<PAGE> 1
UNITED STATES
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, 1999
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)
<TABLE>
<S> <C>
DELAWARE 94-1369354
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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
June 1, 1999: 22,125,574
<PAGE> 2
ABM INDUSTRIES INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
- ------ ----
<S> <C>
Item 1 Condensed Consolidated Financial Statements...........................2
Notes to the Condensed Consolidated
Financial Statements................................................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................9
Item 3 Qualitative and Quantitative Disclosures
About Market Risk...................................................20
PART II
- -------
Item 4 Submission of Matters to a Vote of Stockholders......................20
Item 6 Exhibits and Reports on Form 8-K.....................................22
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
OCTOBER 31, APRIL 30,
ASSETS: 1998 1999
- ----------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,844 $ 1,878
Accounts receivable, net 260,549 267,827
Inventories 22,965 22,709
Deferred income taxes 10,505 13,570
Prepaid expenses and other current assets 28,445 30,160
- ----------------------------------------------------------------------------------------
Total current assets 324,308 336,144
- ----------------------------------------------------------------------------------------
INVESTMENTS AND LONG-TERM RECEIVABLES 12,405 13,464
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and buildings 4,802 4,487
Transportation equipment 11,633 12,919
Machinery and other equipment 51,528 57,410
Leasehold improvements 13,096 14,229
- ----------------------------------------------------------------------------------------
81,059 89,045
Less accumulated depreciation and amortization 53,752 58,540
- ----------------------------------------------------------------------------------------
Property, plant and equipment, net 27,307 30,505
- ----------------------------------------------------------------------------------------
INTANGIBLE ASSETS - NET 102,776 106,049
DEFERRED INCOME TAXES 27,509 28,269
OTHER ASSETS 7,058 7,928
- ----------------------------------------------------------------------------------------
$501,363 $522,359
========================================================================================
</TABLE>
(Continued)
2
<PAGE> 4
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
OCTOBER 31, APRIL 30,
LIABILITIES AND STOCKHOLDERS' EQUITY: 1998 1999
- --------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 865 $ 920
Bank overdraft 2,475 15,203
Trade accounts payable 34,992 34,904
Income taxes payable 5,527 7,551
Accrued Liabilities:
Compensation 40,914 41,741
Taxes - other than income 15,887 15,504
Insurance claims 29,254 29,380
Other 27,910 31,824
- --------------------------------------------------------------------------------------
Total current liabilities 157,824 177,027
Long-Term Debt (less current portion) 33,720 14,949
Retirement plans 15,974 17,786
Insurance claims 49,911 50,323
- --------------------------------------------------------------------------------------
Total Liabilities 257,429 260,085
- --------------------------------------------------------------------------------------
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,
100,000,000 shares authorized;
21,601,000 and 22,067,000 shares
issued and outstanding at October 31, 1998 216 221
and April 30, 1999, respectively
Additional capital 79,904 89,381
Retained earnings 157,414 166,272
- --------------------------------------------------------------------------------------
Total stockholders' equity 237,534 255,874
- --------------------------------------------------------------------------------------
$501,363 $522,359
======================================================================================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 5
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
1998 1999 1998 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES AND OTHER INCOME $369,034 $398,291 $727,781 $790,122
EXPENSES:
Operating Expenses and Cost of Goods Sold 320,528 348,063 633,022 689,739
Selling, General and Administrative 35,344 35,582 70,971 73,371
Interest 1,016 466 1,839 1,020
- ---------------------------------------------------------------------------------------------------------------
Total Expenses 356,888 384,111 705,832 764,130
- ---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 12,146 14,180 21,949 25,992
INCOME TAXES 5,041 5,814 9,109 10,657
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,105 $ 8,366 $ 12,840 $ 15,335
===============================================================================================================
NET INCOME PER COMMON SHARE
Basic $ 0.33 $ 0.37 $ 0.60 $ 0.69
Diluted $ 0.30 $ 0.35 $ 0.55 $ 0.64
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 20,996 21,963 20,818 21,840
Diluted 23,230 23,701 23,056 23,717
DIVIDENDS PER COMMON SHARE $ 0.12 $ 0.14 $ 0.24 $ 0.28
</TABLE>
4
<PAGE> 6
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1998 AND 1999
(In thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1999
