SecProbe.io

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VIA EDGAR

April 24, 2006

Mr. Jorge Bonilla

Senior Staff Accountant

Division of Corporation Finance

United States Securities and Exchange Commission

100 F Street N.E.

Washington, D.C. 20549

Mail Stop 4561

    Re:

    ABM Industries Incorporated

Form 10-K for the fiscal year ended October 31, 2005

File No. 1-08929

Dear Mr. Bonilla:

This letter is in response to the comment set forth in the letter from the Staff of the Securities
and Exchange Commission (the Commission) dated April 12, 2006 in connection with the Form 10-K
filed by ABM Industries Incorporated (the Company) for the fiscal year ended October 31, 2005. For
ease of reference, we have repeated in full the comment before our response.

FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 2005

Note 18 – Quarterly Information, page 60:

Comment: We note that you restated your financial statements for the quarterly periods ending in
2005 due to the material weaknesses relating to Security Services of America, LLC, whose
operating assets you acquired on March 15, 2004. Please tell us in detail if these material
weaknesses affected, and to what extent, your 2004 financial statements and if not tell us how
they were only related to the 2005 financial statements.

Response: As disclosed in Note 18 of the Notes to Consolidated Financial Statements,
Quarterly Information (Unaudited), the financial statements for the quarterly periods
ending in 2005 were restated to correct accounting errors associated with the operations
acquired from Security Services of America, LLC (SSA LLC) on March 15, 2004. The aggregate
effect of the adjustment for the quarter ended January 31, 2005 was a reduction of the Security
segment’s operating profit and the Company’s income from continuing operations before income
taxes by $4.0 million.

As further disclosed in Note 18, $2.0 million of the $4.0 million adjustment was attributable to
the correction of accounting errors that affected the Company’s 2004 financial statements. The
$2.0 million ($1.2 million after tax) is composed of:

    •

    a $0.3 million ($0.2 million after tax) increase in cost of goods sold associated
with the costs of providing licensed security officers to customers in 2004

The $0.3 million understatement of cost of goods sold for the year ended October 31,
2004 is comprised of a $2.5 million underaccrual of payroll and payroll-related
expenses that was substantially offset by a $2.2 million overstatement of
subcontracting expenses – charges of substantially the same character as those
underaccrued. The Company entered the subcontracting arrangement with SSA LLC, from
which it had purchased the operating assets, so it could continue to provide
security services under acquired contracts while it pursued certain state operating
licenses. (The subcontracting arrangement ended on June 30, 2005.) Had the Company
identified the error in 2004, the Company would have recorded a $2.2 million
receivable due from SSA LLC, the former owner, as of October 31, 2004.

    •

    a $1.1 million ($0.7 million after tax) reduction in cost of goods sold for the
overstatement of insurance expense in 2004

The Company’s results for the fiscal year ended October 31, 2004 overstated
insurance expenses by $1.1 million. This resulted from a $0.5 million overaccrual
of insurance premiums as of October 31, 2004 and premium payments of $0.6 million
during 2004 that were both attributable to insurance coverage for the period prior
to the Company’s acquisition of operations from SSA LLC. Had the Company identified
the error in 2004, the Company would have recorded a $0.6 million receivable due
from SSA LLC, the former owner, as of October 31, 2004.

    •

    a $2.8 million ($1.7 million after tax) increase in selling, general and
administrative expenses for a reserve provided for the SSA LLC 2004 receivables

Although, as discussed above, the effect of the correction of the $2.2 million
overpayment of subcontracting expenses and the $0.6 million insurance payments made
on behalf of SSA LLC would have been the creation of a receivable of equal amount,
the Company determined to fully reserve this $2.8 million (and similar overpayments
in the first quarter of fiscal year 2005) because SSA LLC disputed that the Company
had overpaid it.

The tables below summarize the impact the adjustment would have had on the Company’s balance
sheet and income statement as of and for the year ended October 31, 2004.

