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Netra Shetty
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Supply Chain Management of Interscope Music Group - January 11th, 2011

International Total Services, Inc. (ITS) provides the world's airports and other public facilities with security services, security equipment, and support staff. The company's Aviation Staffing Services division, which represents the largest part of the company's business, contracts with airports to provide staff for roles as skycaps, baggage handlers, maintenance workers, and security screeners. Through its Crown Technical Systems, Inc. subsidiary, ITS supplies the equipment--including metal detectors, screening equipment, security systems, and other high-tech equipment&mdashø help ensure safety at airports, museums, banks, government agencies, and other public places. Finally, ITS provides commercial security staffing for offices, hospitals, shopping malls, sports arenas, museums, airports, and other facilities. ITS serves more than 330 locations in the United States, Guam, the Philippines, and central Europe.

1970s Origins

Robert Weitzel and Richard P. Starke were executives at ITT Services Industries, when a British concern bought that company and brought in a new management team of its own. Suddenly without jobs, the two men decided to strike out on their own and establish their own business in the service industry. Based in Cleveland, International Total Services (ITS) was founded in 1978 and by the end of its first year was reporting $10 million in revenues providing janitorial services and a variety of airline services, such as baggage handling and the pre-departure screening of passengers for security reasons.

Pre-departure security soon became the company's major focus, as airport safety concerns made headlines nationally and abroad. ITS's security operations were considerably enhanced by its 1980 acquisition of the pre-board screening operations of American Airlines. Before long, ITS was the largest such operation in the United States. The company continued to provide janitorial services as well, serving airports and other service-oriented businesses. By 1984, ITS was reporting $40 million in annual revenues and had acquired Andy Frain Services, Inc., which specialized in providing ticket-takers and ushers for events at entertainment arenas. ITS was thriving and looking to expand into new markets, such as general staffing services. However, its fortunes were about to be reversed.

Challenges in the Mid-1980s

While details on the case were never publicized, a legal dispute in the mid-1980s nearly ruined ITS. According to a 1988 article in Crain's Cleveland Business, the litigation involved one of the company's minority shareholders and proved costly to ITS. Though ITS prevailed in the case, Weitzel said that it 'quite frankly brought us to our knees.' ITS filed for bankruptcy and emerged in 1987, with Weitzel as CEO, a smaller, more focused company, having sold the Andy Frain subsidiary, which management regarded as seasonal and unstable. Annual revenues had suffered during this difficult period and were estimated at $25 million in 1987.

Hoping to make a strong comeback, ITS was forced to address internal issues, one of which was improving efficiency of its airport operations. An estimated 65 percent of the company's business at that time originated with the airlines, and there ITS sought to control costs and provide better service through new methods of employee scheduling and tracking. One difficulty with scheduling involved the unproductive hours employees endured (or enjoyed) when waiting to serve delayed flights. A new method was devised under which employees clocked in at a central location and were dispatched to specific locations for specific jobs on an as-needed basis. This procedure allowed the company to keep track of its work force, be flexible with flight changes, and provide special services, such as wheelchair assistance for the elderly and disabled, more promptly. Moreover, an identification card with bar coding helped ITS keep track of employees, who used the card to check in at the airport locations where they had been assigned to perform a service.

Also, as airport pre-departure security screening continued as the company's main focus, employee training became integral to improving customer satisfaction. By 1990 ITS was serving 65 airports with 2,500 pre-departure security personnel, for a total of 4,500 employees in service positions nationwide. The company sought to ensure that these employees had the best training possible and toward that end stepped up its programs for new hires. To emphasize the importance of airport security, ITS offered a $50,000 reward to any pre-boarding screener, whether an ITS employee or not, who foiled a terrorist act on a flight within the United States.

Given its success in airport security, ITS next sought to expand the segment to include commercial security staffing for government facilities, business offices, factories, hospitals, museums, and sports arenas. After two years, the new operating unit accounted for 9.7 percent of annual revenue in 1994.

Moreover, through its Crown Technical Systems (CTS) subsidiary, ITS began offering security equipment, including walk-through and hand-held metal detectors, and closed circuit television monitors. In 1992 CTS introduced a new security system at Houston Intercontinental Airport, where the company was contracted to provide staffing. To existing metal detectors and x-ray devises in Houston, ITS's High Efficiency Screening System (HESS) added video cameras and monitors, audio recorders, modular walls, and porticoes. Secondary metal detectors rescreened passengers when the first detector tripped an alarm, allowing for faster movement of passengers through the first check.