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 717,976 $ 782,211
Other operating cash receipts 582 1,234
Interest received 352 388
Cash paid to suppliers and employees (699,748) (749,576)
Interest paid (1,626) (1,245)
Income taxes paid (12,249) (12,458)
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,287 20,554
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (6,371) (9,038)
Proceeds from sale of assets 1,255 585
Increase in investments and
long-term receivable (381) (1,059)
Intangible assets acquired (3,124) (6,561)
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (8,621) (16,073)
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 6,486 8,018
Dividends paid (5,292) (6,473)
Increase in cash overdraft 6,685 12,724
Increase in notes payable 99 55
Long-term borrowings 52,126 8,008
Repayments of long-term borrowings (56,803) (26,779)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 3,301 (4,447)
- ---------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (33) 34
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,783 1,844
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,750 $ 1,878
=============================================================================================
</TABLE>
(Continued)
5
<PAGE> 7
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1998 AND 1999
(In thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 12,840 $ 15,335
Adjustments:
Depreciation and amortization 9,527 10,049
Provision for bad debts 1,508 1,101
Gain on sale of assets (108) (42)
Deferred income taxes (1,556) (3,825)
Increase in accounts receivable (7,212) (8,379)
Decrease (increase) in inventories (1,088) 256
Increase in prepaid expenses and other
current assets (3,462) (1,715)
Decrease (increase) in other assets 411 (870)
Increase (decrease) in income taxes payable (1,584) 2,024
Increase in retirement plans accrual 1,537 1,812
Increase (decrease) in insurance claims
liability (292) 538
Increase in accounts payable and other
accrued liabilities (5,234) 4,270
- ---------------------------------------------------------------------------------------------------
Total Adjustments to net income (7,553) 5,219
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 5,287 $ 20,554
===================================================================================================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
<PAGE> 8
ABM INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all material adjustments which are
necessary to present fairly the Company's financial position as of April 30,
1999, and the results of operations and cash flows for the six months then
ended. These adjustments are of a normal, recurring nature.
These condensed 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,
1998 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.
<TABLE>
<CAPTION>
Six months Ended Six months Ended
April 30, 1998 April 30, 1999
---------------- ----------------
<S> <C> <C>
Net Income $ 12,840,000 $ 15,335,000
Preferred Stock Dividends (256,000) (256,000)
------------ ------------
$ 12,584,000 $ 15,079,000
============ ============
Common shares outstanding - basic 20,818,000 21,840,000
Effect of dilutive securities:
Stock options 2,039,000 1,735,000
Other 199,000 142,000
------------ ------------
Common shares outstanding - diluted 23,056,000 23,717,000
============ ============
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
Three months Ended Three months Ended
April 30, 1998 April 30, 1999
------------------ ------------------
<S> <C> <C>
Net Income $ 7,105,000 $ 8,366,000
Preferred Stock Dividends (128,000) (128,000)
------------ ------------
$ 6,977,000 $ 8,238,000
============ ============
Common shares outstanding - basic 20,996,000 21,963,000
Effect of dilutive securities:
Stock options 2,035,000 1,601,000
Other 199,000 137,000
------------ ------------
Common shares outstanding - diluted 23,230,000 23,701,000
============ ============
</TABLE>
For purposes of computing diluted net income per common share, weighted
average common share equivalents do not include stock options with an exercise
price that exceeds the average fair market value of the Company's common stock
for the period. On April 30, 1999, options to purchase approximately 1,100,200
shares of common stock at a weighted average exercise price of $31.77 were
outstanding, but were excluded from the computation because the options'
exercise price was greater than the average market price of the common shares.
At April 30, 1998, no options were excluded from the computation of diluted net
income per common share since the average fair market value of the Company's
common stock for the period exceeded the exercise price of all outstanding stock
options.
3. ACQUISITIONS
During the six months ended April 30, 1999 the Company completed three
business combinations that were accounted for under the purchase method of
accounting. The consolidated financial statements include the results of these
acquired entities from their respective dates of acquisition. The aggregate
consideration paid for these acquisitions consisted of $3,386,000 cash. The
aggregate purchase price does not include payments of contingent consideration
based upon the results of operations of the businesses acquired.
