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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10 Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 1998
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
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(Exact name of registrant as specified in its charter)
DELAWARE 94-1369354
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
160 PACIFIC AVENUE SUITE 222, SAN FRANCISCO, CALIFORNIA 94111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 733-4000
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 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
--- ---
Number of shares of Common Stock outstanding as of July 31, 1998: 21,382,393
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ABM INDUSTRIES INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 1998
TABLE OF CONTENTS
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PART I PAGE
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Item 1 Consolidated Financial Statements . . . . . . . . . . . . . . . . 2
Notes to the Consolidated Financial Statements . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 9
PART II
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 18
</TABLE>
1
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PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
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<CAPTION>
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OCTOBER 31, JULY 31,
ASSETS: 1997 1998
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,783 $1,815
Accounts receivable, net 234,464 255,723
Inventories 21,197 22,320
Deferred income taxes 10,968 9,368
Prepaid expenses and other current assets 26,005 29,620
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Total current assets 294,417 318,846
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INVESTMENTS AND LONG-TERM RECEIVABLES 12,900 12,890
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and buildings 4,684 4,753
Transportation equipment 11,211 11,931
Machinery and other equipment 46,147 49,956
Leasehold improvements 10,476 11,828
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72,518 78,468
Less accumulated depreciation and amortization 45,934 51,800
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Property, plant and equipment, net 26,584 26,668
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INTANGIBLE ASSETS - NET 100,313 102,227
DEFERRED INCOME TAXES 25,426 28,305
OTHER ASSETS 7,512 6,988
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$467,152 $495,924
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</TABLE>
(Continued)
2
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
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OCTOBER 31, JULY 31,
LIABILITIES AND STOCKHOLDERS' EQUITY: 1997 1998
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(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $1,393 $1,538
Bank overdraft 12,975 14,870
Trade accounts payable 34,555 31,256
Income taxes payable 4,265 5,388
Accrued Liabilities:
Compensation 35,965 37,129
Taxes - other than income 12,609 14,529
Insurance claims 25,479 25,158
Other 29,419 28,207
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Total current liabilities 156,660 158,075
Long-Term Debt (less current portion) 38,402 37,710
Retirement plans 13,413 15,537
Insurance claims 54,464 54,349
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Total Liabilities 262,939 265,671
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SERIES B 8% SENIOR REDEEMABLE CUMULATIVE
PREFERRED STOCK 6,400 6,400
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 500,000 _ _
shares authorized; none issued
Common stock, $.01 par value, 28,000,000 shares
authorized; 20,464,000 and 21,382,000 shares
issued and outstanding at October 31, 1997
and July 31, 1998, respectively 205 256
Additional capital 63,416 75,027
Retained earnings 134,192 148,570
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Total stockholders' equity 197,813 223,853
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$467,152 $495,924
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share amounts)
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THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31 JULY 31
1997 1998 1997 1998
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<S> <C> <C> <C> <C>
REVENUES AND OTHER INCOME $ 308,471 $ 381,036 $ 894,418 $ 1,108,817
EXPENSES:
Operating Expenses and Cost of Goods Sold 264,738 328,744 770,744 961,766
Selling, General and Administrative 30,168 35,198 90,538 106,169
Interest 659 811 1,800 2,650
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Total Expenses 295,565 364,753 863,082 1,070,585
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INCOME BEFORE INCOME TAXES 12,906 16,283 31,336 38,232
INCOME TAXES 5,420 6,757 13,161 15,866
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NET INCOME $ 7,486 $ 9,526 $ 18,175 $ 22,366
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NET INCOME PER COMMON SHARE
Basic $ 0.37 $ 0.44 $ 0.89 $ 1.05
Diluted $ 0.34 $ 0.40 $ 0.82 $ 0.95
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 20,210 21,304 20,060 20,980
Diluted 21,858 23,237 21,624 23,116
DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.12 $ 0.30 $ 0.36
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1998
(In thousands)
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1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 881,230 $1,082,151
Other operating cash receipts 1,063 971
Interest received 434 484
Cash paid to suppliers and employees (841,525) (1,053,787)
Interest paid (1,935) (2,559)
Income taxes paid (13,648) (16,022)
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Net cash provided by operating activities 25,619 11,238
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (8,699) (8,235)
Proceeds from sale of assets 239 395
Decrease in investments and
long-term receivable 330 10
Intangible assets acquired (7,257) (7,050)
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Net cash used in investing activities (15,387) (14,880)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 6,360 10,314
Dividends paid (6,422) (7,988)
Increase (decrease) in cash overdraft (1,152) 1,895
Increase (decrease) in notes payable 482 145
Long-term borrowings 64,662 80,172
Repayments of long-term borrowings (74,064) (80,864)
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Net cash (used in) provided by financing
activities (10,134) 3,674
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 98 32
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,567 1,783
