<PAGE>
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 APRIL 30, 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
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-1369354
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
160 PACIFIC AVENUE SUITE 222, SAN FRANCISCO, CALIFORNIA 94111
- -------------------------------------------------------------------------------
(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
April 30, 1998: 21,167,530
<PAGE>
ABM INDUSTRIES INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
- ------ ----
<S> <C> <C>
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
<CAPTION>
PART II
- -------
<S> <C> <C>
Item 6 Exhibits and Reports on Form 8-K.................................. 18
</TABLE>
1
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
OCTOBER 31, APRIL 30,
ASSETS: 1997 1998
- -------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,783 $ 1,750
Accounts receivable, net 234,464 240,168
Inventories 21,197 22,285
Deferred income taxes 10,968 9,458
Prepaid expenses and other current assets 26,005 29,467
- -------------------------------------------------------------------------------
Total current assets 294,417 303,128
- -------------------------------------------------------------------------------
INVESTMENTS AND LONG-TERM RECEIVABLES 12,900 13,281
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and buildings 4,684 4,746
Transportation equipment 11,211 11,609
Machinery and other equipment 46,147 48,060
Leasehold improvements 10,476 11,436
- -------------------------------------------------------------------------------
72,518 75,851
Less accumulated depreciation and amortization 45,934 49,297
- -------------------------------------------------------------------------------
Property, plant and equipment, net 26,584 26,554
- -------------------------------------------------------------------------------
INTANGIBLE ASSETS - NET 100,313 100,512
DEFERRED INCOME TAXES 25,426 28,492
OTHER ASSETS 7,512 7,101
- -------------------------------------------------------------------------------
$467,152 $479,068
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(Continued)
2
<PAGE>
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
OCTOBER 31, APRIL 30,
LIABILITIES AND STOCKHOLDERS' EQUITY: 1997 1998
- -------------------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt.............. $ 1,393 $ 1,492
Bank overdraft ................................. 12,975 19,660
Trade accounts payable.......................... 34,555 29,710
Income taxes payable ........................... 4,265 2,681
Accrued Liabilities:
Compensation................................. 35,965 36,772
Taxes - other than income.................... 12,609 13,770
Insurance claims............................. 25,479 25,210
Other........................................ 29,419 27,062
- ------------------------------------------------------------------------------
Total current liabilities................. 156,660 156,357
Long-Term Debt (less current portion).............. 38,402 33,725
Retirement plans................................... 13,413 14,950
Insurance claims................................... 54,464 54,441
- ------------------------------------------------------------------------------
Total Liabilities......................... 262,939 259,473
- ------------------------------------------------------------------------------
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 21,168,000 shares
issued and outstanding at October 31, 1997
and April 30, 1998, respectively................ 205 254
Additional capital................................ 63,416 71,201
Retained earnings................................. 134,192 141,740
- -------------------------------------------------------------------------------
Total stockholders' equity................ 197,813 213,195
- -------------------------------------------------------------------------------
$467,152 $479,068
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
1997 1998 1997 1998
- ---------------------------------------------------------------------------------------------------------
REVENUES AND OTHER INCOME........................ $ 294,309 $ 369,034 $ 585,947 $ 727,781
EXPENSES:
Operating Expenses and Cost of Goods Sold..... 253,255 320,528 506,006 633,022
Selling, General and Administrative........... 30,427 35,344 60,370 70,971
Interest...................................... 542 1,016 1,141 1,839
- ---------------------------------------------------------------------------------------------------------
Total Expenses............................. 284,224 356,888 567,517 705,832
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES....................... 10,085 12,146 18,430 21,949
INCOME TAXES..................................... 4,236 5,041 7,741 9,109
- ---------------------------------------------------------------------------------------------------------
NET INCOME....................................... $ 5,849 $ 7,105 $ 10,689 $ 12,840
- ---------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic......................................... $ 0.28 $ 0.33 $ 0.52 $ 0.60
Diluted....................................... $ 0.26 $ 0.30 $ 0.48 $ 0.55
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic......................................... 20,064 20,996 19,985 20,818
