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 JANUARY 31, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file Number 1-8929
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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.)
50 FREMONT STREET, 26TH FLOOR, SAN FRANCISCO, CALIFORNIA 94105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 597-4500
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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
January 31, 1998: 20,783,373
ABM INDUSTRIES INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS ENDED JANUARY 31, 1998
TABLE OF CONTENTS
PART I PAGE
Item 1 Consolidated Financial Statements. . . . . . . . . . . . . . . . . 2
Notes to the Consolidated Financial Statements. . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 8
PART II
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .14
1
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
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ASSETS: OCTOBER 31, JANUARY 31,
1997 1998
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(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,783 $ 1,756
Accounts receivable, net 234,464 248,071
Inventories 21,197 21,572
Deferred income taxes 10,968 9,249
Prepaid expenses and other current assets 26,005 27,347
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Total current assets 294,417 307,995
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INVESTMENTS AND LONG-TERM RECEIVABLES 12,900 13,485
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and buildings 4,684 4,808
Transportation equipment 11,211 11,459
Machinery and other equipment 46,147 47,610
Leasehold improvements 10,476 10,778
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72,518 74,655
Less accumulated depreciation and amortization 45,934 48,282
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Property, plant and equipment, net 26,584 26,373
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INTANGIBLE ASSETS - NET 100,313 99,198
DEFERRED INCOME TAXES 25,426 27,991
OTHER ASSETS 7,512 6,513
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$ 467,152 $ 481,555
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(Continued)
2
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
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LIABILITIES AND STOCKHOLDERS' EQUITY: OCTOBER 31, JANUARY 31,
1997 1998
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(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,393 $ 1,371
Bank overdraft 12,975 11,144
Trade accounts payable 34,555 33,386
Income taxes payable 4,265 7,606
Accrued Liabilities:
Compensation 35,965 32,645
Taxes - other than income 12,609 15,794
Insurance claims 25,479 25,029
Other 29,419 35,122
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Total current liabilities 156,660 162,097
Long-Term Debt (less current portion) 38,402 40,458
Retirement plans 13,413 14,681
Insurance claims 54,464 53,972
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Total Liabilities 262,939 271,208
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SERIES B 8% SENIOR REDEEMABLE CUMULATIVE
PREFERRED STOCK 6,400 6,400
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 500,000
shares authorized; none issued - -
Common stock, $.01 par value, 28,000,000 shares
authorized; 20,464,000 and 20,783,000 shares
issued and outstanding at October 31, 1997
and January 31, 1998, respectively 205 207
Additional capital 63,416 66,430
Retained earnings 134,192 137,310
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Total stockholders' equity 197,813 203,947
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$ 467,152 $ 481,555
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The accompanying notes are an integral part of the consolidated financial
statements.
3
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1998
(In thousands except per share amounts)
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1997 1998
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REVENUES AND OTHER INCOME $ 291,638 $ 358,747
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EXPENSES:
Operating expenses and cost of goods sold 252,751 312,494
Selling, general and administrative 29,943 35,627
Interest 599 823
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Total expenses 283,293 348,944
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INCOME BEFORE INCOME TAXES 8,345 9,803
INCOME TAXES 3,505 4,068
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NET INCOME $ 4,840 $ 5,735
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NET INCOME PER COMMON SHARE
Basic $ 0.24 $ 0.27
Diluted $ 0.22 $ 0.25
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 19,906 20,641
Diluted 21,416 22,883
DIVIDENDS PER COMMON SHARE $ 0.10 $ 0.12
The accompanying notes are an integral part of the consolidated financial
statements
4
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1998
(In thousands)
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1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 293,224 $ 343,043
Other operating cash receipts 743 255
Interest received 151 235
Cash paid to suppliers and employees (278,180) (337,954)
Interest paid (501) (591)
Income taxes paid (351) (1,573)
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Net cash provided by operating activities 15,086 3,415
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,976) (2,440)
Proceeds from sale of assets 144 29