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CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,665 $ 1,815
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</TABLE>
(Continued)
5
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1998
(In thousands)
<TABLE>
<CAPTION>
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1997 1998
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RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 18,175 $ 22,366
Adjustments:
Depreciation and amortization 11,485 14,395
Provision for bad debts 1,442 2,177
Gain on sale of assets (15) (155)
Deferred income taxes (848) (1,279)
Decrease (increase) in accounts receivable (11,864) (23,436)
Increase in inventories (2,944) (1,123)
Increase in prepaid expenses and other
current assets (3,369) (3,615)
Decrease in other assets 1,344 524
Increase in income taxes payable 361 1,123
Increase in retirement plans accrual 2,813 2,124
Increase (decrease) in insurance claims
liability 4,218 (436)
Increase in accounts payable and
other accrued liabilities 4,821 (1,427)
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Total Adjustments to net income 7,444 (11,128)
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Net Cash Provided by Operating Activities $25,619 $11,238
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
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ABM INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all material adjustments which are necessary to
present fairly the Company's financial position as of July 31, 1998, and the
results of operations and cash flows for the three and nine months then ended.
These adjustments are of a normal, recurring nature.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Form 10-K filed for the fiscal year ended October
31, 1997 with the Securities and Exchange Commission.
2. NET INCOME PER COMMON SHARE
The company has reported its earnings in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share. Basic net income
per common share, after the reduction for preferred stock dividends, is based on
the weighted average number of shares actually outstanding during the period.
Diluted net income per common share, after the reduction for preferred stock
dividends, is based on the weighted average number of shares outstanding during
the period, including common stock equivalents. Diluted net income per common
share is consistent with the Company's former presentation of primary net income
per common share. The calculation of these amounts is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
July 31, 1997 July 31, 1998
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Net Income $ 18,175,000 $ 22,366,000
Preferred Stock Dividends (384,000) (384,000)
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$ 17,791,000 $ 21,982,000
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Common shares outstanding - basic 20,060,000 20,980,000
Effect of dilutive securities:
Stock options 1,216,000 1,937,000
Other 348,000 199,000
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Common shares outstanding - diluted 21,624,000 23,116,000
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</TABLE>
7
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<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
July 31, 1997 July 31, 1998
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<S> <C> <C>
Net Income $ 7,486,000 $9,526,000
Preferred Stock Dividends (128,000) (128,000)
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$ 7,358,000 $9,398,000
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Common shares outstanding - basic 20,210,000 21,304,000
Effect of dilutive securities:
Stock options 1,300,000 1,734,000
Other 348,000 199,000
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Common shares outstanding - diluted 21,858,000 23,237,000
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</TABLE>
In March 1998, the Company's Board of Directors adopted a stockholder
rights plan to replace an existing rights plan that expired on April 22, 1998.
The new plan provides for a dividend distribution of one preferred stock
purchase right (a "Right") for each outstanding share of common stock,
distributed to stockholders of record on April 22, 1998. The Rights will be
exercisable only if a person or group acquires 20% or more of the Company's
common stock (an "Acquiring Person") or announces a tender offer for 20% or more
of the common stock. Each Right will entitle stockholders to buy one-thousandth
of a share of newly created Participating Preferred Stock, par value $.01 per
share, of the Company at an initial exercise price of $175 per Right, subject to
adjustment from time to time. However, if any person becomes an Acquiring
Person, each Right will then entitle its holder (other than the Acquiring
Person) to purchase at the exercise price common stock (or, in certain
circumstances, Participating Preferred Stock) of the Company having a market
value at that time of twice the Right's exercise price. These Rightsholders
would also be entitled to purchase an equivalent number of shares at the
exercise price if the Acquiring Person were to control the Company's Board of
Directors and cause the Company to enter into certain mergers or other
transactions. In addition, if an Acquiring Person acquired between 20% and 50%
of the Company's voting stock, the Company's Board of Directors may, at its
option, exchange one share of the Company's common stock for each Right held
(other than Rights held by the Acquiring Person). Rights held by the Acquiring
Person will become void. The Rights Plan excludes from its operation Theodore
Rosenberg and Sydney J. Rosenberg, and certain related persons, and, as a
result, their holdings will not cause the Rights to become exercisable or
nonredeemable or trigger the other features of the Rights. The Rights will
expire on April 22, 2008, unless earlier redeemed by the Board at $0.01 per
Right.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Cash provided from operations and bank borrowings have historically been
the sources for meeting working capital requirements, financing capital
expenditures and acquisitions, and paying cash dividends. Management
believes that cash from these sources will remain available and adequately
serve the Company's liquidity needs. The Company has an unsecured revolving
credit agreement with a syndicate of U.S. banks. This agreement had a $125
million line of credit expiring July 1, 2002. Effective November 1, 1997,
the agreement was amended to increase the amount available to $150 million.
