The increase in operating profit margins was driven by improved margins on certain contracts in the current quarter.

Parking

 

    Three Months Ended April 30,        

($ in thousands)

  2013     2012     Increase / (Decrease)  

Revenues

  $ 151,626      $ 152,680      $         (1,054)        (0.7)%   

Operating profit

    6,134        6,092        42        0.7%   

Operating profit as a % of revenues

    4.0     4.0         

The 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 (referred to as “management reimbursement revenues”) totaled $76.2 million and $76.3 million for the three months ended April 30, 2013 and 2012, respectively.

Total Parking revenues decreased by $1.1 million, or 0.7%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The decrease was primarily related to the termination of certain unprofitable contracts, in excess of new business.

Operating profit remained consistent at $6.1 million during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012.

Security

 

    Three Months Ended April 30,        

($ in thousands)

  2013     2012     Increase  

Revenues

  $ 91,536      $ 88,890      $         2,646        3.0%   

Operating profit

    2,100        1,012        1,088        NM*     

Operating profit as a % of revenues

    2.3     1.1     1.2  

 

*

Not meaningful

Security revenues increased by $2.6 million, or 3.0%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The increase was primarily driven by an increase in scope of work from existing clients and additional revenues from new business, which was partially offset by contract losses.

Operating profit increased by $1.1 million during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. Operating profit margins increased by 1.2%, to 2.3% in the three months ended April 30, 2013 from 1.1% in the three months ended April 30, 2012. The increase in operating profit margins was primarily related to a reduction in payroll and payroll-related expenses due to improved labor management and a reduction in legal expenses.

 

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Table of Contents

Building & Energy Solutions

 

                                               
    Three Months Ended April 30,        

($ in thousands)

  2013     2012     Increase / (Decrease)  

Revenues

  $ 93,901      $ 86,639      $ 7,262        8.4%   

Operating profit

    2,523        2,643        (120     (4.5)%   

Operating profit as a % of revenues

    2.7     3.1     (0.4 )%   

Building & Energy Solutions revenues increased by $7.3 million, or 8.4%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. Revenues in the three months ended April 30, 2013, included $17.9 million in revenues from the HHA and Calvert-Jones acquisitions on November 1, 2012. Excluding the impact of the HHA and Calvert-Jones acquisitions, revenues decreased by $10.6 million, or 12.2%, primarily as a result of the comparative mix and timing of certain awarded and completed U.S. Government contracts during 2012 and 2013. This decrease was partially offset by an increase in revenues from new bundled energy solution contracts in 2013.

Operating profit decreased by $0.1 million, or 4.5%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. Operating profit margins decreased by 0.4%, to 2.7% in the three months ended April 30, 2013 from 3.1% in the three months ended April 30, 2012. The decrease in operating profit margins was due to an accelerated method of amortization for recently acquired customer relationships from the HHA and Calvert-Jones acquisitions, which are amortized using the sum-of-the-years’-digits method. In addition, there were higher payroll and payroll-related expenses as a result of increased headcount to support sales initiatives, which were offset by higher margins on certain U.S. Government contracts.

Other

 

                                                   
    Three Months Ended April 30,        

($ in thousands)

  2013     2012     Increase  

Revenues

  $ 79,767      $ —        $         79,767        NM*   

Operating profit

    2,914        —          2,914        NM*   

Operating profit as a % of revenues

    3.7     —          3.7  

 

*

Not meaningful

Revenues and operating profit in our Other segment increased by $79.8 million, and $2.9 million, respectively, during the three months ended April 30, 2013, as a result of the November 1, 2012 acquisition of Air Serv. The operating profit for the three months ended April 30, 2013, includes amortization expense of $1.7 million and depreciation expense of $1.5 million relating to the acquisition of Air Serv.

The final consideration and purchase price allocation for Air Serv are subject to, among other items, further analysis of tax accounts, insurance balances, plant and equipment, and capital leases. The fair value assigned to customer relationships was $42.0 million, which will be amortized on an accelerated method using the sum-of-the-years’-digits over a weighted average life of 15 years. The fair value assigned to trademarks and a non-compete agreement was $2.5 million and will be amortized on a straight-line basis over 2-3 years. Annual amortization expense for customer relationships, trademarks, and the non-compete agreement in 2013 is estimated at approximately $6.5 million.

