ABM Matches EPS, Beats Revenue - Analyst Blog

ABM Industries Inc. (ABM) reported fourth-quarter 2010 adjusted earnings per share (EPS) of 43 cents per share, in line with the Zacks Consensus Estimate and 10% above the prior-year quarter EPS of 39 cents. Increase in revenues in conjunction with effective management of costs culminated in the improved year-over-year performance.

The EPS in the reported quarter excluded acquisition costs and insurance adjustments. The prior-year figure excluded charges related to insurance adjustments and the company's corporate initiatives. Excluding these items, EPS in the quarter was 41 cents versus 29 cents in the year-ago quarter.

Total revenue in the quarter under review increased 3.8% year over year to $901 million, surpassing the Zacks Consensus Estimate of $890 million due to improved performance across all its segments. The Parking segment led the performance with a growth of 13% year over year to $128.5 million.

The Engineering segment posed a growth of 7% to reach segment revenues of $88.7 million. The Security segment's revenue increased 6% to $87 million while Janitorial segment's revenues inched 1% to $596.8 million

Operating expenses upped 3% year over year to $803.7 million. As a percentage of revenues, it dipped 50 basis points to 89.2%. Selling, general and administrative expenses decreased 7% year over year to $58.8 million mainly due to lower IT costs. As a percentage of revenues, selling, general and administrative expenses improved 80 basis points to 6.5%.

The company reported an operating profit of $35.7 million, an increase of 55% year over year. Continued focus on cost reductions led to improved profits across all its segments. Operating profit at the Security segment increased 39% year over year to $3.2 million.

The Parking segment's operating income increased 6% year over year to $6.7 million. The Janitorial segment's operating income was $39.2 million, up 4% year over year. The Engineering segment's operating income improved 2% year over year to $6.2 million in the reported quarter.

Fiscal 2010 Performance: A Snapshot

ABM Industries reported adjusted EPS of $1.34, an increase of 1% from $1.33 in the prior year. The EPS was in line with the Zacks Consensus Estimate. Adjusted EPS for the year was near the lower end of management's guidance range of $1.33 to $1.37 per share.

The current year's EPS excluded charges related to corporate initiatives, acquisition costs, litigation contingency and insurance adjustments. The prior-year EPS excluded charges related to corporate initiatives, insurance adjustments, loss on Auction Rate Security and a benefit from a legal settlement. Including these items, the company's EPS was $1.21 in fiscal 2010 versus $1.07 in fiscal 2009.

Revenues increased 0.4% year over year to $3.49 billion, beating the Zacks Consensus Estimate of $3.48 billion. Revenue increased at the Parking, Security and Engineering segments by 2.6%, 0.5% and 14.8%, respectively, which was partially offset by a 1.9% decline at the Janitorial segment.

Financial Update

The balance of cash and cash equivalents at the end of the fiscal 2010 was $39.4 million, up from $34.1 million at fiscal year-end 2009. Cash from operations in the fourth quarter 2010 was $69.5 million compared with $64.4 million in the prior-year quarter. At the end of the reported quarter, the line of credit balance totaled $140.5 million, lower than $172.5 million at the end of fiscal 2009.

Dividend

The board of directors authorized a fourth-quarter cash dividend of 14 cents per common share to stockholders of record as of January 6, 2011. The dividend will be paid on February 7, 2011. With this authorization, the company will pay the 179th consecutive quarterly cash dividend.

Full-Year 2011 Guidance

Management expects adjusted EPS to be in the range of $1.43 to $1.53. Including transaction and integration costs, management expects EPS to be in the range of $1.23 to $1.33. ABM Industries acquired Linc Group in December 2010. ABM Industries expects the deal to be slightly accretive to fiscal 2011 earnings with no accretion in the first quarter.

There will be one additional work day of labor expense for 2011 compared with the prior year, with a pre-tax impact of $4 million to $5 million, primarily on Janitorial fixed-price contracts. This includes one additional work day in the first quarter of 2011. The refinancing of the company's credit facility is expected to increase year-over-year interest expense in the range of $10 million to $12 million pre-tax.

Our Take

ABM Industries' top-line remains has been under pressure due to sagging commercial office building occupancy and rental rates in the U.S. However, revenues showed an improvement in the quarter ending the year on a promising note.

ABM Industries depends on acquisitions for growth. However, the company had been relatively quiet on the acquisition front over the past two years. The last significant deal of OneSource for $390.5 million came in 2007.

After two small acquisitions in 2008 and 2009, ABM Industries acquired both Diversco Inc and Linc Group in 2010. The Linc acquisition will expand its client base in engineering and energy services and will help tap the significant growth opportunities in these key markets.

Given expected accretions from recent acquisitions, along with a strong focus on cost control, ABM Industries is in a better position entering fiscal 2011. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

ABM Industries operates through its subsidiaries and is the leading provider of facility services in the United States. The company provides janitorial, facility, engineering, parking and security services for thousands of commercial, industrial, institutional and retail facilities across the United States, Puerto Rico and British Columbia, Canada.

Its business services include ABM Janitorial Services, ABM Facility Services, ABM Engineering Services, Ampco System Parking and ABM Security Services. It competes with privately held ARAMARK Corporation, Central Parking Corporation and UNICCO Service Company.

 
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