At the Company's option, the credit facility provides interest at the prime
rate or IBOR+.35%. As of July 31, 1998, the total amount outstanding was
approximately $105.0 million, which was comprised of loans in the amount of
$34.0 million and standby letters of credit of $71.0 million. This agreement
requires the Company to meet certain financial ratios and places some
limitations on dividend payments and outside borrowing. The Company is
prohibited from declaring or paying cash dividends exceeding 50% of its net
income for any fiscal year. In February 1996, the Company entered into a
loan agreement with a major U.S. bank which provides a seven-year term loan
of $5 million. This loan bears interest at a fixed rate of 6.78 % with
annual payments of principal in varying amounts, and interest due each
February 15 through 2003. The Company's effective interest rate for all long
term debt for the nine months ended July 31, 1998 was 7.02%.
At July 31, 1998, working capital was $160.8 million, as compared to $137.8
million at October 31, 1997.
EFFECT OF INFLATION
The low rates of inflation experienced in recent years had no material
impact on the financial statements of the Company. The Company attempts to
recover inflationary costs by increasing sales prices to the extent permitted by
contracts and competition.
ENVIRONMENTAL MATTERS
The nature of the Company's operations, primarily services, would not
ordinarily involve it in environmental contamination. However, the Company's
operations are subject to various federal, state and/or local laws regulating
the discharge of materials into the environment or otherwise relating to the
protection of the environment, such as discharge into soil, water and air, and
the generation, handling, storage, transportation and disposal of waste and
hazardous substances. These laws
9
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generally have the effect of increasing costs and potential liabilities
associated with the conduct of the Company's operations, although historically
they have not had a material adverse effect on the Company's financial position
or its results of operations.
The Company is currently involved in four proceedings relating to
environmental matters: one involving alleged potential soil and groundwater
contamination at a Company facility in Florida; one involving alleged soil
contamination at a former Company facility in Arizona; one involving alleged
potential soil and groundwater contamination of a parking garage previously
operated by the Company; and, one involving alleged potential soil and
groundwater contamination at a former dry-cleaning facility leased by the
Company in Nevada. While it is difficult to predict the ultimate outcome of
these matters, based on information currently available, management believes
that none of these matters, individually or in the aggregate, are reasonably
likely to have a material adverse affect on the Company's financial position or
its results of operations.
YEAR 2000 ISSUE
The Company recognizes the significance of the Year 2000 Issue and is currently
in the process of becoming "Year 2000 compliant". The Company has established a
project team specifically to work on the Year 2000 issue and has developed a
detailed plan for becoming Year 2000 compliant consisting of the following
phases: awareness, inventory, risk assessment, remediation, testing,
implementation, and certification. This plan includes both information
technology ("IT") related systems and non-IT related systems.
The project team is currently in the remediation and testing phases for the core
application programs, such as its accounting programs, service dispatch systems,
and labor control systems. The team is in the assessment and remediation phases
of the other IT systems and all non-IT systems, and is also currently reviewing
its vendors' and customers' compliance with regard to the Year 2000 issue.
There can be no assurance that the systems of other companies on which the
Company relies will be Year 2000 compliant, or that the failure of such systems
to be Year 2000 compliant will not have a material adverse effect on the
Company's business, financial condition and results of operations.
