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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 JULY 31, 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
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(Exact name of registrant as specified in its charter)
DELAWARE 94-1369354
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
160 PACIFIC AVENUE SUITE 222, SAN FRANCISCO, CALIFORNIA 94111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 415/733-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock outstanding as of
September 1, 1999: 22,341,226
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ABM INDUSTRIES INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 1999
TABLE OF CONTENTS
PART I PAGE
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 6 Exhibits and Reports on Form 8-K..................................21
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
- ---------------------------------------------------- ------------------ - ------------------
OCTOBER 31, 1998 JULY 31, 1999
ASSETS:
- ---------------------------------------------------- ------------------ - ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,844 $ 2,048
Accounts receivable, net 260,549 283,718
Inventories 22,965 22,383
Deferred income taxes 10,505 14,480
Prepaid expenses and other current assets 28,445 30,565
- ---------------------------------------------------- ---------------- ---- -----------------
Total current assets 324,308 353,194
- ---------------------------------------------------- ---------------- ---- -----------------
INVESTMENTS AND LONG-TERM RECEIVABLES 12,405 14,031
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and buildings 4,802 4,517
Transportation equipment 11,633 13,545
Machinery and other equipment 51,528 60,818
Leasehold improvements 13,096 14,934
- ---------------------------------------------------- ---------------- ---- -----------------
81,059 93,814
Less accumulated depreciation and amortization 53,752 61,078
- ---------------------------------------------------- ---------------- ---- -----------------
Property, plant and equipment, net 27,307 32,736
- ---------------------------------------------------- ---------------- ---- -----------------
INTANGIBLE ASSETS - NET 102,776 105,818
DEFERRED INCOME TAXES 27,509 29,569
OTHER ASSETS 7,058 9,017
- ---------------------------------------------------- ---------------- ---- -----------------
$ 501,363 $ 544,365
==================================================== ================ ==== =================
(Continued)
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
- --------------------------------------------------- ----------------- -- ------------------
OCTOBER 31, 1998 JULY 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY:
- --------------------------------------------------- ----------------- -- ------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 865 $ 891
Bank overdraft 2,475 12,252
Trade accounts payable 34,992 35,462
Income taxes payable 5,527 8,402
Accrued Liabilities:
Compensation 40,914 41,545
Taxes - other than income 15,887 16,850
Insurance claims 29,254 29,605
Other 27,910 31,304
- --------------------------------------------------- ----------------- -- ------------------
Total current liabilities 157,824 176,311
Long-Term Debt (less current portion) 33,720 24,929
Retirement plans 15,974 18,545
Insurance claims 49,911 50,752
- --------------------------------------------------- ----------------- -- ------------------
Total Liabilities 257,429 270,537
- --------------------------------------------------- ----------------- -- ------------------
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 22,265,000 shares
issued and outstanding at October 31, 1998 216 223
and July 31, 1999, respectively
Additional capital 79,904 93,047
Retained earnings 157,414 174,158
- --------------------------------------------------- ----------------- -- ------------------
Total stockholders' equity 237,534 267,428
- --------------------------------------------------- ----------------- -- ------------------
$ 501,363 $ 544,365
=================================================== ================= == ==================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
- ---------------------------------------------------- ------------------------------------ ----------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31 JULY 31
1998 1999 1998 1999
- ---------------------------------------------------- ---------------- -- ---------------- --------------- -- ---------------
REVENUES AND OTHER INCOME $ 381,036 $ 412,689 $1,108,817 $1,202,811
EXPENSES:
Operating Expenses and Cost of Goods Sold 328,744 356,105 961,766 1,045,844
Selling, General and Administrative 35,198 37,214 106,169 110,585