The total purchase price was allocated to the fair value of the net assets
acquired resulting in goodwill of approximately $2,156,000.
8
<PAGE> 10
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, 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, 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, 1999, the total amount outstanding
was approximately $76 million, which was comprised of loans in the amount of $12
million and standby letters of credit of $64 million. This agreement requires
the Company to meet certain financial ratios, places some limitations on outside
borrowing and prohibits declaring or paying cash dividends exceeding 50% of the
Company's net income for any fiscal year. In February 1996, the Company entered
into a loan agreement with a major U.S. bank that 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
borrowings for the six months ended April 30, 1999 was 6.37%.
At April 30, 1999, working capital was $159.1 million, as compared to
$166.5 million at October 31, 1998.
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.
9
<PAGE> 11
These laws 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 potential
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 in Washington; 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 Year 2000 Issue is the result of computer programs being written and
embedded chips being designed that use two digits rather than four digits to
define the applicable year. As a result, there is a potential that existing
computer programs and hardware will be unable to accurately process dates beyond
the year 1999. This could result in system errors or failures that could impact
both administration and operations. In mid-1997, the Company established a
dedicated Project Team that has initiated a Company-wide effort to mitigate the
Year 2000 Issue. The Project Team has developed a detailed plan for becoming
Year 2000 compliant that consists of the following seven phases: awareness,
inventory, risk assessment, remediation, testing, implementation, and
certification. The Year 2000 Issue encompasses both information technology
("IT") related systems, such as the Company's accounting software, and non-IT
related systems such as the impact to the Company due to the non-compliance of
major vendors or customers.
The Company is striving to make all levels of management within the Company
cognizant of the Year 2000 Issue via quarterly newsletters. This newsletter
provides Year 2000 progress updates to management, who are then able to
communicate with customers, vendors, and other third parties. Additionally, the
Year 2000 Project Team maintains a discussion database that is available to
managers within the Company for their review and input.
The Project Team has completed a Company-wide inventory of all office
10
<PAGE> 12
equipment, software, hardware, and any product, equipment, service or system
that could be impacted by the Year 2000 Issue. This inventory has provided a
basis for identifying and prioritizing risk associated with the equipment,
hardware, software, and services that the Company utilizes. The Project Team has
attempted to assess all relevant issues and has developed a process to assess
all new products and services introduced subsequent to the initial inventory.
The inventory process was completed in April 1999.
The Project Team is in testing phases for its core application programs.
All proprietary software, such as its accounting programs, service dispatch
systems, and labor control systems, has been fully remediated and tested.
Mission-critical proprietary applications, such as the accounting and payroll
programs, have also been tested and certified to be Year 2000 compliant by an
outside vendor using a second generation code inspection tool. These Year 2000
compliant applications are currently being implemented. The implementation will
be completed by July 1999.
Six Divisions use the Company's proprietary accounting software, which
is internally maintained. The Elevator, Lighting and Mechanical Divisions use
software purchased from outside vendors. The financial software used by the
Elevator Division has been tested and reviewed by the Company and outside
consultants. The Supply Division's inventory control system and the Lighting
Division's financial applications are currently being tested for compliance. The
Mechanical Division will be replacing its accounting and dispatching software
with a Year 2000 compliant system. The new software is in the final testing
phase, and is anticipated to be installed by July 1999.
The Project Team has identified vendors that represent 80 percent of the
Company's total purchases, and in October 1998, began surveying these vendors to
identify their plans to address the Year 2000 Issue. This process was completed
in March 1999.
All vendors with mission-critical IT-related products or services are being
tested as mentioned above. The Company is amending its vendor selection process,
as needed, to minimize potential vendor-related Year 2000 risks.