CTS's first major contract, and the largest of its kind in the industry at the time, involved its deal for supplying 132 metal detectors to the Canadian government's transportation department. Transport Canada contracted to purchase the metal detectors for $609,000, a price that would include employee training for 28 major airport locations. Transport Canada compared the products of ten companies and reported that Crown Technical Services had scored the best for price, performance, and maintenance. More good publicity came when the U.S. Secret Service began using Crown's metal detectors and recommended them to the Democratic National Committee for use at the 1996 national convention.

Also during this time, however, ITS began experiencing some bad press as well. After security breaches at several airports at which ITS was under contract, customers and the public began questioning the professionalism of ITS. In truth, personnel for airport pre-departure screening were difficult to hire; wages were low and turnover high. As a result, ITS lost some contracts for security at airports in Los Angeles, San Francisco, Ontario, Phoenix, Minneapolis, Detroit, and Boston. The company continued to serve these airports in other capacities, however, including some forms of pre-departure screening. To help improve the company's relationship with the airlines, ITS hired James O. Singer, formerly with American Airlines and an aviation industry consultant, as president and COO.

The company also expanded its business by purchasing service companies and contracts. In spring 1997, for example, ITS acquired contracts and goodwill from Intex Aviation Services, Inc. of Greenville, South Carolina, for $4.8 million. The contracts covered 30 locations nationwide and involved baggage handling, ground support, aircraft appearance, and aircraft lavatory cleaning services.

By the end of 1996 ITS provided pre-departure screening services to over 120 airports in 38 states for more than 60 domestic and international airlines. The company employed more than 4,400 pre-departure screeners, and approximately 50 percent of the company's revenues originated from this service. In Asian and European airports, where concern over terrorist activity was stronger than in the United States, ITS also provided document verification agents and passenger profiling services. Ramp and ground handling services accounted for over 14 percent of revenues, while passenger services, such as curbside skycap check-in, wheelchair assistance, and assistance with passenger problems accounted for approximately 20 percent of revenues. Commercial security comprised 11.7 percent of total revenues in 1996.

Going Public in 1997

In 1997, ITS management decided to take the company public, selling over 2.8 million shares (about 45 percent of its total shares) on the NASDAQ exchange at $11.25 per share. The offering raised approximately $30 million, which the company used to pay down debt and fund further acquisitions. With the airport security market beginning to mature, and competition heating up, ITS set a goal of realizing $500 million in sales by the year 2000 through the expansion of service offerings.

In the six months that followed the stock offering, ITS doubled its revenues through several acquisitions. For $700,000 ITS acquired contracts from Curtis Security Systems, Inc. of San Francisco to provide commercial security services to 50 Fortune 500 companies in California, Nevada, and throughout the western United States. ITS acquired aviation service contracts from ARC Security, Inc. of Atlanta for $9 million. Under the contracts ITS provided airline security, pre-departure screening, and aircraft appearance services for 12 major airlines in the south and east. Contracts purchased from ASI Inc. for $100,000 cash involved aircraft appearance and baggage handling services.

International expansion was a focus for ITS as well, and it made several acquisitions in England and Germany. Specifically, the company added to its service operations at London's three airports with the acquisition of White Lion Aviation Security Ltd. for $700,000. White Lion provided aviation security, baggage handling, and cargo delivery services, primarily at Stanstead Airport, a growing hub. The acquisition of Storehire UK Ltd. complemented existing services; that company provided secure, lockable storage units for commercial, professional, and personal use at Stanstead Airport. On the continent, ITS purchased OS Security Service GMBH, based in Frankfurt, Germany, for $300,000 cash. From its locations in Dusseldorf, Berlin, Hamburg, and Stuttgart the company provided aircraft guards, passenger profiling, and baggage and cargo screening services for eight major international airlines. ITS also initiated operations in Rome, under the name ITS Italia, which provided ground handling, supervisory, and administrative services.

The acquisitions continued the following year, when ITS purchased an aviation staffing service, Securex, Inc. of Tampa. Securex employed 1,200 people and provided staffing for commercial security, as well as skycap and aircraft cabin services in 30 Florida cities. The acquisition of contracts from Sky Valet, based in West Palm Beach, for $800,000 involved stations in South Carolina, Mississippi, Texas, Tennessee, Pennsylvania and Massachusetts. ITS also acquired six contracts for $400,000 from Neptune Equipment and Facilities, Inc. which provided airport ground equipment maintenance, aircraft appearance, and janitorial services at Las Vegas International Airport and Denver International Airport.