Interest 811 507 2,650 1,527
- ---------------------------------------------------- ---------------- -- ---------------- --------------- -- ---------------
Total Expenses 364,753 393,826 1,070,585 1,157,956
- ---------------------------------------------------- ---------------- -- ---------------- --------------- -- ---------------
INCOME BEFORE INCOME TAXES 16,283 18,863 38,232 44,855
INCOME TAXES 6,757 7,734 15,866 18,391
- ---------------------------------------------------- ---------------- -- ---------------- --------------- -- ---------------
NET INCOME $ 9,526 $ 11,129 $ 22,366 $ 26,464
==================================================== ================ == ================ =============== == ===============
NET INCOME PER COMMON SHARE
Basic $ 0.44 $ 0.50 $ 1.05 $ 1.19
Diluted $ 0.40 $ 0.46 $ 0.95 $ 1.10
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 21,304 22,183 20,980 21,954
Diluted 23,237 23,866 23,116 23,767
DIVIDENDS PER COMMON SHARE $ 0.12 $ 0.14 $ 0.36 $ 0.42
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1999
(In thousands)
- ------------------------------------------------------ ------------------- - -----------------
1998 1999
- ------------------------------------------------------ ----------------- -- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $1,082,151 $1,177,450
Other operating cash receipts 971 1,434
Interest received 484 679
Cash paid to suppliers and employees (1,053,787) (1,135,197)
Interest paid (2,559) (1,695)
Income taxes paid (16,022) (21,551)
- ------------------------------------------------------ ----------------- -- ------------------
Net cash provided by operating activities 11,238 21,120
- ------------------------------------------------------ ----------------- -- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (8,235) (14,184)
Proceeds from sale of assets 395 776
Decrease (increase) in investments and
long-term receivable 10 (1,626)
Intangible assets acquired (7,050) (8,860)
- ------------------------------------------------------ ----------------- -- ------------------
Net cash used in investing activities (14,880) (23,894)
- ------------------------------------------------------ ----------------- -- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 10,314 11,686
Dividends paid (7,988) (9,720)
Increase in cash overdraft 1,895 9,777
Increase in notes payable 145 25
Long-term borrowings 80,172 39,037
Repayments of long-term borrowings (80,864) (47,827)
- ------------------------------------------------------ ----------------- -- ------------------
Net cash provided by financing
activities 3,674 2,978
- ------------------------------------------------------ ----------------- -- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 32 204
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,783 1,844
====================================================== ================= == ==================
CASH AND CASH EQUIVALENTS END OF PERIOD $ 1,815 $ 2,048
====================================================== ================= == ==================
(Continued)
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ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1999
(In thousands)
- ------------------------------------------------------- ----------------- ------------------
1998 1999
- ------------------------------------------------------- ----------------- ------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 22,366 $ 26,464
Adjustments:
Depreciation and amortization 14,395 15,321
Provision for bad debts 2,177 1,772
Gain on sale of assets (155) (60)
Deferred income taxes (1,279) (6,035)
Increase in accounts receivable (23,436) (24,941)
Decrease (increase) in inventories (1,123) 582
Increase in prepaid expenses and other
current assets (3,615) (2,120)
Decrease (increase) in other assets 524 (1,959)
Increase in income taxes payable 1,123 2,875
Increase in retirement plans accrual 2,124 2,571
Increase (decrease) in insurance claims
liability (436) 1,192
Increase(decrease)in accounts payable
and other accrued liabilities (1,427) 5,458
- ------------------------------------------------------- ----------------- ------------------
Total adjustments to net income (11,128) (5,344)
- ------------------------------------------------------- ----------------- ------------------
Net Cash Provided by Operating Activities $ 11,238 $ 21,120
======================================================= ================= ==================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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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 July 31,
1999, and the results of operations and cash flows for the nine 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.