 

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Table of Contents

Corporate

 

                                                   
     Three Months Ended April 30,        

($ in thousands)

   2013     2012     Decrease  

Corporate expenses

   $ (22,070   $ (28,116   $ 6,046         21.5%   

Corporate expenses decreased by $6.0 million, or 21.5%, during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. The decrease in corporate expenses was primarily related to:

 

   

a $5.3 million reduction in legal fees associated with the settlement of certain legal cases in 2012;

 

   

$0.8 million lower IT costs as a result of the centralization of our IT datacenters in 2012;

 

   

a $0.7 million reduction in legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture; and

 

   

a $0.4 million reduction in costs associated with the Company’s rebranding initiative;

partially offset by:

 

   

a $0.8 million increase in sales and marketing expenses associated with new growth initiatives; and

 

   

a $0.5 million increase in restructuring costs associated with the realignment of our operational structure.

 

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RESULTS OF OPERATIONS

Six Months Ended April 30, 2013 Compared with the Six Months Ended April 30, 2012

Consolidated

 

                                                       
     Six Months Ended April 30,      

($ in thousands)

   2013     2012     Increase / (Decrease)

Revenues

   $ 2,355,740      $ 2,131,029      $ 224,711      10.5%  

Expenses

        

Operating

     2,116,092        1,914,336        201,756      10.5%  

Gross margin as a % of revenues

     10.2     10.2     —       

Selling, general and administrative

     172,231        169,184        3,047      1.8%  

As a % of revenues

     7.3     7.9     (0.6 )%   

Amortization of intangible assets

     14,494        10,850        3,644      33.6%  
  

 

 

   

 

 

   

 

 

   

Total expenses

     2,302,817        2,094,370        208,447      10.0%  
  

 

 

   

 

 

   

 

 

   

Operating profit

     52,923        36,659        16,264      44.4%  

Other-than-temporary impairment credit losses on auction rate security recognized in earnings

  

 

—  

  

    (313     313      NM*    

Income from unconsolidated affiliates, net

     2,328        4,633        (2,305   (49.8)%  

Interest expense

     (6,343     (5,275     (1,068   20.2%  
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     48,908        35,704        13,204      37.0%  

Provision for income taxes

     (16,252     (13,317     (2,935   22.0%  
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     32,656        22,387        10,269      45.9%  

Loss from discontinued operations, net of taxes

     —          (45     45      NM*    
  

 

 

   

 

 

   

 

 

   

Net income

   $ 32,656      $ 22,342      $ 10,314      46.2%  
  

 

 

   

 

 

   

 

 

   

 

*

Not meaningful

Revenues

Revenues increased by $224.7 million, or 10.5%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase was primarily related to revenues from the November Acquisitions, which contributed $198.0 million in the six months ended April 30, 2013. The remaining increase in revenues was related to new business and increased scope of work within the Janitorial, Facility Services, and Security segments, which contributed $57.6 million in additional revenues in the first half of 2013. This increase in revenues was partially offset by the impact of lower sales in the Building & Energy Solutions segment of $28.2 million, excluding revenues related to the HHA and Calvert-Jones acquisitions, primarily as a result of the comparative mix and timing of certain awarded and completed U.S. Government contracts during 2012 and 2013. This decrease was partially offset by an increase in revenues from new bundled energy solution contracts in 2013.

Operating Expenses

Operating expenses increased by $201.8 million, or 10.5%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase in operating expenses was primarily related to the November Acquisitions. As a percentage of revenues, gross margin remained flat at 10.2% in the six months ended April 30, 2013 and 2012. Gross margins were favorably impacted by lower payroll and payroll-related expenses as a result of one less working day in 2013, the impact of which was partially offset by the $2.7 million reduction in sales allowance reserve in the prior year as a result of sustained improvements in historical and expected credits on client receivables.