ITS management created a new position, vice-president of marketing, to develop marketing programs in support of these acquisitions. Marketing concerns included developing brand name recognition and initiating a direct mail marketing program. In addition to sales and service skills, training for sales executives involved selling the company's services as a package. ITS planned to expand using existing infrastructure to offer a wider array of services. The resulting cost efficiency enabled ITS to offer airlines enhanced value on contracts which engaged the company for more than one service. ITS later created two operating divisions to improve cost efficiency related to selling integrated packages of aviations services. Charles P. Licata became president of Commercial Staffing Services, while Thomas M. Vaiden became president of Aviation Staffing Services.

At fiscal year end March 31, 1998, ITS reported $173.2 million in revenues and $5.7 million net income. Contracts with Delta Airlines comprised 26 percent of revenues, Continental Airlines contracts comprised 14.7 percent, and six other major airlines accounted for 57.3 percent of total revenues. During this time, ramp and ground handling services proved the fastest growing sector of the airline services business.

The company entered the market for high-level security personnel with the May 1998 acquisition of Gibraltar Protection, Inc. for $1.3 million. Rated one of the top security firms in Los Angeles and Orange Counties, the Torrance-based company provided commercial security for high rise office buildings, industrial facilities, and for executive protection. The company employed 350 people and generated $6 million in annual revenues in 1997. Other acquisitions involved Versatile Services, Inc., for $100,000, which provided skycap services in Hawaii. In June 1998 ITS acquired commercial security contracts from Security Coordinators, Inc., based in San Antonio.

Financial Woes in the Late 1990s

Amidst this rash of acquisitions, in May 1998, ITS management announced that it had a banner fiscal year, with earnings of $5.7 million on sales that had increased 50 percent to $173.2 million. However, that June the company called for an outside audit of its books, which revealed lower earnings and eroding profit margins. The labor shortage had resulted in overtime wages and wage increases prior to contract renegotiation in order to attract and retain employees. Also, in an effort to discourage employee turnover, ITS had initiated an expensive employee health and medical benefits plan. Regardless of the reasons, Wall Street noticed the disappointing results, and ITS's stock value dropped to $6.31 per share, down from approximately $20 per share a month earlier and $24 per share in March. Interestingly, and for undisclosed reasons, over the course of the year two ITS executives left the company: vice-president of finance, Robert Schwartz, and president and chief financial officer, Singer. Such uncertainty in the leadership ranks was reflected in the declining stock price for ITS.

The following year, ITS moved to fill the leadership positions as well as to straighten out the financial morass left over from the year before. A payroll-related accounting problem was discovered during audits, and earnings again had to be restated, and again they were disappointing. In July 1999 NASDAQ moved to halt trading of the company's shares until ITS could answer some of the Exchange's questions regarding its finances. When ITS was unable to file a report as requested, NASDAQ debited the stock the following September. By November ITS traded on the over-the-counter Bulletin Board, at $1.13 per share.

In February 2000 ITS restated earnings from operations for 1997, 1998, and 1999 and hoped that the stock would be relisted. Changes in 1998's income involved a reduction from $5.2 million in profit, as reported after the previous audit, to $4.9 million. For 1999 the company had reported a net income of $1 million; the restated results showed a net loss of $7.3 million. At the time, the company's outside auditor questioned whether ITS could continue as a going concern.

Still, demand was for ITS services was high and management was cautiously optimistic. The company obtained a new executive management team which the board of directors hoped would reposition ITS for future profitability. After the retirement of Weitzel, Mark D. Thompson was named CEO, and in February 2000 ITS hired two new executive vice-presidents who, along with Thompson, had been instrumental in the turnaround of another company. Ronald P. Koegler managed financial reporting and tax functions, while Michael F. Sosh administered banking, insurance, cash management, accounts receivable and payable, payroll, information systems, and human resources functions. The new management team faced issues relating to high employee turnover and integration of the 25 acquisitions made by ITS since going public. Rather than continue to grow with acquisitions, the company sought to establish controls over finance and operations. In pursuing new business, ITS focused on opportunities with adequate profit margins. Potential areas of growth in airline services included passenger ticketing and cargo handling.

Principal Subsidiaries: Crown Technical Systems, Inc.

Principal Divisions: Aviation Staffing Services; Commercial Staffing Services.

Principal Competitors: Borg-Warner Security Corporation; Burns International Services Corporation; International Aviation Security, Inc.; Globe Aviation Securities Corporation; Ogden Allied Support Services; Signature Flight Support Services; The Wackenhut Corporation.

Last edited by netrashetty; January 11th, 2011 at 12:17 PM..
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