Nine months Ended Nine months Ended
July 31, 1998 July 31, 1999
------------- -------------
Net Income $ 22,366,000 $ 26,464,000
Preferred Stock Dividends (384,000) (384,000)
----------- -----------
$ 21,982,000 $ 26,080,000
========== ============
Common shares outstanding - basic 20,980,000 21,954,000
Effect of dilutive securities:
Stock options 1,937,000 1,718,000
Other 199,000 95,000
-------- ---------
Common shares outstanding - diluted 23,116,000 23,767,000
========== ==========
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Three months Ended Three months Ended
July 31, 1998 July 31, 1999
------------------ ------------------
Net Income $ 9,526,000 $ 11,129,000
Preferred Stock Dividends (128,000) (128,000)
--------- ----------
$ 9,398,000 $ 11,001,000
========= ==========
Common shares outstanding - basic 21,304,000 22,183,000
Effect of dilutive securities:
Stock options 1,734,000 1,546,000
Other 199,000 137,000
-------- --------
Common shares outstanding - diluted 23,237,000 23,866,000
========== ==========
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 July 31, 1999, options to purchase approximately 1,100,000
shares of common stock at a weighted average exercise price of $31.80 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 July 31, 1998, 671,750 shares of common stock at a weighted average exercise
price of $29.80 were outstanding, but were excluded from the computation because
the options' exercise price was greater than the average market price of the
common shares.
3. ACQUISITIONS
During the nine months ended July 31, 1999 the Company completed five
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 $6,469,000 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 $4,163,000, which is being
amortized over ten years.
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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 July 31, 1999, the total amount outstanding
was approximately $86 million, which was comprised of loans in the amount of $22
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 nine months ended July 31, 1999 was 6.58%.
At July 31, 1999, working capital was $176.9 million, as compared to
$166.5 million at October 31, 1998.
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 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
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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 effect 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 eight phases: awareness,
inventory, risk assessment, remediation, testing, implementation, certification,
and contingency planning. 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 continues to inform all levels of management within the Company
of Year 2000 issues by producing and distributing quarterly newsletters. In
turn, the Company's management is able to effectively communicate with third
parties with regard to Year 2000 issues. Additionally, the Project Team
maintains a discussion database that is available to managers within the Company
for their review and input. This database is updated weekly; managers are
notified of the updates via e-mail.
The Project Team has completed a Company-wide inventory of all office
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 inventory and
risk assessment process was completed in April 1999. Non-PC
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related hardware has been remediated and is considered Year 2000 compliant. A
company-wide replacement of PC and related hardware is currently in progress and
will be completed in November 1999. 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 and assessment.
Six Divisions use the Company's proprietary accounting software, which is
internally maintained. Year 2000 compliant versions of this software have been
implemented for these divisions as of August 1999. The Elevator, Lighting,
Supply, and Mechanical Divisions use software purchased from outside vendors.
The financial software used by the Elevator Division has been made Year 2000
compliant. The Supply Division's inventory control system and the Lighting
Division's financial applications were made Year 2000 compliant in August 1999.
The Mechanical Division replaced its accounting and dispatching software with a
Year 2000 compliant system in 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. Based upon the results of these surveys, alternate suppliers have
been identified for all vendors who were found either to be non-compliant,
pending compliance, or who did not respond. Surveys were sent to all lessors to
ensure that facilities, where the Company's employees work, will not be impacted
by Year 2000 issues.
The Company has established contingency plans for all its field office
locations, which includes business continuity plans customized for each
division, employee safety and a disaster recovery plan for the Company's data.
As part of this plan, the Company produced process manuals that document the
necessary procedures in the event of a Year 2000 related failure. These manuals
will be distributed to all offices of the Company for its coordinated
preparation for Year 2000 in October 1999. The anticipated date of final
roll-out of the contingency plans to all offices is November 1999.
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 the Company is responsible for all Year
2000 issues. The Company sent an informational letter to all major customers
informing them of potential issues that could arise from the Year 2000 issue.
There can be no assurance that the systems of other
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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, including internal costs, 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.
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 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.
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.
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Effective July 1, 1999, the Company acquired the operations and selected
assets of Suburban Lighting Company, with customers located in Minnesota and
other parts of the upper Midwest. 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 five business combinations were accounted for under the purchase
method of accounting. The aggregate consideration paid for these acquisitions
consisted of $6,469,000. The aggregate purchase price does not include payments
of contingent consideration based upon the results of operations of the
businesses acquired.
Effective August 1, 1999, the Company acquired the operations and
selected assets of FaciliTech, with customers located in the Minneapolis/St.
Paul metropolitan area of Minnesota. 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.