Diluted....................................... 21,598 23,230 21,507 23,056
DIVIDENDS PER COMMON SHARE....................... $ 0.10 $ 0.12 $ 0.20 $ 0.24
</TABLE>
4
<PAGE>
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND 1998
(In thousands)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 583,433 $ 717,976
Other operating cash receipts 748 582
Interest received 309 352
Cash paid to suppliers and employees (554,098) (699,748)
Interest paid (1,337) (1,626)
Income taxes paid (10,222) (12,249)
--------- ---------
Net cash provided by operating activities 18,833 5,287
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,102) (6,371)
Proceeds from sale of assets 219 1,255
Decrease (increase) in investments and
long-term receivable
188 (381)
Intangible assets acquired (4,410) (3,124)
--------- ---------
Net cash used in investing activities (9,105) (8,621)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 4,106 6,486
Dividends paid (4,266) (5,292)
Increase (decrease) in cash overdraft 3,269 6,685
Increase (decrease) in notes payable 482 99
Long-term borrowings 23,662 52,126
Repayments of long-term borrowings (37,050) (56,803)
--------- ---------
Net cash (used in) provided by financing
activities (9,797) 3,301
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
(69) (33)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,567 1,783
--------- ---------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,498 $ 1,750
--------- ---------
--------- ---------
</TABLE>
(Continued)
5
<PAGE>
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND 1998
(In thousands)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 10,689 $ 12,840
Adjustments:
Depreciation and amortization 7,614 9,527
Provision for bad debts 880 1,508
Gain on sale of assets (13) (108)
Deferred income taxes (2,610) (1,556)
Decrease (increase) in accounts receivable (5,040) (7,212)
Increase in inventories (3,306) (1,088)
Increase in prepaid expenses and other
current assets (2,019) (3,462)
Decrease in other assets 402 411
Increase in income taxes payable 129 (1,584)
Increase in retirement plans accrual 2,288 1,537
Increase (decrease) in insurance claims
liability
3,817 (292)
Increase in accounts payable and
other accrued liabilities
6,002 (5,234)
--------- ---------
Total Adjustments to net income 8,144 (7,553)
--------- ---------
Net Cash Provided by Operating Activities $ 18,833 $ 5,287
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
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 April 30, 1998, and the
results of operations and cash flows for the six 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 10K 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>
Six months Ended Six months Ended
April 30, 1997 April 30, 1998
---------------- ----------------
<S> <C> <C>
Net Income $ 10,689,000 $ 12,840,000
Preferred Stock Dividends (256,000) (256,000)
------------ ------------
$ 10,433,000 $ 12,584,000
------------ ------------
------------ ------------
Common shares outstanding - basic 19,985,000 20,818,000
Effect of dilutive securities:
Stock options 1,174,000 2,039,000
Other 348,000 199,000
------------ ------------
Common shares outstanding - diluted 21,507,000 23,056,000
------------ ------------
------------ ------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three months Ended Three months Ended
April 30, 1997 April 30, 1998
------------------ ------------------
<S> <C> <C>
Net Income $ 5,849,000 $ 7,105,000
Preferred Stock Dividends (128,000) (128,000)
----------- -----------
$ 5,721,000 $ 6,977,000
----------- -----------
----------- -----------
Common shares outstanding - basic 20,412,000 20,996,000
Effect of dilutive securities:
Stock options 1,186,000 2,035,000
Other 348,000 199,000
----------- -----------
Common shares outstanding - diluted 21,598,000 23,030,000
----------- -----------
----------- -----------
</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
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Funds 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 funds 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 April 30, 1998, the total amount outstanding was
approximately $101.0 million, which was comprised of loans in the amount of
$30.0 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 February
15, 1997 through February 15, 2003. The Company's effective interest rate
for all long term debt for the six months ended April 30, 1998 was 6.99%.
At April 30, 1998, working capital was $146.8 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
<PAGE>
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 has identified the accounting software it uses which is not
year 2000 compliant, and has begun its effort to coordinate the
identification, evaluation, and implementation of changes to its computer
systems and applications necessary to achieve year 2000 compliance. A study
is underway to determine the other areas of the Company's business that could
be affected, including the possible impact of the failure of the Company's
customers and suppliers to be year 2000 compliant. The total cost of
compliance and its effect on the Company's financial condition and future
results of operations have not been determined.