The Company has remediated and is testing Company-owned equipment and
software that could have an impact on operations, and indirectly the Company's
customers. The Company believes that appropriate steps are being taken to
minimize potential risk to its customers; however, there is a concern that
customer-owned equipment may not be Year 2000 compliant, which could adversely
impact the Company's operational performance. Additionally, there may be a
possible misconception among some customers that ABM is responsible for all Year
2000 Issues. The Company sent an informational letter to all major customers
informing them of potential issues that could
11
<PAGE> 13
arise from the Year 2000 Issue; additionally, this letter is intended to state
the Company's position regarding Year 2000 Issues. 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.
Based upon assumptions and forecasts of management at this time, the
Company estimates the cost of becoming Year 2000 compliant to be approximately
$3.0 million, funded by operating cash flows. The Company believes it is making
the necessary modifications and changes to mitigate the Year 2000 Issue.
However, 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 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 is
establishing contingency plans for all its major IT systems, field office
locations, and largest accounts, in case of unexpected Year 2000 failures. As
part of its contingency plans, the Company intends to prepare process manuals
that will document the necessary procedures in the event of IT-related failures,
such as hardware or software applications, as well as non-IT failures. These
procedures will be tested to be certain that the procedures are viable
alternatives in the case of a Year 2000 disruption. These manuals will be
distributed to all offices of the Company for its coordinated preparation for
Year 2000. The Company anticipates having the contingency plan in place by
August 1999.
ACQUISITIONS
The operating results of businesses acquired have been included in the
accompanying condensed consolidated financial statements from their respective
dates of acquisition.
Effective February 1, 1999, the Company acquired the operations and
selected assets of VIP Valet Parking, with customers located in Austin and
Houston, Texas. The terms for the purchase of this acquisition were a cash
downpayment made at closing plus annual contingent payments based on operating
profits to be made over five years.
Effective April 1, 1999, the Company acquired the operations and
selected assets of Commercial Landscaping Services, with operations located in
the Carolinas and Tennessee. The terms for the purchase of this acquisition were
a cash downpayment made at closing plus annual contingent payments based on
operating profits to be made over five years.
Effective April 1, 1999, the Company acquired the operations and
selected assets of Integra Services Corporation, with customers located in
12
<PAGE> 14
Des Moines, Iowa. The terms for the purchase of this acquisition were a cash
downpayment made at closing plus annual contingent payments based on operating
profits to be made over five years.
These three business combinations were accounted for under the purchase
method of accounting. The aggregate consideration paid for these acquisitions
consisted of $3,386,000. The aggregate purchase price does not include payments
of contingent consideration based upon the results of operations of the
businesses acquired.
Effective May 1, 1999, the Company acquired the operations and stock of
Masterclean Systems, Inc., with customers located in Louisville, Kentucky, and
Master-Klean, Inc. with customers in Indianapolis, Indiana. The terms for the
purchase of these acquisitions were a cash downpayment made at closing plus
annual contingent payments based on operating profits to be made over five
years.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
condensed 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, 1999 VS. THREE MONTHS ENDED APRIL 30, 1998
Revenues and other income (hereafter called revenues) for the second
quarter of 1999 were $398.3 million compared to $369.0 million in 1998, a 7.9%
increase over the same quarter of the prior year. Much of this growth was
attributable to new business and price increases, particularly by the Janitorial
and Engineering Divisions, as well as acquisitions made during 1998. For the
quarter ended April 30, 1999, the increase in revenues relating to acquisitions
made during 1998 was approximately $3.5 million, approximately 11.9% of the
total revenue increase of $29.3 million.
As a percentage of revenues, operating expenses and cost of goods sold
were 87.4% for the second quarter of 1999, compared to 86.9% in 1998.
Consequently, as a percentage of revenues, the Company's gross profit (revenue
minus operating expenses and cost of goods sold) of 12.6% in the second quarter
of 1999 was lower than the gross profit of 13.1% for the second quarter of 1998.
The gross profit percentage declined mostly due to
13
<PAGE> 15
higher labor and related costs. The Company expects these costs to be gradually
recovered through future price increases.
Selling, general and administrative expenses for the second quarter of
1999 were $35.6 million compared to $35.3 million for the corresponding three
months of 1998. As a percentage of revenues, selling, general and administrative
expenses decreased to 8.9% for the three months ended April 30, 1999, from 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 revenues. The $238,000 increase in
selling, general and administrative expenses for the three months ended April
30, 1999, compared to the same period in 1998, is primarily due to expenses
related to growth, including the amortization of goodwill, and data processing
expenses associated with the installation of a new enterprise resource plan.