As it is in its assessment and remediation phases of its plan, the Company can
only estimate the total cost of becoming year 2000 compliant. Based upon
assumptions and forecasts of management at this time, the Company estimates the
cost of becoming year 2000 compliant to be approximately $1.5 to $2.0 million.
There can be no assurance that all the Company's systems will be Year 2000
compliant, that the costs to be Year 2000 compliant will not exceed management's
current expectations, or that the failure of such
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systems to be Year 2000 compliant will not have a material adverse effect on the
Company's business, financial condition and results of operations. The company
has not yet completed a contingency plan in the event that any systems are not
Year 2000 compliant.
ACQUISITIONS
The operating results of businesses acquired have been included in the
accompanying consolidated financial statements from their respective dates of
acquisition.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company. All information in the
discussion and references to the years and quarters are based on the Company's
fiscal year and third quarter which end on October 31 and July 31, respectively.
THREE MONTHS ENDED JULY 31, 1998 VS. THREE MONTHS ENDED JULY 31, 1997
Revenues and other income (hereafter called revenues) for the third quarter
of 1998 were $381.0 million compared to $308.5 million in 1997, a 24% increase
over the same quarter of the prior year. Much of this growth was attributable
to acquisitions during 1997 as well as new business and price increases. For
the quarter ended July 31, 1998, the increase in revenues relating to
acquisitions made during 1997 was approximately $43.8 million, or 60% of the
total revenue increase of $72.6 million.
As a percentage of revenues, operating expenses and cost of goods sold were
86.3% for the third quarter of 1998, compared to 85.8% in 1997. Consequently,
as a percentage of revenues, the Company's gross profit (revenue minus operating
expenses and cost of goods sold) of 13.7% in the third quarter of 1998 was lower
than the gross profit of 14.2% for the third quarter of 1997. The gross profit
percentage declined mostly due to higher labor and related costs. The Company
anticipates these costs to be gradually recovered through future price
increases.
Selling, general and administrative expenses for the third quarter of
1998 were $35.2 million compared to $30.2 million for the corresponding three
months of 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 9.8% for the three months ended July
31, 1997, to 9.2% for the same period in 1998, primarily as a result of
certain fixed and variable costs not increasing at the same rate as revenues.
The $5.0 million increase in selling, general and administrative expenses
for the three months ended July 31, 1998, compared to the same period in
1997, is primarily due to expenses related to growth, including the
amortization of goodwill, and expenses associated with acquisitions.
11
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Interest expense was $811,000 for the third quarter of 1998 compared to
$659,000 for the same period in 1997, an increase of $152,000. This increase
was primarily due to higher weighted average borrowings during the third quarter
of 1998, which were needed to fund acquisitions and working capital.
The pre-tax income for the third quarter of 1998 was $16,283,000 compared
to $12,906,000, an increase of 26% over the same quarter of 1997. Most of the
Company's divisions reported profit percentage increases higher than the
corresponding revenue increases and are discussed below.
The estimated effective income tax rate for the third quarter of 1998 was
41.5%, compared to 42% in the third quarter of 1997. The lower tax rate was for
the most part attributed to an increase in various federal and state tax
credits.
Net income for the third quarter of 1998 was $9.5 million, an increase of
27% compared to the net income of $7.5 million for the third quarter of 1997.
Diluted net income per common share rose 18% to 40 cents for the third quarter
of 1998 compared to 34 cents for the same period in 1997. The increase in
diluted net income per share was not proportional to the increase in net income
due to a 6% increase in diluted shares outstanding.
The results of operations from the Company's three industry segments and
its nine operating divisions for the three months ended July 31, 1998, as
compared to the three months ended July 31, 1997, are more fully described
below:
The Janitorial Divisions segment, which includes American Building
Maintenance (also known as ABM Janitorial Services) and Easterday Janitorial
Supply, reported revenues for the third quarter of 1998 of $225.9 million, an
increase of approximately $51.5 million, or 30%, over the third quarter of 1997.
This segment's operating profits (revenues minus expenses, excluding interest
and corporate allocations) increased by 44% over the comparable quarter of 1997.
This is the Company's largest segment and accounted for approximately 59% of the
Company's total revenues for the current quarter. AMERICAN BUILDING MAINTENANCE
revenues increased by 31% during the third quarter of 1998 as compared to the
same quarter of 1997 as a result of several acquisitions made during the latter
half of 1997, particularly in New York. This division's operating profits
increased 43% when compared to the same period last year. The increase in
operating profits is principally due to increased revenues. Operating profits
increased at a higher rate than revenues due primarily to slightly lower labor
and labor related costs, insurance expense, as well as administrative expense.