INTERNAL INVESTIGATION
The Audit Committee of the Board of Directors, comprised of three
outside directors, has been investigating allegations of questionable payments
and related accounting practices in connection with several janitorial service
contracts awarded to one of its building maintenance subsidiaries. These
contracts total less than 5% of the Company's consolidated revenues. Having now
concluded this investigation, the Company does not believe that there have been
any material misstatements in its financial statements for past periods, or that
the matter investigated will have any material impact on its financial condition
or results of operations. However, in an abundance of caution, the Company's
Board of Directors will refer this matter to appropriate government agencies,
with which the Company will fully cooperate.
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 third quarter which end on October 31 and July 31,
respectively.
THREE MONTHS ENDED JULY 31, 1999 VS. THREE MONTHS ENDED JULY 31, 1998
Revenues and other income (hereafter called revenues) for the third
quarter of 1999 were $412.7 million compared to $381.0 million in 1998, an 8.3%
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 July 31, 1999, the increase in revenues relating to acquisitions
made during 1998 was $3.7 million, 11.7% of the total revenue increase of $31.7
million.
As a percentage of revenues, operating expenses and cost of goods sold
were 86.3% for the third quarter of both 1999 and 1998. Consequently, as a
percentage of revenues, the Company's gross profit (revenue minus operating
expenses and cost of goods sold) also remained the same at 13.7% for the third
quarter of 1999 and 1998. Slight increases in labor and related costs were
offset by a number of other expenses.
Selling, general and administrative expenses for the third quarter of
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1999 were $37.2 million compared to $35.2 million for the corresponding three
months of 1998. As a percentage of revenues, selling, general and administrative
expenses decreased to 9.0% for the three months ended July 31, 1999, from 9.2%
for the same period in 1998, primarily as a result of certain fixed and variable
costs that do not increase at the same rate as revenues, and a reduction in
legal costs. The $2.0 million increase in selling, general and administrative
expenses for the three months ended July 31, 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 $0.5 million for the third quarter of 1999 compared
to $0.8 million for the same period in 1998, a decrease of $0.3 million. This
decrease was due to lower weighted average borrowings during the third quarter
of 1999.
The pre-tax income for the third quarter of 1999 was $18.9 million
compared to $16.3 million, an increase of 15.8% over the same quarter of 1998.
The growth in pretax earnings outpaced the 8.3% increase in revenue, as a result
of the lower increase in selling, general and administrative expenses. Five of
the Company's nine Divisions reported profit percentage increases and are
discussed in more detail below.
The estimated effective income tax rate for the third quarter of 1999
was 41.0%, compared to 41.5% in the third 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 third quarter of 1999 was $11.1 million, an increase
of 16.8% compared to the net income of $9.5 million for the third quarter of
1998. Diluted net income per common share rose 15.0% to 46 cents for the third
quarter of 1999 compared to 40 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 2.7% increase in diluted shares outstanding.
The results of operations from the Company's three industry segments and
its nine operating divisions for the three months ended July 31, 1999, as
compared to the three months ended July 31, 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 third quarter of 1999 of $242.1 million, an
increase of $16.2 million, or 7.2%, over the third quarter of 1998. This
segment's operating profits (revenues minus
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expenses, excluding interest and corporate allocations) increased by 14.9% over
the comparable quarter of 1998. This is the Company's largest segment and
accounted for 59% of the Company's total revenues for the current quarter.
American Building Maintenance revenues increased by 7.1% during the third
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 16.9% when
compared to the same period last year. Operating profits increased at a higher
rate than revenues due primarily to a slight reduction in labor and related
costs partly as a reduction of accruals in excess of amounts required. In
addition, there was a small decline in selling and administrative expenses as a
percent of sales. Easterday Janitorial Supply's third quarter revenues for 1999
increased by 10.9% compared to the same quarter in 1998. The increase was
generally due to increased business in its Houston, Texas and Sacramento,
California branches, offset by continued weak sales in its Portland, Oregon and
San Francisco, California markets. Operating profits decreased 28.1% in the
third quarter of 1999, compared to the same quarter of 1998 due primarily to
higher costs of inventory sold reflecting lower margins necessary for
competitive pricing.