 

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Table of Contents

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $3.0 million, or 1.8%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. As a percentage of revenues, selling, general and administrative expenses decreased by 0.6%, to 7.3% in the six months ended April 30, 2013 from 7.9% in the six months ended April 30, 2012.

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

 

   

$8.7 million incremental selling, general and administrative expense of acquired businesses;

 

   

a $4.0 million increase in sales and marketing expenses associated with new growth and sales initiatives; and

 

   

a $1.7 million increase in restructuring costs associated with the realignment of our operational structure;

partially offset by:

 

   

a $6.4 million reduction in legal fees and costs associated with the settlement of certain legal cases in 2012;

 

   

a $2.4 million reduction in legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture;

 

   

$1.7 million lower IT costs as a result of the centralization of our IT datacenters in 2012; and

 

   

a $0.8 million reduction in costs associated with the Company’s rebranding initiative.

Amortization of Intangible Assets

Amortization of intangible assets increased by $3.6 million, or 33.6%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase was primarily related to the amortization of acquired intangible assets associated with the November Acquisitions.

Income from Unconsolidated Affiliates, Net

Income from unconsolidated affiliates, net, decreased by $2.3 million, or 49.8%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The decrease was primarily related to the Company’s share of a gain recognized in 2012 in connection with property sales completed by one of the Company’s investments in a low income housing partnership.

Interest Expense

Interest expense increased by $1.1 million, or 20.2%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase was primarily related to an increase in average borrowings under the Company’s line of credit to fund the November Acquisitions. The average outstanding balances under the Company’s line of credit were $436.7 million and $306.1 million in the six months ended April 30, 2013 and 2012, respectively.

Provision for Income Taxes

The effective tax rates on income from continuing operations for the six months ended April 30, 2013 and 2012 were 33.2% and 37.3%, respectively. The effective tax rate for the six months ended April 30, 2013 decreased due to discrete tax benefits of $2.9 million related to a retroactive reinstatement of federal employment-based tax credits during 2013, partially offset by discrete adjustments of $1.2 million for employment-based tax credits during 2012. Without the discrete items, our estimated annual effective tax rate for 2013 is expected to be 39.0%.

 

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Table of Contents

Segment Information

 

           
    Six Months Ended April 30,      

($ in thousands)

  2013     2012     Increase / (Decrease)

Revenues

       

Janitorial

  $ 1,214,748      $ 1,187,787      $ 26,961      2.3%  

Facility Services

    303,830        280,516        23,314      8.3%  

Parking

    302,863        306,130        (3,267   (1.1)%  

Security

    188,209        180,872        7,337      4.1%  

Building & Energy Solutions

    181,883        175,807        6,076      3.5%  

Other

    163,747        —          163,747      NM*    

Corporate

    460        (83     543      NM*    
 

 

 

   

 

 

   

 

 

   
  $ 2,355,740      $ 2,131,029      $ 224,711      10.5%  
 

 

 

   

 

 

   

 

 

   

Operating profit

       

Janitorial

  $ 66,153      $ 64,002      $ 2,151      3.4%  

Operating profit as a % of revenues

    5.4     5.4     —       

Facility Services

    12,275        10,486        1,789      17.1%  

Operating profit as a % of revenues

    4.0     3.7     0.3  

Parking

    10,957        10,842        115      1.1%  

Operating profit as a % of revenues

    3.6     3.5     0.1  

Security

    3,768        1,857        1,911      NM*    

Operating profit as a % of revenues

    2.0     1.0     1.0  

Building & Energy Solutions

    3,319        3,933        (614   (15.6)%  

Operating profit as a % of revenues

    1.8     2.2     (0.4 )%   

Other

    4,902        —          4,902      NM*    

Operating profit as a % of revenues

    3.0     —          3.0  

Corporate

    (46,014     (52,788     6,774      12.8%  

Adjustment for income from unconsolidated affiliates, net included in Building & Energy Solutions

    (2,437     (1,673     (764   45.7%  
 

 

 

   

 

 

   

 

 