EASTERDAY JANITORIAL SUPPLY'S 1998 third quarter revenue increased by
approximately 2% compared to the same quarter in 1997. The relatively small
increase was generally due to weak sales in the Sacramento, Portland, and San
Francisco markets. Operating profits
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increased 65% in the 3rd quarter of 1998, compared to the same quarter of 1997,
primarily due to an acquisition, improved margins and vendor rebate programs.
Revenues of the Public Service Divisions segment, which includes American
Commercial Security Services (also known as "ACSS" and "ABM Security Services"),
Ampco System Parking, and ABM Facility Services, for the third quarter of 1998
were approximately $63.1 million, a 1.9% increase over the same quarter of 1997.
Public Service Divisions accounted for approximately 17% of the Company's
revenues for the quarter. The operating profits of this segment increased 13% in
the third quarter of 1998 as both Ampco System Parking and American Commercial
Security Services reported increased profits when compared to the prior year
quarter. AMERICAN COMMERCIAL SECURITY SERVICES reported a very small decrease
in revenues, but its operating profits were up by 24% in the third quarter of
1998 compared to the same period of 1997. The revenue decline was largely due
to loss of a several large customers in the San Francisco Bay area and in
Minneapolis, Minnesota. The increase in operating profits was primarily due to
a reduction in insurance charges and slightly lower labor costs. AMPCO SYSTEM
PARKING revenues increased by 2%, while its operating profits increased 11%
during the third quarter of 1998 compared to the third quarter of 1997. The
increase in revenues was primarily due to growth in its national airport
business, as well as in Texas. The operating profits increase was primarily due
to a reduction in payroll tax expense. The Company's new division, ABM FACILITY
SERVICES, was established in November of 1997 as a result of customer requests
to provide services from two or more of its divisions (the ABM Family of
Services) under one management. Because this division is new and depends
primarily on management fees for its income, start up costs exceeded revenues
during the current quarter. Management does not expect this division to be
profitable during the current year. Revenues generated by this division are
generally reported by the respective divisions providing services and contribute
to the operating profits of those divisions.
The Company's Technical Divisions segment includes ABM Engineering Services,
Amtech Elevator Services, Amtech Lighting Services and CommAir Mechanical
Services. This segment reported revenues of $92.0 million, which represents
approximately 24% of the Company's revenues for the third quarter of 1998.
Revenues increased approximately 28% over the same quarter of last year due to
increases in revenues reported by all its divisions. Operating profits of this
segment increased 16% compared to the third quarter of 1997 due to increases in
operating profits of all of the divisions except Amtech Lighting Services. ABM
ENGINEERING SERVICES' revenues increased by 68% and its operating profits
increased 24% for the third quarter of 1998 compared to the same period in 1997.
The large revenue increase was due primarily to an acquisition in New York in
August 1997. The smaller percentage increase in operating profits is due to
increased insurance costs and lower margins on contracts purchased through
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the New York acquisition. Revenues for AMTECH ELEVATOR SERVICES were up by 10%
for the third quarter of 1998 over the same quarter of 1997 primarily due to an
increased customer base in the maintenance and repair sector. The Division also
posted a 24% increase in operating profit for the third quarter compared to the
corresponding quarter of 1997. This proportionally larger increase in operating
profits can be attributed primarily to higher profit margin on service
contracts, as well as a reduction in insurance costs. AMTECH LIGHTING SERVICES
reported a 9% revenue increase and operating profits decreased by 11% during the
third quarter of 1998 compared to the same quarter of the prior year. The
decrease in operating profits was primarily due to increased sales of
maintenance-based contracts that require more administrative support than
retrofit projects. COMMAIR MECHANICAL SERVICES revenues increased by 14%,
resulting primarily from an acquisition in Southern California during the third
quarter of 1997. Operating profits for the third quarter of 1998 increased by
60% from the prior year third quarter as a result of an increase in more
profitable service revenues due to unseasonably hot weather in California.