Decrease (increase) in investments and
long-term receivable 65 (585)
Intangible assets acquired (791) (1,048)
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Net cash used in investing activities (2,558) (4,044)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 1,976 3,016
Dividends paid (2,126) (2,617)
Increase (decrease) in cash overdraft 1,086 (1,831)
Increase (decrease) in notes payable 31 (22)
Long-term borrowings 14,112 30,049
Repayments of long-term borrowings (22,813) (27,993)
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Net cash (used in) provided by financing
activities (7,734) 602
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,794 (27)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 1,567 1,783
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CASH AND CASH EQUIVALENTS END OF PERIOD $ 6,361 $ 1,756
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(Continued)
5
ABM INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1998
(In thousands)
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1997 1998
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RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 4,840 $ 5,735
Adjustments:
Depreciation and amortization 3,783 4,793
Provision for bad debts 497 737
Gain on sale of assets (10) (8)
Deferred income taxes (903) (846)
Decrease (increase) in accounts receivable 1,291 (14,344)
Increase in inventories (2,379) (375)
Increase in prepaid expenses and other
current assets (1,223) (1,342)
Decrease in other assets 619 999
Increase in income taxes payable 4,057 3,341
Increase in retirement plans accrual 1,735 1,268
Increase (decrease) in insurance claims
liability 1,051 (942)
Increase in accounts payable and
other accrued liabilities 1,728 4,399
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Total Adjustments to net income 10,246 (2,320)
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Net Cash Provided by Operating Activities $ 15,086 $ 3,415
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The accompanying notes are an integral part of the consolidated financial
statements.
6
ABM INDUSTRIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all material adjustments which are necessary to
present fairly the Company's financial position as of January 31, 1998, and the
results of operations and cash flows for the three months then ended. These
adjustments are of a normal, recurring nature.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Form 10K filed for the fiscal year ended October 31, 1997 with the
Securities and Exchange Commission.
2. NET INCOME PER COMMON SHARE
The company has reported its earnings in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share. Basic net income
per common share, after the reduction for preferred stock dividends, is based on
the weighted average number of shares actually outstanding during the period.
Diluted net income per common share, after the reduction for preferred stock
dividends, is based on the weighted average number of shares outstanding during
the period, including common stock equivalents. Diluted net income per common
share is consistent with the Company's former presentation of primary net income
per common share. The calculation of these amounts is as follows:
Three months Ended Three months Ended
January 31, 1997 January 31, 1998
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Net Income $ 4,840,000 $ 5,735,000
Preferred Stock Dividends (128,000) (128,000)
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$ 4,712,000 $ 5,607,000
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Common shares outstanding - basic 19,906,000 20,641,000
Effect of dilutive securities:
Stock options 1,162,000 2,043,000
Other 348,000 199,000
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Common shares outstanding - diluted 21,416,000 22,883,000
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7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Funds provided from operations and bank borrowings have historically been
the sources for meeting working capital requirements, financing capital
expenditures and acquisitions, and paying cash dividends. Management believes
that funds from these sources will remain available and adequately serve the
Company's liquidity needs. The Company has an unsecured revolving credit
agreement with a syndicate of U.S. banks. This agreement had a $125 million
line of credit expiring July 1, 2002. Effective November 1, 1997, the agreement
was amended to increase the amount available to $150 million. At the Company's
option, the credit facility provides interest at the prime rate or IBOR+.35%.
As of January 31, 1998, the total amount outstanding was approximately $106.6
million, which was comprised of loans in the amount of $36.0 million and standby
letters of credit of $70.6 million. This agreement requires the Company to meet
certain financial ratios and places some limitations on dividend payments and
outside borrowing. The Company is prohibited from declaring or paying cash
dividends exceeding 50% of its net income for any fiscal year. In February
1996, the Company entered into a loan agreement with a major U.S. bank which
provides a seven-year term loan of $5 million. This loan bears interest at a
fixed rate of 6.78 % with annual payments of principal in varying amounts, and
interest due February 15, 1997 through February 15, 2003. The Company's
effective interest rate for all long term debt for the quarter ended January 31,
1998 was 6.83%.