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 second quarter which end on October 31 and April
30, respectively.
THREE MONTHS ENDED APRIL 30, 1998 VS. THREE MONTHS ENDED APRIL 30, 1997
Revenues and other income (hereafter called revenues) for the first
three months of 1998 were $369.0 million compared to $294.3 million in
10
<PAGE>
1997, a 25% 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 April 30, 1998, the increase in
revenues relating to acquisitions made during 1997 was approximately $42.5
million, or 57% of the total revenue increase of $74.7 million.
As a percentage of revenues, operating expenses and cost of goods sold
were 86.9% for the second quarter of 1998, compared to 86.1% in 1997.
Consequently, as a percentage of revenues, the Company's gross profit
(revenue minus operating expenses and cost of goods sold) of 13.1% in the
second quarter of 1998 was lower than the gross profit of 13.9% for the
second quarter of 1997. The gross profit percentage declined mostly due to
higher labor and related costs. The Company expects these costs to be
gradually recovered through price increases.
Selling, general and administrative expenses for the second quarter of
1998 were $35.3 million compared to $30.4 million for the corresponding three
months of 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 10.3% for the three months ended April
30, 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 $4.9 million increase in selling, general and administrative expenses for
the three months ended April 30, 1998, compared to the same period in 1997,
is primarily due to expenses related to growth, the move of corporate
offices, and expenses associated with acquisitions.
Interest expense was $1,016,000 for the second quarter of 1998 compared
to $542,000 for the same period in 1997, an increase of $474,000. This
increase was primarily due to higher weighted average borrowings during the
second quarter of 1998, which were needed to fund acquisitions and working
capital.
The pre-tax income for the second quarter of 1998 was $12,146,000
compared to $10,085,000, an increase of 20% over the same quarter of 1997.
The growth in pre-tax income did not keep pace with revenue growth for the
current quarter of 1998 due to lower gross profit.
The estimated effective income tax rate for the second quarter of 1998
was 41.5%, compared to 42% in the second quarter of 1997. The lower tax rate
was for the most part attributed to an increase in various federal and state
tax credits.
As a result, net income for the second quarter of 1998 was $7.1 million an
increase of 21%, compared to the net income of $5.8 million for the second
quarter of 1997. Diluted net income per common share rose 15% to 30 cents for
the second quarter of 1998 compared to 26 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 an 8% increase in diluted shares outstanding.
11
<PAGE>
The results of operations from the Company's three industry segments and
its nine operating Divisions for the three months ended April 30, 1998, as
compared to the three months ended April 30, 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 second quarter of 1998 of $217.5 million,
an increase of approximately $52.7 million, or 32% over the second quarter of
1997. This segment's operating profits (revenue minus expenses, excluding
interest and corporate allocations) increased by 21% 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 32% during the second
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 21% when compared to the
same period last year. The increase in operating profits is principally due
to increased sales. Operating profit increased at a slower rate than
revenues due primarily to higher labor costs that resulted in lower margins
on accounts acquired through recent acquisitions. EASTERDAY JANITORIAL
SUPPLY'S 1998 second quarter revenue increased by approximately 19% compared
to the same quarter in 1997 generally due to strong sales in the Los Angeles,
Portland, and Houston markets. The increase of 3% in operating profits was
achieved because of higher sales, but at a lower gross profit percentage,
mostly related to an increase in the cost of materials sold.
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 second
quarter of 1998 were approximately $64.7 million, an 11% increase over the
same quarter of 1997. Public Service Divisions accounted for approximately
18% of the Company's revenues for the quarter. The operating profits of this
segment increased 10% in the second 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 decrease in revenues of 1%, but its operating profits
were up by 18% in the second 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 profit was primarily due to a reduction in insurance
charges and slightly lower labor costs. AMPCO SYSTEM PARKING revenues
increased by 17%, while its operating profits increased 18% during the second
quarter of 1998 compared to the second quarter of 1997. The increase in
revenues was mostly due to growth in its national airport business, as well
as in Texas. The operating profit
12
<PAGE>
increase was due for the most part to the sales increase with slightly higher
profit margins as a result of decreased legal and insurance costs. The
Company's new Division, ABM FACILITY SERVICES, was established 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. Revenue generated by this
Division is generally reported by the respective Division providing services.