NINE MONTHS ENDED JULY 31, 1998 VS. NINE MONTHS ENDED JULY 31, 1997
Revenues and other income for the first nine months of 1998 were $1,108.8
million compared to $894.4 million in 1997, a 24% increase over the same period
of the prior year. Much of this growth was attributable to acquisitions during
1997 as well as new business and price increases. For the nine months ended
July 31, 1998, the increase in revenues relating to acquisitions made during
1997 was approximately $131.9 million or 62% of the total revenue increase of
$214.4 million.
As a percentage of revenues, operating expenses and cost of goods sold were
86.7% for the first nine months of 1998, compared to 86.2% in 1997.
Consequently, as a percentage of revenues, the Company's gross profit of 13.3%
in the first nine months of 1998 was lower than the gross profit of 13.8% for
the first nine months of 1997. The gross profit percentage declined mostly due
to higher labor and related costs. The Company anticipates these costs to be
gradually recovered through price increases.
Selling, general and administrative expenses for the first nine months of
1998 were $106.2 million compared to $90.5 million for the corresponding nine
months of 1997. As a percentage of revenues, selling, general and
administrative expenses decreased slightly, from 10.1% for the nine months ended
July 31, 1997, to 9.6% for the same period in 1998, primarily as a result of
certain fixed and variable costs not increasing at the same rate as sales. The
increase in the dollar amount of selling, general and administrative expenses,
$15.7 million, for the nine months ended July 31, 1998, compared to the same
period in 1997, is primarily due to expenses related to growth and to a somewhat
lesser extent expenses associated with acquisitions including the amortization
of goodwill.
14
<PAGE>
Interest expense was $2,650,000 for the first nine months of 1998 compared
to $1,800,000 for the same period in 1997, an increase of $850,000. This
increase was primarily due to higher weighted average borrowings during the
first nine months of 1998, which were needed to fund acquisitions and working
capital.
The pre-tax income for the first nine months of 1998 was $38.2 million
compared to $31.3 million, an increase of 22% over the same period in 1997.
The growth in pre-tax income did not keep pace with revenue growth for the first
nine months of 1998 due to lower gross profit.
The estimated effective income tax rate for the first nine months of 1998
was 41.5%, compared to 42.0% in the first nine months of 1997. The lower tax
rate was due for the most part to an increase in various federal and state tax
credits.
Net income for the first nine months of 1998 was $22.4 million, an increase
of 23%, compared to net income of $18.2 million for the same period in 1997.
Diluted net income per common share rose 16% to 95 cents for the first nine
months of 1998 compared to 82 cents for the same period in 1997. The increase
in diluted net income per share was not proportional to the increase in net
income due to the increased average number of common and common equivalent
shares outstanding.
The results of operations from the Company's three industry segments and
its nine operating divisions for the nine months ended July 31, 1998, as
compared to the nine months ended July 31, 1997, are more fully described below:
The Janitorial Divisions segment, which includes the operating divisions of
American Building Maintenance (also known as ABM Janitorial Services) and
Easterday Janitorial Supply, reported revenues for the first nine months of 1998
of $656.5 million, an increase of approximately $151.8 million, or 30%, over the
same period of 1997. This segment's operating profits increased by 32% over the
comparable period of 1997. This is the Company's largest segment and accounted
for approximately 59% of the Company's total revenues for the current nine
months. AMERICAN BUILDING MAINTENANCE'S revenues increased by 31% during the
first nine months of 1998, as compared to the same period in 1997, as a result
of several acquisitions made during the latter half of 1997, particularly in the
Midwest and New York. This division's operating profits increased 32% when
compared to the same period last year. Operating profits increased due
primarily to lower labor and labor related costs. EASTERDAY JANITORIAL SUPPLY'S
revenues for the first nine months of 1998 increased by approximately 12%
compared to the same period in 1997 generally due to strong sales in the Los
Angeles and Houston markets. An increase of 29% in operating profits was
achieved primarily due to an acquisition and improved margins.