    (in thousands)

    October 31, 2004

    As reported

    Adjustments

    Pro-forma

    Assets

    Prepaid expenses and other current assets

    $
    38,607

    $
    —

    $
    38,607

    Receivable from SSA LLC

    2,800

    2,800

    Reserve against receivable

    (2,800
    )

    (2,800
    )

    38,607

    —

    38,607

    Total assets

    $
    842,524

    $
    —

    $
    842,524

    Liabilities

    Income taxes payable

    10,065

    (784
    )

    9,281

    Accrued compensation

    64,350

    2,500

    66,850

    Other accrued liabilities

    47,710

    (500
    )

    47,210

    Total liabilities

    400,363

    1,216

    401,579

    Stockholders’ equity

    Retained earnings

    328,258

    (1,216
    )

    327,042

    Total liabilities and stockholders’ equity

    $
    842,524

    $
    —

    $
    842,524

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    Year ended October 31,

    (in thousands)

    2004

    As reported

    Adjustments

    Pro-forma

    Revenues

    $
    2,375,149

    $
    —

    $
    2,375,149

    Expenses

    Operating expenses and cost of goods sold

    2,157,637

    2,157,637

    Insurance expense adjustment

    (1,100
    )

    (1,100
    )

    Payroll and subcontracting expenses adjustment

    300

    300

    Subtotal

    2,157,637

    (800
    )

    2,156,837

    Selling, general and administrative

    166,981

    2,800

    169,781

    Interest

    1,016

    1,016

    Intangible amortization

    4,519

    4,519

    Total Expenses

    2,330,153

    2,000

    2,332,153

    Income from continuing operations before income taxes

    44,996

    (2,000
    )

    42,996

    Income taxes

    15,352

    (784
    )

    14,568

    Income from continuing operations

    $
    29,644

    $
    (1,216
    )

    $
    28,428

    Diluted earnings per share

    Income per share from continuing operations

    $
    0.59

    $
    (0.02
    )

    $
    0.57

The Company included the adjustments described in Note 18 and above in the quarter ended
January 31, 2005 (together with similar adjustments during that quarter), rather than restating
fiscal 2004 results, because it did not believe that the errors were material. Set forth below
is the quantitative and qualitative materiality analysis of these errors.

Quantitative Materiality.

In conjunction with the Company’s assessment of internal control over financial reporting as
required by Section 404 of the Sarbanes-Oxley Act of 2002 and based on applicable considerations
(e.g., no going concern or liquidity issues, little regulation or specialized accounting issues,
consistency with the practices of others etc.), the Company established a materiality threshold
equal to 5% of net income or, if applicable, income from continuing operations for assessing
misstatements and potential misstatements. Any misstatement or potential misstatement
individually and in the aggregate that meets or exceeds that threshold could be considered
material and could result in a material weakness in the Company’s internal control over
financial reporting.

From a quantitative standpoint, the Company believes that the misstatements resulting from
errors associated with the operations acquired from SSA LLC, should not be considered material
since they would have affected income from continuing operations for 2004 by less than 5%. If
the errors had been corrected in 2004, income from continuing operations would have been reduced
by $1.2 million (after tax) or 4.1%, from $29.6 million ($0.59 per diluted share) to $28.4
million ($0.57 per diluted share). Further, if the errors had been corrected in 2004, total
assets of $842.5 million as of October 31, 2004 would not have changed, while total liabilities
would have been only $1.2 million higher, which is approximately 0.3% of the $400.4 million in
total liabilities reported as of October 31, 2004.

This analysis both aggregates and nets the 2004 misstatements. In general, determination of
materiality should give consideration to whether the misstatement of individual amounts could be
deemed to cause a material misstatement of the financial statements taken as a whole,
irrespective of its effect when combined with other misstatements. In this instance, however,
each misstatement is part of one overall error, i.e., inadequately distinguishing between the
old operations and the new operations in the form of overpayments for subcontracted services and
of insurances premiums and, in the case of the overpayment for subcontracting services, the
failure to accrue for the expenses of providing the services directly–all of which entries are
included within cost of goods sold. The only misstatement that appears outside of this line
item, is the reserve taken against the receivable for the

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subcontracting and insurance premium overpayments (despite the fact that the Company is pursuing
collection vigorously) and the corresponding increase in selling, general and administrative
expenses, neither of which is related to the Company’s ongoing profitability or, as discussed
further below, the operating results and associated trends in profitability of the Company’s
Security segment.

Qualitative Materiality.

As Staff Accounting Bulletin No. 99, Materiality, points out, looking at a percentage
such as 5% may be “an initial step in assessing materiality.” However, SAB No. 99 further
states, “the magnitude of a misstatement is only the beginning of an analysis. SAB No. 99
provides that “a matter is ‘material’ if there is a substantial likelihood that a reasonable
person would consider it important.” Quoting the Supreme Court in TSC Industries vs.
Northway, SAB No. 99 also states that a fact is material if there is “a substantial
likelihood that . . . the fact would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made available.”