At January 31, 1998, working capital was $145.9 million, as compared to $137.8
million at October 31, 1997.
EFFECT OF INFLATION
The low rates of inflation experienced in recent years had no material
impact on the financial statements of the Company. The Company attempts to
recover inflationary costs by increasing sales prices to the extent permitted by
contracts and competition.
8
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
contamination at a Company facility in Florida; one involving alleged soil
contamination at a former Company facility in Arizona; one involving alleged
potential soil and groundwater contamination of a parking garage previously
operated by the company; and, one involving alleged potential soil and
groundwater contamination at a former dry-cleaning facility leased by the
company in Nevada. While it is difficult to predict the ultimate outcome of
these matters, based on information currently available, management believes
that none of these matters, individually or in the aggregate, are reasonably
likely to have a material adverse affect on the Company's financial position or
its results of operations.
YEAR 2000 ISSUE
The Company has identified the software it uses which is not year 2000
compliant and has begun its effort to coordinate the identification, evaluation,
and implementation of changes to its computer systems and applications necessary
to achieve a year 2000 date conversion. The total cost of compliance and its
effect on the Company's financial condition and future results of operations
have not been determined.
ACQUISITIONS
The operating results of businesses acquired have been included in the
accompanying consolidated financial statements from their respective dates of
acquisition.
9
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company. All information in the
discussion and references to the years and quarters are based on the Company's
fiscal year and first quarter which end on October 31 and January 31,
respectively.
THREE MONTHS ENDED JANUARY 31, 1998 VS. THREE MONTHS ENDED JANUARY 31, 1997
Revenues and other income (hereafter called revenues) for the first three
months of 1998 were $358.7 million compared to $291.6 million in 1997, a 23%
increase over the same quarter of the prior year. Much of this growth was
attributable to acquisitions during 1997 as well as new business and price
increases. For the quarter ended January 31, 1998, the increase in revenues
relating to acquisitions made during 1997 was approximately $43.9 million on a
total revenue increase of $67.1 million.
As a result, net income for the first quarter of 1998 was $5.7 million an
increase of 18%, compared to the net income of $4.8 million for the first
quarter of 1997. Diluted net income per common share rose 14% to 25 cents for
the first quarter of 1998 compared to 22 cents for the same period in 1997. The
increase in diluted net income per share was not proportional to the increase in
net income due to the increased average number of common and common equivalent
shares outstanding. As a percentage of revenues, operating expenses and cost of
goods sold were 87.1% for the first quarter of 1998, compared to 86.7% in 1997.
Consequently, as a percentage of revenues, the Company's gross profit (revenue
minus operating expenses and cost of goods sold) of 12.9% in the first quarter
of 1998 was lower than the gross profit of 13.3% for the first quarter of 1997.
The gross profit percentage declined mostly due to higher labor and related
costs. These costs could not be recovered through price increases because of
stiff competition in the market place faced by most of the Company's Divisions.
Selling, general and administrative expenses for the first three months of
1998 were $35.6 million compared to $29.9 million for the corresponding three
months of 1997. As a percentage of revenues, selling, general and
administrative expenses decreased slightly, from 10.3% for the three months
ended January 31, 1997, to 9.9% for the same period in 1998, primarily as a
result of certain fixed and variable costs not increasing at the same rate as
sales. The increase in the dollar amount, of selling, general and
administrative expenses, $5.7 million, for the three months ended January 31,
1998, compared to the same period in 1997, is primarily due to expenses related
to growth and to a somewhat lesser extent expenses associated with acquisitions.
10
Interest expense was $823,000 for the first three months of 1998 compared
to $599,000 for the same period in 1997, an increase of $224,000. This increase
was primarily due to higher weighted average borrowings during the first quarter
of 1998 which were needed to fund acquisitions and working capital.