   
  $ 52,923      $ 36,659      $ 16,264      44.4%  
 

 

 

   

 

 

   

 

 

   

*  Not meaningful

       
Janitorial        
    Six Months Ended April 30,      

($ in thousands)

  2013     2012     Increase

Revenues

  $ 1,214,748      $ 1,187,787      $ 26,961      2.3%  

Operating profit

    66,153        64,002        2,151      3.4%  

Operating profit as a % of revenues

    5.4     5.4     —       

Janitorial revenues increased by $27.0 million, or 2.3%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase was primarily related to additional revenues from new business that exceeded contract losses, increases in the scope of work from existing clients, and the impact of additional tag work during the six months ended April 30, 2013.

Operating profit increased by $2.2 million, or 3.4%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. Operating profit margins remained flat at 5.4% in the six months ended April 30, 2013 and 2012. The increase in operating profit was primarily related to lower payroll and payroll-related expenses as a result of one less working day in 2013. Also contributing to the increase in operating profit were lower legal expenses in the six months ended April 30, 2013, as a result of prior year settlements. The increase in operating profit was partially offset by higher initial costs incurred on new contracts, including higher labor costs, during the six months ended April 30, 2013 and a reduction in the sales allowance reserve in 2012 as a result of sustained improvements in historical and expected credits on client receivables.

 

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Table of Contents

Facility Services

 

    Six Months Ended April 30,        

($ in thousands)

  2013     2012     Increase  

Revenues

  $ 303,830      $ 280,516      $         23,314        8.3%   

Operating profit

    12,275        10,486        1,789        17.1%   

Operating profit as a % of revenues

    4.0     3.7     0.3  

Facility Services revenues increased by $23.3 million, or 8.3%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase was primarily related to additional revenues from increases in the scope of work from existing clients and new business that exceeded contract losses.

Operating profit increased by $1.8 million, or 17.1%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. Operating profit margins increased by 0.3%, to 4.0% in the six months ended April 30, 2013 from 3.7% in the six months ended April 30, 2012. The increase in operating profit margins was driven by improved margins on certain contracts in the current year.

Parking

 

    Six Months Ended April 30,        

($ in thousands)

  2013     2012     Increase / (Decrease)  

Revenues

  $ 302,863      $ 306,130      $         (3,267)        (1.1)%   

Operating profit

    10,957        10,842        115        1.1%   

Operating profit as a % of revenues

    3.6     3.5     0.1  

Management reimbursement revenues totaled $152.1 million and $154.1 million for the six months ended April 30, 2013 and 2012, respectively.

Total Parking revenues decreased by $3.3 million, or 1.1%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The decrease was primarily related to lower management reimbursement revenues and the termination of certain unprofitable contracts, in excess of new business.

Operating profit increased $0.1 million, or 1.1%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. Operating profit margins increased slightly by 0.1%, to 3.6% in the six months ended April 30, 2013 from 3.5% in the six months ended April 30, 2012. The slight increase was primarily related to the termination of certain unprofitable contracts and lower amortization of intangible assets expense in the six months ended April 30, 2012.

Security

 

    Six Months Ended April 30,        

($ in thousands)

  2013     2012     Increase  

Revenues

  $ 188,209      $ 180,872      $         7,337        4.1%   

Operating profit

    3,768        1,857        1,911        NM*   

Operating profit as a % of revenues

    2.0     1.0     1.0  

 

*

Not meaningful

Security revenue increased $7.3 million, or 4.1%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase was primarily driven by an increase in scope of work from existing clients and additional revenues from new business, which was partially offset by contract losses.

 

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Table of Contents

Operating profit increased by $1.9 million during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. Operating profit margins increased by 1.0%, to 2.0% in the six months ended April 30, 2013 from 1.0% in the six months ended April 30, 2012. The increase in operating profit margins was primarily related to a reduction in payroll and payroll-related expenses due to improved labor management, a reduction in legal expenses, and a reduction in general and administrative expenses due to additional cost control measures.