Interest expense was $466,000 for the second quarter of 1999 compared to
$1,016,000 for the same period in 1998, a decrease of $550,000. This decrease
was due to lower weighted average borrowings during the second quarter of 1999.
The pre-tax income for the second quarter of 1999 was $14,180,000
compared to $12,146,000, an increase of 16.7% over the same quarter of 1998. All
but two of the Company's Divisions reported profit percentage increases and are
discussed below.
The estimated effective income tax rate for the second quarter of 1999
was 41.0%, compared to 41.5% in the second quarter of 1998. The lower tax rate
was for the most part attributable to an increase in various federal and state
estimated tax credits.
Net income for the second quarter of 1999 was $8,366,000 an increase of
17.7% compared to the net income of $7,105,000 for the second quarter of 1998.
Diluted net income per common share rose 16.7% to 35 cents for the second
quarter of 1999 compared to 30 cents for the same period in 1998. The increase
in diluted net income per share was slightly disproportional to the increase in
net income due to a 2.0% 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 April 30, 1999, as
compared to the three months ended April 30, 1998, 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 1999 of $235.9 million, an
increase of approximately $18.5 million, or 8.5%, over
14
<PAGE> 16
the second quarter of 1998. This segment's operating profits (revenues minus
expenses, excluding interest and corporate allocations) increased by 3.1% over
the comparable quarter of 1998. 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 8.9% during the
second quarter of 1999 as compared to the same quarter of 1998 as a result of
increased business nationwide but particularly in the Mid-Atlantic, Southeast,
Southwest and Texas regions. This Division's operating profits increased 3.1%
when compared to the same period last year. The increase in operating profits is
principally due to increased revenues. Operating profits increased at a slightly
lower rate than revenues due primarily to slightly higher labor costs. Easterday
Janitorial Supply's 1999 second quarter revenues decreased by approximately 3.5%
compared to the same quarter in 1998. The relatively small decrease was
generally due to weak sales in the Portland, and San Francisco markets.
Operating profits remained basically flat in the second quarter of 1999,
compared to the same quarter of 1998. Vendor rebates and higher profit margins
offset the effect of lower revenues.
Revenues of the Public Service Divisions segment, which includes
American Commercial Security Services (also known as "ACSS" and "ABM Security
Services"), Ampco System Parking (also known as "Ampco System Airport Parking"
and "Ampco Express Airport Parking"), and ABM Facility Services, for the second
quarter of 1999 were approximately $66.8 million, a 3.3% increase over the same
quarter of 1998. Public Service Divisions accounted for approximately 17% of the
Company's revenues for the second quarter of 1999. The operating profits of this
segment decreased 1.3% in the second quarter of 1999, due to the Security
Division. American Commercial Security Services reported a 4.9% increase in
revenues, but its operating profits were down by 37.0% in the second quarter of
1999 compared to the same period of 1998. The revenue increase was largely due
to the sale of new business by its Phoenix, New Orleans, Southern California and
Texas offices. The decrease in operating profits was primarily due to higher
labor and related costs. Ampco System Parking's revenues increased by 1.3%,
while its operating profits increased 15.9% during the second quarter of 1999
compared to the second quarter of 1998. The increase in revenues was primarily
due to growth in its California and Texas operations. The operating profits
increase was due to the increased sales of higher margin management contracts.
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.
15
<PAGE> 17
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 $95.3 million, which
represents approximately 24% of the Company's revenues for the second quarter of
1999. Revenues increased approximately 10.0% over the same quarter of last year
due to increases in revenues reported by all its Divisions. Operating profits of
this segment increased 3.6% compared to the second quarter of 1998 due to
increases in operating profits in all of its Divisions except Amtech Lighting.
ABM Engineering Services' revenues increased by 14.4% and its operating profits
increased 5.8% for the second quarter of 1999 compared to the same period in
1998. The revenue increase was due primarily to new business sold in all its
operations with particularly strong sales growth in its newer offices in Chicago
and Arizona as well as Southern California. The smaller percentage increase in
operating profits is due to lower margins on contracts in its New York office.