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 third
quarter of 1999 were $69.3 million, a 9.9% increase over the same quarter of
1998. Public Service Divisions accounted for 17% of the Company's revenues for
the third quarter of 1999. The operating profits of this segment decreased 11.4%
in the third quarter of 1999, due to the lower margins of the Security Division.
American Commercial Security Services reported an 8.1% increase in revenues, but
its operating profits were down by 30.7% in the third quarter of 1999 compared
to the same period of 1998. The revenue increase was largely due to new business
in Houston, Phoenix, New Orleans and Southern California. The decrease in
operating profits was primarily due to higher labor and related costs as a
result of a shortage of qualified employees available to work at competitive pay
rates and having to bid new jobs at lower margins as a result of increased
competition. Ampco System Parking's revenues increased by 10.5%, while its
operating profits increased 1.9% during the third quarter of 1999 compared to
the third quarter of 1998. The increase in revenues was primarily due to
continued growth in its California and Texas operations. The operating profits
increase was due to slightly higher margins on its management contracts, offset
by proportionally higher selling, general and administrative expenses. 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 relatively new and
depends primarily on management fees for its income, start up costs exceeded
revenues during the current
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quarter. Management does not expect this Division to be profitable during the
current year. Revenues generated by this Division are generally reported by the
respective Divisions providing services and contribute to the operating profits
of those Divisions.
The Company's Technical Divisions segment includes ABM Engineering
Services, Amtech Elevator Services, Amtech Lighting Services and CommAir
Mechanical Services. This segment reported revenues of $101.1 million, which
represents 24% of the Company's revenues for the third quarter of 1999. Revenues
increased 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 4.4%
compared to the third quarter of 1998 due to increases in operating profits in
its Amtech Lighting and Amtech Elevator Divisions. ABM Engineering Services'
revenues increased by 8.1% but its operating profits decreased 1.7% for the
third quarter of 1999 compared to the same period in 1998. The revenue increase
was due primarily to new business in all its operations, with particularly
strong sales growth in its newer offices in Chicago and Arizona, as well as
Southern California. The small decrease in operating profits was due to low
margins on contracts in its New York and Philadelphia operations and slightly
higher selling, general and administrative expenses. Revenues for Amtech
Elevator Services increased by 12.5% compared to the same period in 1998
primarily due to an increase in maintenance contract and modernization sales,
particularly in the Northern California operation. As a result, the Division
posted a 6.9% increase in operating profit for the third quarter compared to the
corresponding quarter of 1998. Profits were disproportional to the sales
increase due to a slight increase in selling, general and administrative
expenses. Amtech Lighting Services reported an 11.9% revenue increase, and
operating profits increased by 16.4% during the third quarter of 1999 compared
to the same quarter of the prior year. The increase in operating profits was
primarily due to slightly lower labor costs. CommAir Mechanical Services' (also
known as "CommAir Preferred Mechanical Services") revenues increased by 7.3%,
resulting primarily from increased business throughout most of its branches in
California. Operating profits for the third quarter of 1999 decreased by 7.8%
compared to the same quarter of the prior year as a result of losses related to
a construction project in Southern California.
NINE MONTHS ENDED JULY 31, 1999 VS. NINE MONTHS ENDED JULY 31, 1998
Revenues and other income for the first nine months of 1999 were
$1,202.8 million compared to $1,108.8 million in 1998, an 8.5% 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
nine months ended July 31, 1999, the increase in revenues relating to
acquisitions made during 1998 was $10.6 million or 11.3% of the total revenue
increase of $94.0 million. As a percentage of
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revenues, operating expenses and cost of goods sold were 86.9% for the first
nine months of 1999, compared to 86.7% in 1998. Consequently, as a percentage of
revenues, the Company's gross profit of 13.1% in the first nine months of 1999
was lower than the gross profit of 13.3% for the first nine months of 1998. The
gross profit percentage declined mostly due to higher labor and related costs.
The Company anticipates these costs to be gradually recovered through price
increases.