Building & Energy Solutions

 

    Six Months Ended April 30,        

($ in thousands)

  2013     2012     Increase / (Decrease)  

Revenues

  $ 181,883      $ 175,807      $         6,076        3.5%   

Operating profit

    3,319        3,933        (614     (15.6)%   

Operating profit as a % of revenues

    1.8     2.2     (0.4 )%   

Building & Energy Solutions revenues increased by $6.1 million, or 3.5%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. Revenues in the six months ended April 30, 2013, included $34.3 million in revenues from the HHA and Calvert-Jones acquisitions on November 1, 2012. Excluding the impact of the HHA and Calvert-Jones acquisitions, revenues decreased by $28.2 million, or 16.0%, primarily as a result of the comparative mix and timing of certain awarded and completed U.S. Government contracts during 2012 and 2013. This decrease was partially offset by an increase in revenues from new bundled energy solution contracts in 2013.

Operating profit decreased by $0.6 million, or 15.6%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. Operating profit margins decreased by 0.4%, to 1.8% in the six months ended April 30, 2013 from 2.2% in the six months ended April 30, 2012. The decrease in operating profit margins was due to an accelerated method of amortization for recently acquired customer relationships from the HHA and Calvert-Jones acquisitions, which are amortized using the sum-of-the-years’-digits method. In addition, there were higher payroll and payroll-related expenses as a result of increased headcount to support sales initiatives, which were offset by higher margins on certain U.S. Government contracts.

Other

 

    Six Months Ended April 30,        

($ in thousands)

  2013     2012     Increase  

Revenues

  $     163,747      $         —        $         163,747        NM*   

Operating profit

    4,902        —          4,902        NM*   

Operating profit as a % of revenues

    3.0     —          3.0  

 

*

Not meaningful

Revenues and operating profit in our Other segment increased by $163.7 million, and $4.9 million, respectively, during the six months ended April 30, 2013, as a result of the November 1, 2012 acquisition of Air Serv. The operating profit for the six months ended April 30, 2013, includes amortization expense of $3.3 million and depreciation expense of $3.3 million relating to the acquisition of Air Serv.

Corporate

 

    Six Months Ended April 30,        

($ in thousands)

  2013     2012     Decrease  

Corporate expenses

  $ (46,014   $ (52,788   $         6,774         12.8%   

Corporate expenses decreased by $6.8 million, or 12.8%, during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012, primarily due to:

 

   

a $4.7 million reduction in legal fees associated with the settlement of certain legal cases in 2012;

 

   

a $2.4 million reduction in legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture;

 

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Table of Contents
   

$1.7 million lower IT costs as a result of the centralization of our IT datacenters in 2012; and

 

   

a $0.8 million reduction in costs associated with the Company’s rebranding initiative;

partially offset by:

 

   

a $2.0 million increase in sales and marketing expenses associated with new growth initiatives; and

 

   

$1.7 million increase in restructuring costs associated with the realignment of our operational structure.

Liquidity and Capital Resources

The Company continually projects anticipated cash requirements for its operating, investing, and financing needs as well as cash flows generated from operating activities available to meet these needs. The Company’s operating needs could include, among other items, commitments for operating leases, payroll payments, insurance claim payments, interest payments, legal settlements, and pension funding obligations. The Company’s investing and financing spending could include payments for acquired businesses, capital expenditures, commitments for capital leases, share repurchases, dividends, and payments on its outstanding indebtedness. The Company believes that its operating cash flows, cash and cash equivalents, borrowing capacity under its line of credit, and access to capital markets are sufficient to fund its operating, investing, and financing requirements for the next twelve months. However, there can be no assurance that our business will generate sufficient cash flows from operations, that anticipated net sales growth and operating improvements will be realized, or that future borrowings will be available under our revolving credit facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

As of April 30, 2013, the total outstanding amounts under the Company’s $650.0 million line of credit in the form of cash borrowings and standby letters of credit were $384.0 million and $103.8 million, respectively. As of April 30, 2013, the Company had up to $162.2 million borrowing capacity under the line of credit. The Company, at its option, may increase the size of its line of credit 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’s ability to draw down available amounts under the line of credit is subject to and may be limited by compliance with certain financial covenants, including covenants relating to a fixed charge coverage ratio, a leverage ratio, and consolidated net worth. In addition, other covenants under the line of credit include limitations on liens, dispositions, fundamental changes, investments, and certain transactions and payments. As of April 30, 2013, the Company was in compliance with all financial covenants and expects to be in compliance in the foreseeable future.