15
<PAGE>
Revenues of the Public Service Divisions segment, which includes American
Commercial Security Services (also known as "ACSS" and "ABM Security Services"),
Ampco System Parking, and ABM Facility Services, for the first nine months of
1998 were approximately $189.5 million, a 6.2% increase over the same period of
1997. Public Service Divisions accounted for approximately 17% of the Company's
revenues. The operating profits of this segment increased 13.0% in the first
nine months of 1998 as both Ampco System Parking and American Commercial
Security Services reported increased profits when compared to the prior year
period. AMERICAN COMMERCIAL SECURITY SERVICES reported a decrease in revenues
of almost 2%, but its operating profits were up by 20% in the first nine months
of 1998 compared to the same period of 1997. The revenue decline was largely
due to loss of a several large customers in the San Francisco Bay Area and in
Minneapolis, Minnesota. The increase in operating profits was primarily due to
a reduction in insurance charges. Due to low unemployment levels in this
division's major markets, labor and labor-related costs increased, but were
offset by price increases. AMPCO SYSTEM PARKING Division's revenues increased
by 10%, while its profits increased 18% during the first nine months of 1998
compared to the first nine months of 1997. The increase in revenues was mostly
due to growth in its national airport business, as well as the Texas region.
The operating profit increase was due for the most part to lower payroll tax
expense, decreased legal costs and increased sales. As reported previously,
this segment now includes the Company's new division, ABM FACILITY SERVICES.
The Company has responded to customer requests to provide services from two or
more of its divisions (the ABM Family of Services) under one management.
Because this division is new and depends primarily on management fees for its
income, start up costs exceeded revenues during the first nine months.
Management does not expect this division to be profitable during the current
year. Revenues generated by this division are generally reported by the
respective divisions providing services and contribute to the operating profits
of those divisions.
The Company's Technical Divisions segment includes ABM Engineering Services
(also known as Amtech Engineering Services), Amtech Elevator Services, Amtech
Lighting Services and CommAir Mechanical Services. This segment reported
revenues of $262.2 million, which represent approximately 24% of the Company's
revenues for the first nine months of 1998. This represents an increase of
approximately 24% over the same nine months of last year due to increases in
revenues reported by all its divisions. The operating profits of this segment
increased 11% compared to the first nine months of 1997 due to increases in
operating profits of all of its divisions, except Amtech Lighting Services. ABM
ENGINEERING SERVICES' revenues increased by 59% and its operating profits
increased 11% for the first nine months of 1998 compared to the same period in
1997. The large revenue increase was due primarily to an acquisition in New York
in August 1997. The smaller percentage increase in operating profits is due to
lower gross profits on existing jobs due to increased insurance costs and
16
<PAGE>
pressure from competition to reduce fees, and lower margins on contracts
purchased through the New York acquisition. Revenues for AMTECH ELEVATOR
SERVICES were up by 10% for the first nine months of 1998 over the same period
of 1997 largely due to an increased customer base in the maintenance and repair
sector. The division posted a 35% increase in operating profits for the first
nine months compared to the corresponding period of 1997. This increase in
operating profits can be attributed primarily to a higher profit margin on
service contracts and reduction of insurance costs. AMTECH LIGHTING SERVICES
reported an 8% revenue increase due to increased revenues in most regions.
Operating profits decreased by 5% during the first nine months of 1998 compared
to the same period of the prior year primarily due to increases in
administrative expenses related to increased sales of maintenance-based
contracts that require more administrative support than retrofit projects, and
costs associated with a computer system upgrade. COMMAIR MECHANICAL SERVICES
revenues increased by 15%, resulting primarily from an acquisition in Southern
California during the third quarter of 1997. Operating profits for the first
nine months of 1998 increased by 15% from the prior year period as a result of
increased profit margin sales during the current quarter due to the unseasonably
hot weather in California.