Selling, general and administrative expenses for the first nine months
of 1999 were $110.6 million compared to $106.2 million for the corresponding
nine months of 1998. As a percentage of revenues, selling, general and
administrative expenses decreased, from 9.6% for the nine months ended July 31,
1998, to 9.2% for the same period in 1999, primarily as a result of certain
fixed and variable costs that do not increase at the same rate as sales, and a
reduction of legal costs. The increase in the dollar amount, of selling, general
and administrative expenses, $4.4 million, for the nine months ended July 31,
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 $1.5 million for the first nine months of 1999
compared to $2.6 million for the same period in 1998, a decrease of $1.1
million. This decrease was primarily due to lower weighted average borrowings
during the first nine months of 1999.
The pre-tax income for the first nine months of 1999 was $44.9 million
compared to $38.2 million, an increase of 17.3% over the same period in 1998.
The growth in pre-tax income outpaced revenue growth for the first three
quarters of 1999 as a result of lower interest costs and a lower increase in
selling, general and administrative expenses.
The estimated effective income tax rate for the first nine months of
1999 was 41%, compared to 41.5% in the first nine 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 nine months of 1999 was $26.5
million an increase of 18.3%, compared to the net income of $22.4 million for
the same period of 1998. Diluted net income per common share rose 15.8% to $1.10
for the first nine months of 1999 compared to $0.95 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 2.8% 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 nine months ended July 31, 1999,
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as compared to the nine months ended July 31, 1998, are more fully described
below:
The Janitorial Divisions segment, which includes the operating Divisions
of American Building Maintenance (also known as ABM Janitorial Services) and
Easterday Janitorial Supply, reported revenues for the first nine months of 1999
of $711.5 million, an increase of $55.0 million, or 8.4% over the same period of
1998. This segment's operating profits increased by 12.2% over the comparable
period of 1998. This is the Company's largest segment and accounted for 59% of
the Company's total revenues for the current nine months. American Building
Maintenance's revenues increased by 8.6% during the first nine months of 1999,
as compared to the same period 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 13.2% when compared to the
same period last year. Operating profits increased at a higher rate than
revenues due to lower labor and related costs, and slightly lower selling,
general and administrative expenses. Easterday Janitorial Supply's revenue for
the first nine months of 1999 increased by 1.3% compared to the same period in
1998. This small increase is generally due to weak sales in the Portland, Oregon
and San Francisco, California markets. Operating profits decreased by 12.7%
compared to the comparable period of 1998, as a result of increases in the cost
of inventory sold and additional labor costs, which were not passed on to
customers through price increases.
Revenues of the Public Service Divisions segment, which includes
American Commercial Security Services (also known as "ACSS" and "ABM Security
Services"), Ampco System Parking, and ABM Facility Services, for the first nine
months of 1999 were $201.5 million, a 6.3% increase over the same period of
1998. Public Service Divisions accounted for 17% of the Company's revenues. The
operating profits of this segment decreased 1.8% in the first nine months of
1999 due to American Commercial Security Services and ABM Facility Services.
American Commercial Security Services reported an increase in revenues of 6.7%,
but its operating profits were down by 23.7% in the first nine months of 1999
compared to the same period of 1998. The revenue increase was largely due to new
business in Houston, Phoenix, New Orleans, and Southern California. The decrease
in operating profit was primarily due to higher labor and related costs as a
result of a shortage of qualified employees available to work at competitive pay
rates and having to bid new jobs at lower margins as a result of increased
competition. Ampco System Parking Division's revenues increased by 4.8%, while
its profits increased 10.5% during the first nine months of 1999 compared to the
first nine months of 1998. The increase in revenues was mostly due to new
business in its California regions. The proportionally higher operating profit
increase was due to increased sales of higher
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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 relatively new and depends primarily on management fees for its
income, start up costs exceeded revenues during the current quarter. Management
does not expect this Division to be profitable during the current year. Revenues
generated by this Division are generally reported by the respective Divisions
providing services and contribute to the operating profits of those Divisions.