Management does not expect this Division to be profitable during the current
year, although management expects sales made by other Divisions under the
auspices of this Division to be profitable.
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 $86.7 million, which represents
approximately 23% of the Company's revenues for the second quarter of 1998.
Revenues increased approximately 22% over the same quarter of last year due
to increases in revenues reported by all its Divisions. Operating profit of
this segment increased 6% compared to the second quarter of 1997 due to
increases in operating profits of its Elevator and Lighting Divisions, offset
by decreases in its CommAir Mechanical and Engineering Divisions. ABM
ENGINEERING SERVICES' revenues increased by 60% and its operating profits
decreased 1% for the second 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 small percentage decrease in operating profits is
due to lower gross profits on existing jobs due to increased insurance costs
and 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 5% for the second quarter of 1998 over the same quarter
of 1997 largely due to an increased customer base in the maintenance and
repair sector. The Division posted a dramatic 40% increase in operating
profit for the second quarter compared to the corresponding quarter of 1997.
This increase can be attributed primarily to higher profit margin on service
contracts, as well as a reduction in insurance costs. AMTECH LIGHTING
SERVICES reported a 6% revenue increase and operating profits increased by 4%
during the second quarter of 1998 compared to the same quarter of the prior
year. The lower percentage increase in operating profit was primarily due to
increases in selling and administrative expenses. COMMAIR MECHANICAL
SERVICES revenues increased by 14%, resulting primarily from an acquisition
in Southern California during the second quarter of 1997. Operating profits
for the second quarter of 1998 decreased by 41% from the prior year second
quarter as a result of lower profit margins on several large projects, and
weaker service revenues due to unseasonably cool and wet weather in
California. The increase in selling, general and administrative expenses was
also proportionately greater than the increase in revenues.
13
<PAGE>
SIX MONTHS ENDED APRIL 30, 1998 VS. SIX MONTHS ENDED APRIL 30, 1997
Revenues and other income for the first six months of 1998 were $727.8
million compared to $585.9 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 six months ended April 30, 1998, the increase in revenues relating to
acquisitions made during 1997 was approximately $86.5 million or 60% of the
total revenue increase of $141.8 million.
As a percentage of revenues, operating expenses and cost of goods sold
were 87.0% for the first half of 1998, compared to 86.4% in 1997.
Consequently, as a percentage of revenues, the Company's gross profit of
13.0% in the first six months of 1998 was lower than the gross profit of
13.6% for the first six months of 1997. The gross profit percentage declined
mostly due to higher labor and related costs. The Company expects these costs
to be gradually recovered through price increases.
Selling, general and administrative expenses for the first six months of
1998 were $71.0 million compared to $60.4 million for the corresponding six
months of 1997. As a percentage of revenues, selling, general and
administrative expenses decreased slightly, from 10.3% for the six months
ended April 30, 1997, to 9.8% 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, $10.6 million, for the six months ended April 30,
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.
Interest expense was $1,839,000 for the first six months of 1998
compared to $1,141,000 for the same period in 1997, an increase of $698,000.
This increase was primarily due to higher weighted average borrowings during
the first six months of 1998, which were needed to fund acquisitions and
working capital.
The pre-tax income for the first six months of 1998 was $21.9 million
compared to $18.4 million, an increase of 19% over the same period in 1997.
The growth in pre-tax income did not keep pace with revenue growth for the
first half of 1998 due to lower gross profit.
The estimated effective income tax rate for the first six months of 1998
was 41.5%, compared to 42.0% in the first six months of 1997. The lower tax
rate was due for the most part to an increase in various federal and state
tax credits.