On a continuing basis, we consider various transactions to increase shareholder value and enhance our business results, including acquisitions, divestitures, the payment of dividends, and share repurchases. These transactions may result in future cash proceeds or payments.

In addition to revenues and operating profit, the Company’s management views operating cash flows as a good indicator of financial performance, as strong operating cash flows provide opportunities for growth both organically and through acquisitions. Operating cash flows primarily depend on: revenue levels; the quality and timing of collections of accounts receivable (including receivables from U.S. Government contracts which generally have longer collection periods), the timing of payments to suppliers and other vendors; the timing and amount of income tax payments; and the timing and amount of payments on insured claims.

The table below summarizes our cash and cash equivalents activity:

 

(in thousands)

  April 30, 2013     October 31, 2012     Increase / (Decrease)  

Cash and cash equivalents

  $ 37,906      $ 43,459      $ (5,553

Working capital

    345,119        293,517        51,602   
    Six Months Ended April 30,        

(in thousands)

  2013     2012     Increase / (Decrease)  

Net cash provided by operating activities

  $ 37,826      $ 55,522      $ (17,696

Net cash used in investing activities

    (196,906     (15,082     181,824   

Net cash provided by (used in) financing activities

    153,527        (41,496     195,023   

 

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Working Capital

Working capital at April 30, 2013 was $51.6 million higher as compared to October 31, 2012. The increase in working capital was primarily driven by an increase in the accounts receivable balance as a result of the November Acquisitions, partially offset by the timing of payments made for vendor invoices.

Cash Flows

Operating Activities

Net cash provided by operating activities decreased by $17.7 million during the six months ended April 30, 2013 as compared to the six months ended April 30, 2012. The decrease was primarily related to lower contribution from working capital as a result of timing of client receivables, payment of vendor invoices, and cash paid for income taxes, which was partially offset by higher income in the six months ended April 30, 2013 due to the November Acquisitions.

Investing Activities

Net cash used in investing activities increased by $181.8 million during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase was primarily related to $192.0 million cash paid, net of cash acquired, for the November Acquisitions on November 1, 2012, partially offset by a $6.5 million decrease in fixed asset additions and the redemption of an auction rate security of $5.0 million in February 2013.

Financing Activities

Net cash provided by financing activities increased by $195.0 million during the six months ended April 30, 2013, as compared to the six months ended April 30, 2012. The increase was related to a $203.0 million increase in net cash borrowings primarily due to the financing of the November Acquisitions on November 1, 2012. This increase was partially offset by a $6.1 million decline in proceeds from exercise of stock options.

Contingencies

The Company is subject to claims, legal proceedings, settlements, class actions, and purported class actions arising in the ordinary course of business, including employment-based claims and customer contract claims. Litigation outcomes are 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. The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of a potential 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. At April 30, 2013, the total amount accrued for all probable litigation losses where a reasonable estimate of the loss could be made was $1.4 million.

The Company does not accrue for contingent losses that, in the judgment of the Company, are considered to be reasonably possible but not probable. Management currently estimates that the range of loss for all reasonably possible losses for which an estimate can be made is between $0.0 million and $96.4 million, including $94.2 million related to the Augustus, Hall and Davis v. American Commercial Security Services case (the “Augustus case”). Factors underlying this estimated range of loss will change from time to time, and actual results may vary significantly from this estimate. Those matters for which the Company cannot reasonably estimate potential losses are not included within this estimated range and, therefore, this range does not represent the Company’s maximum potential loss exposure.

For additional information about the Company’s contingencies, see Note 10,“Commitments and Contingencies,” in the notes to the Financial Statements.