SAFE HARBOR STATEMENT
Cautionary Safe Harbor Disclosure for Forward Looking Statements under the
Private Securities Litigation Reform Act of 1995: Because of the factors set
forth below, as well as other variables affecting the Company's operating
results, past financial performance should not be considered a reliable
indicator of future performance and investors should not use historical
trends to anticipate results or trends in future periods. The statements
contained herein which are not historical facts are forward-looking
statements that are subject to meaningful risks and uncertainties, including,
but not limited to: (1) the widespread failure of commercial real estate
occupancy to improve in the Company's major markets since it relates directly
to the need for janitorial and other buildings services, (2) the loss or
bankruptcy of one or more of the Company's major customers, which could
adversely affect the Company's ability to collect deferred costs or its
accounts receivable, (3) the untimely departure of one or more of the
Company's key executives, which could affect retention of customers as well
as the day to day management of operations, (4) any major labor disruptions
that may cause loss of revenue or cost increases that non-union companies can
use to their advantage in obtaining market share, (5) significant shortfall
in achieving any acquisition plan to acquire either businesses in new markets
or expand customer base in existing ones, (6) any legislation or other
government action that severely impacts one or more of the Company's lines of
business, such as price controls that could prevent cost recovery and fuel
restrictions that might increase the cost to deliver services, (7) the
reduction or revocation of the Company's lines of credit which would increase
interest expense or the cost of capital, (8) the cancellation or non-renewal
of the Company's primary insurance
17
<PAGE>
policies, as many customers retain services based on the provider's ability to
provide adequate insurance including performance bonds and proof of adequate
insurance, (9) any catastrophic uninsured or underinsured claims against the
Company, which also might include insurance companies financially incapable of
paying claims, (10) the inability to recruit and hire entry level personnel due
to labor shortages, (11) the failure of the Company's IT or non-IT systems, or
those of its customers or vendors, to be Year 2000 compliant, and (12) other
material factors that are disclosed from time-to-time in the Company's public
filings with the United States Securities and Exchange Commission, such as
reports on Forms 8-K, 10-K and 10-Q.
PART II. OTHER INFORMATION
Item 5. Other Information
In accordance with Rule 14-a-4(c)(1) promulgated by the Securities and Exchange
Commission, management proxies intend to use their discretionary voting
authority with respect to any shareholder proposal raised at the Company's
annual meeting as to which the proponent fails to notify the Company on or
before January 3, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.40 - Amendment of Corporate Executive Employment Agreement with
Martinn H. Mandles
Exhibit 10.41 - Amendment of Corporate Executive Employment Agreement with
Jess E. Benton III
Exhibit 27.1 - Financial Data Schedule
(a) Reports on form 8-K: No reports on form 8-K were filed during the quarter
ended July 31, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABM Industries Incorporated
September 14, 1998 /s/ David H. Hebble
- ----------------------- -------------------------------
Vice President, Principal
Financial Officer
19
<PAGE>
Exhibit 10.40
June 30, 1998
Mr. Martinn H. Mandles
ABM Industries Incorporated
160 Pacific Avenue, Suite 222
San Francisco, CA 94111
RE: AMENDMENT OF DIVISION EXECUTIVE EMPLOYMENT AGREEMENT --
INCREASE IN SUPPLEMENTAL EXECUTIVE RETIREMENT PENSION ("SERP")
Dear Martinn:
I am pleased to inform you that the Executive Officer Compensation and Stock
Option Committee of ABM's Board of Directors has approved an increase in the
monthly benefit payable to you to $4,167.00 under this plan. Accordingly, the
maximum benefit payable to you shall increase to $500,000.
This letter shall, in this regard, amend your executive Employment Agreement, as
follows:
The monthly Consulting Fees benefit set forth in paragraph X.5
CONSULTANCY shall be $4,167.00.
Please sign and date all three (3) originals and return two (2) of them to me.
Very truly yours,
/s/ William W. Steele
William W. Steele
I hereby agree to the foregoing amendment.
/s/ Martinn H. Mandles Dated: June 30, 1998.
- --------------------------------- --------------
Martinn H. Mandles
<PAGE>
EXHIBIT 10.41
June 30, 1998
Mr. Jess E. Benton, III
ABM Industries Incorporated
160 Pacific Avenue, Suite 222
San Francisco, CA 94111
RE: AMENDMENT OF DIVISION EXECUTIVE EMPLOYMENT AGREEMENT --
INCREASE IN SUPPLEMENTAL EXECUTIVE RETIREMENT PENSION ("SERP")
Dear Jay:
I am pleased to inform you that the Executive Officer Compensation and Stock
Option Committee of ABM's Board of Directors has approved an increase in the
monthly benefit payable to you to $2,083.00 under this plan. Accordingly, the
maximum benefit payable to you shall increase to $250,000.00.
This letter shall, in this regard, amend your Executive Employment Agreement, as
follows:
The monthly Consulting Fees benefit set forth in paragraph X.5 CONSULTANCY
shall be $2083.00.
Please sign and date all three (3) originals and return two (2) of them to me.
Very truly yours,
/s/ William W. Steele
William W. Steele
I hereby agree to the foregoing amendment.
/s/ Jess E. Benton III June 30
Dated: , 1998
Jess E. Benton, III
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<PERIOD-END> APR-30-1998
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