With respect to financial statements, SAB 99 notes:

In the context of a misstatement of a financial statement item, while the “total mix”
includes the size in numerical or percentage terms of the misstatement, it also includes the
factual context in which the user of financial statements would view the financial statement
item. . . . [F]inancial management and the auditor must consider both “quantitative” and
“qualitative” factors in assessing an item’s materiality.

SAB No. 99 goes on to provide that “misstatements below 5% could well be material” and lists
certain considerations in the determination as to whether a “quantitatively small misstatement
of a financial statement item” is deemed material. These include:

    •

    Whether the misstatement masks a change in earnings or other trends

    •

    Whether the misstatement changes a loss into income or vice versa

    •

    Whether the misstatement hides a failure to meet analysts’ consensus expectations
for the enterprise

    •

    Whether the misstatement concerns a segment or other portion of the registrant’s
business that has been identified as playing a significant role in the registrant’s
operations or profitability

    •

    Whether the misstatement affects the registrant’s compliance with regulatory
requirements

    •

    Whether the misstatement affects the registrant’s compliance with loan covenants or
other contractual requirements

    •

    Whether the misstatement has the effect of increasing management’s compensation –
for example, by satisfying requirements for the award of bonuses or other forms of
incentive compensation

    •

    Whether the misstatement involves concealment of an unlawful transaction

    •

    Whether the misstatement arises from an item capable of precise measurement or
whether it arises from an estimate and, if so, the degree of imprecision inherent in
the estimate

In making the determination as to whether the errors resulted in a material misstatement, despite
their otherwise immaterial magnitude, the following points have been considered:

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    •

    Allowing the 2004 financial statements to remain as originally presented did not
mask a change in earnings or other trends, including cash flow from operations or
balance sheet strength. It did not change a loss into income, or in fact materially
alter the amount of income reported.

    -

    Correcting the errors would not have impacted cash flow from
operations, a key fundamental of ABM’s business, as the adjustment (as detailed
above) to income from continuing operations would have an equal and offsetting
change to the adjustments to reconcile income from continuing operations to net
cash provided from operating activities.

    -

    Correcting the errors would have reduced the Company’s working
capital of $230.7 million as of October 31, 2004 by only $1.2 million (after
tax), which is less than 1% of working capital. Total assets would have been
unaffected.

    -

    Finally, as detailed above, correcting the errors would have
reduced income from continuing operations by only $1.2 million (after tax),
just 4.1% of originally reported income from continuing operations for the year
ended October 31, 2004 and reduced diluted earnings per share by only $0.02.

    •

    The misstatements did not hide a failure to meet analysts’ consensus expectations.

    -

    Subsequent to the filing of the Company’s Quarterly Report on
Form 10-Q for the quarter and nine months ended July 31, 2004, the analysts’
consensus estimate for diluted income per share from continuing operations for
the year ended October 31, 2004 was $0.82. The Company’s reported diluted
income per share for 2004 was $0.59. The Company’s diluted income per share
would have been $0.02 lower if the errors had been recorded appropriately.
Whether this $0.02 per share is taken into account or not, the Company
substantially failed to meet analysts’ consensus expectations. The results for
2004 included a $17.2 million ($10.4 million after tax, $0.21 per diluted
share) insurance charge resulting from adverse developments in the Company’s
California workers’ compensation claims. Further, even eliminating the impact
of the insurance charge on 2004 income from continuing operations, the Company
would have failed to meet the analysts’ consensus expectations, albeit by a
narrower margin than if the misstatements were corrected.

    •

    The misstatements concern the Security segment which has not played a significant
role in profitability over the past 3 years.

    -

    The results of the Company’s operations (as indicated in the
Company’s Form 10-K) are substantially driven by the results of the Company’s
Janitorial segment, which generated an average of approximately 66% of the
Company’s operating profits before corporate expenses for the three years ended
October 31, 2005. During the same three-year period, the Security segment
generated an average of less than 7% of operating profits, in third or fourth
position of the five currently remaining segments. The misstatements
resulted in understated income from continuing operations before income taxes in the Security
segment of only $0.8 million ($0.5 million after tax) in
2004 before the determination to fully reserve against the
receivable from SSA LLC.

    •

    The misstatements did not affect the Company’s compliance with regulatory
requirements.

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    •

    The misstatements did not affect the Company’s compliance with loan covenants or
other contractual requirements as of Octo