Critical Accounting Policies and Estimates

The Company’s accompanying Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments, and opinions of management. There have been no significant changes to the Company’s critical accounting policies and estimates. For a description of the Company’s critical accounting policies, see Item 7., “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” in the Company’s Annual Report on Form 10-K for the year ended October 31, 2012.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Sensitive Instruments

The Company’s 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 Company’s exposure to interest rate risk primarily relates to its variable rate borrowings under the $650.0 million five-year syndicated line of credit that expires in September 2016. At April 30, 2013, the Company had $384.0 million of outstanding LIBOR-and IBOR-based borrowings under its line of credit. The Company anticipates borrowing similar amounts for periods of one day to three months. A hypothetical 1.0% increase in interest rates would have added additional interest expense of $1.2 million on the average outstanding borrowings under the Company’s line of credit, net of the interest rate swap agreements, in the six months ended April 30, 2013.

Interest Rate Swaps

At April 30, 2013, the Company was a counterparty to six interest rate swap agreements with an aggregate notional amount of $180.0 million, pursuant to which the Company receives variable interest payments based on LIBOR and pays fixed interest on such amounts, at rates ranging from 0.44% to 0.89%. These interest rate swap agreements, which are intended to hedge the interest rate risk associated with our LIBOR-based borrowings under the Company’s line of credit, mature between February 2014 and April 2016.

As of April 30, 2013, the fair value of the interest rate swaps were liabilities of $0.6 million, which were included in “Retirement plans and other” on the accompanying unaudited consolidated balance sheets. 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. The ineffective portion of the gain or loss is reported in earnings immediately. The amount included in accumulated other comprehensive loss is $0.6 million ($0.3 million, net of taxes) at April 30, 2013.

Investment in Auction Rate Securities

At April 30, 2013, the Company held investments in auction rate securities from three different issuers having an aggregate original principal amount of $15.0 million. The investments are not subject to material interest rate risk. These auction rate securities are debt instruments with stated maturities ranging from 2033 to 2050, for which the interest rate is designed to be reset through Dutch auctions approximately every 30 days based on spreads to a base rate (i.e., LIBOR). Auctions for these securities have not occurred since August 2007. A hypothetical 1.0% increase in interest rates during the six months ended April 30, 2013 would have added approximately $0.1 million of additional interest income.

Exchange Rate Risk

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.

 

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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 Company’s principal executive officer and principal financial officer evaluated the Company’s 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 Company’s management, including the Company’s 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 Company’s internal control over financial reporting during the quarter ended April 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, other than the controls associated with the recently acquired Air Serv acquisition. Integration activities, including an assessment of the effectiveness of internal controls over financial reporting and related remediation associated with Air Serv, are expected to be conducted over the course of the Company’s 2013 assessment cycle.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

A discussion of material developments in the Company’s litigation occurring in the period covered by this report can be found in Note 10, “Commitments and Contingencies,” to the unaudited consolidated financial statements in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

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, 2012, in response to Item 1A., “Risk Factors,” to Part I of the Annual Report, except for the additional risk factor described below.

We are at risk of losses and adverse publicity stemming from any accident or other incident involving our airport operations. We provide services in support of commercial aviation at airports primarily in the United States and the United Kingdom. Our operations involve the transport of passengers and crew, handling of cargo, cleaning, and security. An accident or other incident involving our aviation support services could expose us to significant liability. If the insurance we carry to cover damages relating to future accidents or other incidents involving our airport operations is not adequate, we may be exposed to substantial losses arising from such accident or other incident. In addition, any such accident or other incident could create a public perception that the services we provide or our personnel are not safe or reliable, which could harm our reputation and our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

 

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Exhibit
No.
   Exhibit Description
  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.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Label Linkbase Document
101.PRE    XBRL Presentation Linkbase Document

 

Indicates filed herewith

Indicates furnished herewith

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

June 5, 2013

     

/s/ James S. Lusk

     

James S. Lusk

Executive Vice President

Chief Financial Officer

June 5, 2013

     

/s/ Dean A. Chin

     

Dean A. Chin

Senior Vice President

Controller and Chief Accounting Officer

 

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