In addition, profit margins in California have declined due to increased
competition. Revenues for Amtech Elevator Services increased by 5.9% compared to
the same period in 1998 primarily due to an increase in maintenance contract and
modernization sales. As a result of higher sales, the Division posted a 3.5%
increase in operating profit for the second quarter compared to the
corresponding quarter of 1998. Amtech Lighting Services reported a 6.2% revenue
increase, but operating profits decreased by 12.0% during the second quarter of
1999 compared to the same quarter of the prior year. The decrease in operating
profits was primarily due to increased labor and related costs. CommAir
Mechanical Services' (also known as "CommAir Preferred Mechanical Services")
revenues increased by 12.4%, resulting primarily from increased business in
nearly all of its branches. Operating profits for the second quarter of 1999
more than doubled from the prior year second quarter as a result of lower
administrative labor and related costs.
SIX MONTHS ENDED APRIL 30, 1999 VS. SIX MONTHS ENDED APRIL 30, 1998
Revenues and other income for the first six months of 1999 were $790.1
million compared to $727.8 million in 1998, an 8.6% increase over the same
period of the prior year. Much of this growth was attributable to new business
and price increases, as well as acquisitions made during 1998. For the six
months ended April 30, 1999, the increase in revenues relating to acquisitions
made during 1998 was approximately $7.0 million or 11.2% of the total revenue
increase of $62.3 million.
As a percentage of revenues, operating expenses and cost of goods sold
were 87.3% for the first half of 1999, compared to 87.0% in 1998. Consequently,
as a percentage of revenues, the Company's gross profit of 12.7% in the first
six months of 1999 was lower than the gross profit of
16
<PAGE> 18
13.0% for the first six months of 1998. 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
1999 were $73.4 million compared to $71.0 million for the corresponding six
months of 1998. As a percentage of revenues, selling, general and administrative
expenses decreased slightly, from 9.8% for the six months ended April 30, 1998,
to 9.3% for the same period in 1999, 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, $2.4 million,
for the six months ended April 30, 1999, compared to the same period in 1998, is
primarily due to expenses related to growth and to a somewhat lesser extent
expenses associated with the installation of a new enterprise resource plan.
Interest expense was $1,020,000 for the first six months of 1999
compared to $1,839,000 for the same period in 1998, a decrease of $819,000. This
decrease was primarily due to lower weighted average borrowings during the first
six months of 1999.
The pre-tax income for the first six months of 1999 was $26.0 million
compared to $21.9 million, an increase of 18.7% over the same period in 1998.
The growth in pre-tax income outpaced revenue growth for the first half of 1999
as a result of lower administrative and interest expense.
The estimated effective income tax rate for the first six months of 1999
was 41%, compared to 41.5% in the first six months of 1998. The lower tax rate
was due for the most part to an increase in various federal and state tax
credits.
As a result, net income for the first six months of 1999 was $15.3
million an increase of 19.5%, compared to the net income of $12.8 million for
the same period of 1998. Diluted net income per common share rose 16.4% to 64
cents for the first six months of 1999 compared to 55 cents for the same period
in 1998. The increase in diluted net income per share was not proportional to
the increase in net income due to a 3% increase in the 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, 1999, as
compared to the six months ended April 30, 1998, are more fully described below:
The Janitorial Divisions segment, which includes the operating Divisions
of American Building Maintenance (also known as ABM Janitorial
17
<PAGE> 19
Services) and Easterday Janitorial Supply, reported revenues for the first six
months of 1999 of $469.4 million, an increase of approximately $38.7 million, or
9.0% over the same period of 1998. This segment's operating profits increased by
10.6% over the comparable period of 1998. 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 9.5%
during the first six months of 1999, as compared to the same period of 1998, as
a result of increased sales, particularly in the Mid-Atlantic, Southeast,
Southwest and Texas regions. This Division's operating profits increased 11.0%
when compared to the same period last year due to sales growth. Easterday
Janitorial Supply's 1999 first six months revenue decreased by approximately
3.8% compared to the same period in 1998 generally due to weak sales in the
Portland and San Francisco markets. However, operating profits remained
approximately the same compared to 1998 because higher profit margins and vendor
rebates offset the effect of lower sales.