14
<PAGE>
As a result, net income for the first six months of 1998 was $12.8
million an increase of 20%, compared to the net income of $10.7 million for
the same period of 1997. Diluted net income per common share rose 15% to 55
cents for the first six months of 1998 compared to 48 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 six months ended April 30, 1998, as
compared to the six months ended April 30, 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 six months of
1998 of $430.6 million, an increase of approximately $100.2 million, or 30%
over the same period of 1997. This segment's operating profits increased by
25% 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 six months. AMERICAN BUILDING MAINTENANCE'S revenues
increased by 31% during the first six months of 1998, as compared to the same
period of 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 26% when compared to the same period last year.
Operating profit increased at a slower rate than revenues due primarily to
lower margin percentages on accounts purchased through recent acquisitions.
EASTERDAY JANITORIAL SUPPLY'S 1998 first six months revenue increased by
approximately 17% compared to the same period in 1997 generally due to strong
sales in the Los Angeles and Houston markets. The increase of 9% in
operating profits was achieved because of higher sales, but at a lower gross
profit percentage, mostly related to increased insurance costs.
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
six months of 1998 were approximately $126.4 million, a 8% 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% in the first six 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 2%, but its profits were up by 17% in the
first six 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
15
<PAGE>
increase in operating profit was primarily due to a reduction in insurance
charges. Price increases compensated for higher wages driven by low
unemployment levels in this division's major markets. AMPCO SYSTEM PARKING
Division's revenues increased by 15%, while its profits increased 24% during
the first six months of 1998 compared to the first six 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 higher profit margins as a result of containment of
management and overhead costs, decreased legal and insurance costs and
increased sales. As reported in the first quarter, 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 six months. The respective Division
providing services generally reports revenue generated by this Division.
Management does not expect this Division to be profitable during the current
year, although management expects sales made by other Divisions under the
auspices of this Division to be profitable.
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 $170.3 million, which represent approximately 24% of the
Company's revenues for the first six months of 1998. This represents an
increase of approximately 23% over the same quarter of last year due to
increases in revenues reported by all its Divisions. Operating profit of
this segment increased 8% compared to the first six months of 1997 due to
increases in operating profits of its Elevator and Engineering Divisions,
offset by decreases in its CommAir Mechanical and Lighting Divisions. ABM
ENGINEERING SERVICES' revenues increased by 54% and its operating profits
increased 4% for the first six 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 small percentage decrease in operating profits is
due to lower gross profits on existing jobs due to increased insurance costs
and 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 9% for the first six 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 43% increase in operating profit for
the first six months compared to the corresponding period of 1997. This
increase in profits can be attributed primarily to a higher profit margin on
service contracts and reduction of insurance costs. AMTECH LIGHTING SERVICES
reported a 7% revenue increase due to increased sales in most regions.
Operating profits decreased by 1% during the first six months of 1998
compared to the same period of the prior year primarily due to increases in
selling and administrative expenses due to one time expenses associated with
a computer system upgrade and the relocation of
16
<PAGE>
the division's headquarters. COMMAIR MECHANICAL SERVICES revenues increased
by 15%, resulting primarily from an acquisition in Southern California during
the second quarter of 1997. Operating profits for the first six months of
1998 decreased by 31% from the prior year period as a result of an increase
in selling, general and administrative expenses, unseasonably mild weather,
and a decline in the operating profit for the Los Angeles branch.
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 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, and (11) 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.
17
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders.
a) The Annual Meeting of Stockholders was held on
March 17, 1998.
b) The following directors nominated by management were elected by a vote
of stockholders: Luke S. Helms, Henry L. Kotkins, Jr., and William E. Walsh.
The following directors remained in office: Maryellen B. Cattani, Esq., John F.