The pre-tax income for the first quarter of 1998 was $9,803,000 compared to
$8,345,000, an increase of 17% over the same quarter of 1997. The growth in
pre-tax income did not keep pace with revenue growth for the current quarter of
1998 due to lower gross profit.
The estimated effective income tax rate for the first three months of 1998
was 41.5%, compared to 42.0% in the first three months of 1997. The lower tax
rate was due for the most part to an increase in various federal and state tax
credits.
The results of operations from the Company's three industry segments and
its nine operating Divisions for the three months ended January 31, 1998, as
compared to the three months ended January 31, 1997, are more fully described
below:
The Janitorial Divisions segment, which includes the operating Divisions of
American Building Maintenance (also known as ABM Janitorial Services) and
Easterday Janitorial Supply, reported revenues for the first quarter of 1998 of
$213.2 million, an increase of approximately $47.7 million, or 29% over the
first quarter of 1997. This segment's operating profits (revenue minus
expenses, excluding interest and corporate allocations) increased by 31% over
the comparable quarter of 1997. This is the Company's largest segment and
accounted for approximately 60% of the Company's total revenues for the current
quarter. AMERICAN BUILDING MAINTENANCE'S revenues increased by 29% during the
first quarter of 1998 as compared to the same quarter of 1997 as a result of
several acquisitions made during the latter half of 1997, particularly in New
York. Revenue grew in all regions except for Canada, Golden Gate, and
Mid-Pacific. This Division's operating profits increased 31% when compared to
the same period last year. The increase in operating profits is principally due
to increased sales with reductions in insurance and administrative expenses
relative to revenues. EASTERDAY JANITORIAL SUPPLY'S 1998 first quarter revenue
increased by approximately 16% compared to the same quarter in 1997 generally
due to strong sales in the Los Angeles and Houston markets. The increase of 15%
in operating profits was achieved because of higher sales, but at a slightly
lower gross profit percentage, mostly related to increased insurance.
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 quarter of 1998
were approximately $61.8 million, a 6% increase
11
over the same quarter of 1997. Public Service Divisions accounted for
approximately 17% of the Company's revenues. The operating profits of this
segment increased 17% in the first quarter of 1998 as both Ampco System Parking
and American Commercial Security Services reported increased profits when
compared to the prior year quarter. AMERICAN COMMERCIAL SECURITY SERVICES
reported a decrease in revenues of 3%, but its profits were up by 17% in the
first quarter of 1998 compared to the same period of 1997. The revenue decline
was largely due to loss of a several large customers in the San Francisco Bay
area and in San Antonio, Texas. The increase in operating profit was primarily
due to a reduction in insurance charges and management reorganization in
California. AMPCO SYSTEM PARKING Division's revenues increased by 13%, while
its profits increased 32% during the first quarter of 1998 compared to the first
quarter of 1997. The increase in revenues was mostly due to growth in its
national airport business, as well as the Northeast and Texas regions. The
operating profit increase was due for the most part to higher profit margins as
a result of containment of management and overhead costs, decreased legal and
insurance costs and increased sales. This segment now includes the Company's
new Division, ABM FACILITY SERVICES. The Company has responded to customer
requests to provide services from two or more of its Divisions (the ABM Family
of Services) under one management. Because this Division is new and depends
primarily on management fees for its income, start up costs exceeded revenues
during the current quarter. Revenue generated by this Division is generally
reported by the respective Division providing services. Management does not
expect this Division to be profitable during the current year, although
management expects sales from other Divisions under the auspices of this
Division to be profitable.