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 1999 were approximately $132.2 million, a 4.5% increase over the same
period of 1998. Public Service Divisions accounted for approximately 17% of the
Company's revenues. The operating profits of this segment increased 5.5% in the
first six months of 1999 due to Ampco System Parking. American Commercial
Security Services reported an increase in revenues of 6.0%, but its operating
profits were down by 19.0% in the first six months of 1999 compared to the same
period of 1998. The revenue increase was largely due to the sale of new business
by its Phoenix, New Orleans, Southern California and Texas offices. The decrease
in operating profit was primarily due to higher wages driven by low unemployment
levels in this Division's major markets, which were not passed on through price
increases due to competition. Ampco System Parking Division's revenues increased
by 2.1%, while its profits increased 17.0% during the first six months of 1999
compared to the first six months of 1998. The small increase in revenues was
mostly due to growth in its California and Texas regions offset by declines in
its national airport business. The proportionally higher operating profit
increase was due to sales of higher margin management contracts. 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.
18
<PAGE> 20
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 $188.0 million, which represent approximately 24% of the Company's
revenues for the first six months of 1999. This represents an increase of
approximately 10.4% over the same period of last year due to increases in
revenues reported by all its Divisions. Operating profit of this segment
increased 4.3% compared to the first six months of 1998 due to increases in
operating profits of its CommAir Mechanical and Engineering Divisions, offset by
decreases in its Elevator and Lighting Divisions. ABM Engineering Services'
revenues increased by 18.3% and its operating profits increased 10.2% for the
first six months of 1999 compared to the same period in 1998. The large revenue
increase was due primarily to new business in Arizona, California and Chicago.
The increase in operating profits is due to increased sales offset by lower
profit margins. Revenues for Amtech Elevator Services were up by 1.9% for the
first six months of 1999 over the same period of 1998. The Division posted a
2.5% decrease in operating profit for the first six months of 1999 compared to
the corresponding period of 1998. This decrease in profits can be attributed to
slightly higher labor and related costs, as well as an increase in liability
insurance. Amtech Lighting Services reported a 7.8% revenue increase due to
increased sales in most regions. Operating profits decreased by 10.8% during the
first six months of 1999 compared to the same period of the prior year primarily
due to lower margins as a result of competition and slightly higher selling and
administrative labor costs. CommAir Mechanical Services revenues increased by
9.5%, resulting from increased business in nearly all of its branches. Operating
profits for the first six months of 1999 increased by 131.6% compared to the
prior year period as a result of increased sales and lower administrative
expenses.
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. Statements
which use the words "expects," "will," "may," "anticipates," "believes," or
"intends" 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,
19
<PAGE> 21
which could adversely affect the Company's ability to collect deferred costs or
its accounts receivable, (3) 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, (4) the failure of the Company's IT or non-IT systems,
or those of its customers or vendors, to be Year 2000 compliant, (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 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, (11) the inability to
recruit and hire entry level personnel due to labor shortages, 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.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, as such, are not subject to
material foreign currency exchange rate risk. Although the Company has market
risk in interest rate exposure in the United States, outstanding debt and the
related interest expense is currently not material.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders.
a) The Annual Meeting of Stockholders was held on March 16, 1999.
b) The following directors nominated by management were elected by a
vote of stockholders: Maryellen B. Cattani, Esq., John F. Egan, Charles T.
Horngren.
20
<PAGE> 22
The following directors remained in office: Linda Chavez, Luke S. Helms, Henry
L. Kotkins, Jr., Martinn H. Mandles, Theodore Rosenberg, William W. Steele and
William E. Walsh
c) Proposal 1 - Election of Directors
<TABLE>
<CAPTION>
Against
or Broker
Nominee: For Withheld Abstentions Nonvotes
<S> <C> <C> <C> <C>
Maryellen B. Cattani, Esq. 18,044,345 78,980 0 0
John F. Egan. 18,032,706 90,619 0 0
Charles T. Horngren 18,037,076 86,249 0 0
</TABLE>
d) Proposal 2 - Approval of an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Common Stock, par value $.01
per share, that the Company shall have authority to issue from 28,000,000 to
100,000,000.