Egan, Charles T. Horngren, Linda Chavez, Martinn H. Mandles, Theodore Rosenberg
and William W. Steele.
c) Proposal 1 - Election of Directors
<TABLE>
<CAPTION>
Against
or Broker
Nominee: For Withheld Abstentions Nonvotes
<S> <C> <C> <C> <C>
Luke S. Helms 17,111,584 25,663 0 0
Henry L. Kotkins, Jr. 17,113,364 23,883 0 0
William E. Walsh 17,097,460 39,787 0 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 27.1 - Financial Data Schedule
Exhibit 27.2 - Financial Data Schedule
Exhibit 27.3 - Financial Data Schedule
(b) Reports on Form 8-K: ABM Industries Incorporated filed a Current
Report on Form 8-K, dated March 17, 1998, relating to the approval by
the board of directors of a replacement stockholders rights plan, and
the declaration of a dividend of one right for each share of common
stock outstanding at the close of business on April 22, 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
June 12, 1998 /s/ David H. Hebble
- -------------- ------------------------------------
Vice President, Principal
Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<CASH> 1,750
<SECURITIES> 0
<RECEIVABLES> 240,168
<ALLOWANCES> 0
<INVENTORY> 22,285
<CURRENT-ASSETS> 303,128
<PP&E> 75,851
<DEPRECIATION> 49,297
<TOTAL-ASSETS> 479,068
<CURRENT-LIABILITIES> 156,357
<BONDS> 0
0
6,400
<COMMON> 254
<OTHER-SE> 212,941
<TOTAL-LIABILITY-AND-EQUITY> 479,068
<SALES> 727,781
<TOTAL-REVENUES> 727,781
<CGS> 633,022
<TOTAL-COSTS> 633,022
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,839
<INCOME-PRETAX> 21,949
<INCOME-TAX> 9,109
<INCOME-CONTINUING> 12,840
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,840
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.58
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1997 OCT-31-1997 OCT-31-1997
<PERIOD-END> OCT-31-1997 JAN-31-1997 APR-30-1997 JUL-31-1997
<CASH> 1,783 6,361 1,498 1,665
<SECURITIES> 0 0 0 0
<RECEIVABLES> 240,387 185,352 191,300 197,562
<ALLOWANCES> 5,923 0 0 0
<INVENTORY> 21,197 19,207 20,134 19,772
<CURRENT-ASSETS> 294,417 244,349 248,582 253,757
<PP&E> 72,518 64,072 65,660 68,799
<DEPRECIATION> 45,934 41,445 42,256 44,085
<TOTAL-ASSETS> 467,152 294,892 402,343 409,469
<CURRENT-LIABILITIES> 156,660 121,622 125,485 120,200
<BONDS> 38,402 0 0 0
0 0 0 0
6,400 6,400 6,400 6,400
<COMMON> 205 200 201 203
<OTHER-SE> 197,608 174,883 180,721 188,303
<TOTAL-LIABILITY-AND-EQUITY> 467,152 394,892 402,343 409,469
<SALES> 1,252,472 291,638 585,947 894,418
<TOTAL-REVENUES> 1,252,472 291,638 585,947 894,418
<CGS> 1,076,078 252,751 506,006 770,744
<TOTAL-COSTS> 1,076,078 252,751 506,006 770,744
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 2,968 0 0 0
<INTEREST-EXPENSE> 2,675 897 1,693 2,667
<INCOME-PRETAX> 46,964 8,345 18,430 31,336
<INCOME-TAX> 19,725 3,505 7,741 13,161
<INCOME-CONTINUING> 27,239 4,840 10,689 18,175
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 27,239 4,840 10,689 18,175
<EPS-PRIMARY> 1.33 0.24 0.52 0.89
<EPS-DILUTED> 1.22 0.22 0.48 0.82
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 1,567
<SECURITIES> 0
<RECEIVABLES> 183,716
<ALLOWANCES> 4,442
<INVENTORY> 16,492
<CURRENT-ASSETS> 233,755
<PP&E> 62,601
<DEPRECIATION> 40,031
<TOTAL-ASSETS> 379,770
<CURRENT-LIABILITIES> 113,798
<BONDS> 0
0
6,400
<COMMON> 195
<OTHER-SE> 164,098
<TOTAL-LIABILITY-AND-EQUITY> 379,770
<SALES> 1,086,925
<TOTAL-REVENUES> 1,086,925
<CGS> 940,296
<TOTAL-COSTS> 940,296
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,039
<INTEREST-EXPENSE> 2,581
<INCOME-PRETAX> 38,105
<INCOME-TAX> 16,385
<INCOME-CONTINUING> 21,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,720
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.05
</TABLE>