The Company's Technical Divisions segment includes ABM Engineering Services
(also known as Amtech Engineering Services), Amtech Elevator Services, Amtech
Lighting Services and CommAir Mechanical Services. This segment reported
revenues of $83.6 million, which represent approximately 23% of the Company's
revenues for the first quarter of 1998. This represents an increase of
approximately 23% over the same quarter of last year due to increases in
revenues reported by all its Divisions. Operating profit of this segment
increased 11% compared to the first quarter of 1997 due to increases in
operating profits of its Elevator and Engineering Divisions, offset by decreases
in its CommAir Mechanical and Lighting Divisions. ABM ENGINEERING SERVICES'
revenues increased by 48% and its operating profits increased 11% for the first
quarter of 1998 compared to the same period in 1997. The large revenue increase
was due primarily to an acquisition in New York in August 1997. The smaller
percentage increase in operating profits resulted from a combination of lower
gross profit on fixed price contracts, increased insurance costs, and an
increase in selling, general and administrative costs. Revenues for AMTECH
ELEVATOR SERVICES were up by 14% for the first quarter of 1998 over the same
quarter of 1997 largely due to an increased customer base in the maintenance and
repair sector. The Division posted a dramatic 47% increase in operating profit
for the first
12
quarter compared to the corresponding quarter of 1997. This increase can be
attributed primarily to a reduction of insurance costs and lower general and
administrative expenses as a percent of sales. AMTECH LIGHTING SERVICES
Division reported a 8% revenue increase due to increased sales in most regions.
Operating profits decreased by 6% during the first quarter of 1998 compared to
the same quarter of the prior year primarily due to increases in selling and
administrative expenses. COMMAIR MECHANICAL SERVICES Division's revenues
increased by 17% resulting primarily from an acquisition in Southern California
during the second quarter of 1997. Operating profits for the first quarter of
1998 decreased by 6% from the prior year first quarter as a result of an
increase in selling, general and administrative expenses proportionately greater
than the increase in revenues.
SAFE HARBOR STATEMENT
Cautionary Safe Harbor Disclosure for Forward Looking Statements under the
Private Securities Litigation Reform Act of 1995: Because of the factors set
forth below, as well as other variables affecting the Company's operating
results, past financial performance should not be considered a reliable
indicator of future performance and investors should not use historical trends
to anticipate results or trends in future periods. The statements contained
herein which are not historical facts are forward-looking statements that are
subject to meaningful risks and uncertainties, including, but not limited to:
(1) the widespread failure of commercial real estate occupancy to improve in the
Company's major markets since it relates directly to the need for janitorial and
other buildings services, (2) the loss or bankruptcy of one or more of the
Company's major customers, which could adversely affect the Company's ability to
collect deferred costs or its accounts receivable, (3) the untimely departure of
one or more of the Company's key executives, which could affect retention of
customers as well as the day to day management of operations, (4) any major
labor disruptions that may cause loss of revenue or cost increases that
non-union companies can use to their advantage in obtaining market share,
(5) significant shortfall in achieving any acquisition plan to acquire either
businesses in new markets or expand customer base in existing ones, (6) any
legislation or other government action that severely impacts one or more of the
Company's lines of business, such as price controls that could prevent cost
recovery and fuel restrictions that might increase the cost to deliver services,
(7) the reduction or revocation of the Company's lines of credit which would
increase interest expense or the cost of capital, (8) the cancellation or
non-renewal of the Company's primary insurance policies, as many customers
retain services based on the provider's ability to provide adequate insurance
including performance bonds and proof of adequate insurance, (9) any
catastrophic uninsured or underinsured claims against the Company, which also
might include insurance companies financially incapable of paying claims, (10)
the inability to recruit and
13
hire entry level personnel due to labor shortages, and (11) other material
factors that are disclosed from time-to-time in the Company's public filings
with the United States Securities and Exchange Commission, such as reports on
Forms 8-K, 10-K and 10-Q.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 27.1 - Financial Data Schedule.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended January 31, 1998.
14
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
March 16, 1998 /s/ David H. Hebble
------------------------------------
Vice President, Principal
Financial Officer
15
5
1,000
3-MOS
OCT-31-1998
JAN-31-1998
1,756
0
248,071
0
21,572
307,995
74,655
48,282
481,555
162,097
0
0
6,400
207
203,740
481,555
358,747
358,747
312,494
312,494
0
0
823
9,803
4,068
5,735
0
0
0
5,735
0.27
0.25