<TABLE>
<CAPTION>
Against
or Broker
For Withheld Abstentions Nonvotes
<S> <C> <C> <C> <C>
14,341,704 3,720,565 61,056 0
</TABLE>
e) Proposal 3 - Approval of an amendment to the Company's Employee Stock
Purchase Plan adopted in 1985, to increase the number of shares authorized for
issuance thereunder by 1,200,000 shares.
<TABLE>
<CAPTION>
Against
or Broker
For Withheld Abstentions Nonvotes
<S> <C> <C> <C> <C>
14,515,018 1,168,839 230,802 2,208,666
</TABLE>
21
<PAGE> 23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1.1 - Certificate of Amendment of Certificate
of Incorporation dated March 16, 1999
Exhibit 10.46 - Amendment numbers 1, 2 and 3 to the Employee Stock
Purchase Plan (Incorporated by reference to exhibits
99.1, 99.2 and 99.3 to Form S-8 Registration Statement
(File No. 333-78425) filed by the registrant)
Exhibit 27.1 - Financial Data Schedule
(b) Reports on form 8-K: No reports on form 8-K were filed during the
quarter ended April 30, 1999.
22
<PAGE> 24
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 11, 1999 /s/ David H. Hebble
- ------------- -----------------------------------------
Vice President, Principal
Financial Officer
23
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
3.1.1 Certificate of Amendment of Certificate of Incorporation dated
March 16, 1999
10.46 Amendment numbers 1, 2 and 3 to the Employee Stock Purchase
Plan (Incorporated by reference to exhibits 99.1, 99.2 and 99.3
to Form S-8 Registration Statement (File No. 333-78425) filed
by the registrant)
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1.1
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION OF
ABM INDUSTRIES INCORPORATED
The undersigned, William W. Steele and Lorraine P. O'Hara, hereby certify that:
(1) They are the President and Assistant Secretary, respectively of ABM
Industries Incorporated, a Delaware corporation.
(2) The Certificate of Incorporation of this corporation is amended by
deleting paragraph (a) of Article Fifth in its entirety and adding a new
paragraph (a) of Article Fifth to such Certificate, to read as follows:
FIFTH (a) The corporation is authorized to issue two classes of shares to be
designated, respectively, "Preferred Stock" and "Common Stock." The number of
shares of Preferred Stock authorized to be issued Five Hundred Thousand
(500,000) and the number of shares of Common Stock authorized to be issued is
One Hundred Million (100,000,000). The stock, whether Preferred Stock or Common
Stock, shall have a par value of $0.01 per share.
The amendment of the Certificate of Incorporation was duly adopted by the
Board of Directors on December 15, 1998 and by the stockholders of the
corporation on March 16, 1999, in accordance with the provisions of Section 242
of the General Corporation law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seal
this 16th day of March 1999.
ABM INDUSTRIES INCORPORATED
/s/ William W. Steele
By: William W. Steele, President
Attest: /s/ Lorraine P. O'Hara
Lorraine P. O'Hara, Assistant Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> APR-30-1999
<CASH> 1,878
<SECURITIES> 0
<RECEIVABLES> 267,827
<ALLOWANCES> 0
<INVENTORY> 22,709
<CURRENT-ASSETS> 336,144
<PP&E> 89,045
<DEPRECIATION> 58,540
<TOTAL-ASSETS> 522,359
<CURRENT-LIABILITIES> 177,027
<BONDS> 0
0
6,400
<COMMON> 221
<OTHER-SE> 255,653
<TOTAL-LIABILITY-AND-EQUITY> 522,359
<SALES> 790,122
<TOTAL-REVENUES> 790,122
<CGS> 689,739
<TOTAL-COSTS> 689,739
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,020
<INCOME-PRETAX> 25,992
<INCOME-TAX> 10,657
<INCOME-CONTINUING> 15,335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,335
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.64
</TABLE>