The Company's Technical Divisions segment includes ABM Engineering
Services (also known as Amtech Engineering Services), Amtech Elevator Services,
Amtech Lighting Services and CommAir Mechanical Services. This segment reported
revenues of $289.1 million, which represents 24% of the Company's revenues for
the first nine months of 1999. This represents an increase of 10.3% 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
nine months of 1998 due to increases in operating profits of its CommAir
Mechanical, Elevator and Engineering Divisions, offset by decreases in its
Lighting Division. ABM Engineering Services' revenues increased by 14.6% and its
operating profits increased 5.5% for the first nine months of 1999 compared to
the same period in 1998. The revenue increase was due primarily to new business
in all its operations, with particularly strong sales growth in its newer
offices in Chicago and Arizona, as well as Southern California. The increase in
operating profits is due to increased business offset by declining margins in
its New York and Philadelphia operations. Revenues for Amtech Elevator Services
were up by 5.5% for the first nine months of 1999 over the same period of 1998.
The Division posted a 1.3% increase in operating profit for the first nine
months of 1999 compared to the corresponding period of 1998. This increase in
profits can be attributed to higher sales at lower margins. Amtech Lighting
Services reported a 9.2% revenue increase due to increased business, primarily
in Atlanta, Chicago, New Orleans, New York and Oakland. Operating profits
decreased by 1.8% during the first nine months of 1999 compared to the same
period of the prior year primarily due to lower margins resulting from higher
labor and material costs. CommAir Mechanical Services' revenues increased by
8.7%, resulting from increased business throughout most of its branches in
California. California. Operating profits for the first nine months of 1999
increased by 33.4% compared to the prior year period as a result of increased
sales and keeping the selling, general and administrative expenses relatively
flat compared to the prior nine months.
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)
significant decreases in commercial real estate occupancy, resulting in reduced
demand and prices for building maintenance and other facility services, in the
Company's major markets, (2) loss or bankruptcy of one or more of the Company's
major customers, which could adversely affect the Company's ability to collect
its accounts receivable or recover its deferred costs, (3) major collective
bargaining issues that may cause loss of revenues or cost increases that
nonunion companies can use to their advantage in gaining market share, (4)
failure of the Company's electronic data processing, telecommunications and
related systems, or those of its major customers or vendors, to be Year 2000
compliant, (5) significant shortfalls in adding additional customers in existing
and new territories and markets, (6) a protracted slowdown in the Company's
acquisition program, (7) legislation or other governmental action that severely
impacts one or more of the Company's lines of business, such as price controls
that could restrict price increases, or the unrecovered cost of any universal
employer-paid health insurance, as well as government investigations that
adversely affect the Company, (8) reduction or revocation of the Company's lines
of credit, which would increase interest expense or the cost of capital, (9)
cancellation or nonrenewal of the Company's primary insurance policies, as many
customers contract out services based on the contractor's ability to provide
adequate insurance coverage and limits, (10) catastrophic uninsured or
underinsured claims against the Company, or the inability of the Company's
insurance carriers to pay otherwise insured claims, (11) resignation,
termination, death or disability of one or more of the Company's key executives,
which could adversely affect customer retention and day-to-day management of the
Company, (12) inability to employ entry level personnel due to labor shortages,
and (13) 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.
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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,
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outstanding debt and the related interest expense is currently not material.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.2 By-laws, amended and restated as of June 15, 1999
Exhibit 3.2.1 - Resolution Amending the By-laws effective February 12, 1999
Exhibit 27.1 - Financial Data Schedule
(b) Reports on form 8-K: No reports on form 8-K were filed during the quarter
ended July 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABM Industries Incorporated
September 13, 1999 /s/ David H. Hebble
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David H. Hebble
Vice President, Principal
Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABM Industries Incorporated
September 13, 1999
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David H. Hebble
Vice President, Principal
Financial Officer
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EXHIBIT INDEX
Exhibit 3.2 By-laws, amended and restated as of June 15, 1999
Exhibit 3.2.1 Resolution Amending the By-laws effective February 12, 1999
Exhibit 27.1 Financial Data Schedule