ABM Industries Inc. (ABM) reported second quarter of fiscal 2011 results, delivering a GAAP EPS of 26 cents compared with 16 cents in the year-ago quarter. The quarter noted some special items, which negatively affected earnings per share to the extent of 2 cents. Excluding these items, adjusted EPS in the reported quarter amounted to 28 cents versus 23 cents in the year-earlier quarter, surpassing the Zacks Consensus Estimate by a penny.
The earnings increased mainly due to a $4.7 million after-tax increase in Divisional operating profit and $2.3 million after-tax benefit from lower labor expense. These benefits were partially offset by higher tax expense and fuel costs.
During the quarter, net sales increased approximately 24% year over year to $1.06 billion, falling behind the Zacks Consensus Estimate of $1.07 billion. Revenues in the quarter mainly improved due to a $200 million contribution from the acquisitions made in 2010.
Costs and Margins
Costs of sales during the quarter were up 23% year over year to $949.6 million. Selling, general and administrative expenses increased 20% year over year to $78.3 million. Operating profit increased at a whopping rate of 70.4% year over year to $26.5 million. Consequently, operating margins increased 70 basis points year over year to 2.5% during the quarter.
Segmental Performance
Janitorial: Net sales of the segment increased 4.2% year over year to $590.2 million during second quarter of fiscal 2011. Operating profit of the segment rose 21.1% year over year to $34.9 million.
Engineering: During the quarter, net sales of the segment increased at a whopping rate of 143.9% year over year to $229.2 million. Operating profit was up 36.2% year over year to $6.8 million.
Parking: Net sales of the segment rose 36.9% year over year to $156.2 million, during the quarter. However, operating profit of the segment declined 5.6% year over year to $4.9 million.
Security: During the quarter, net sales of the segment rose 4.2% on a year -over- year basis to $84 million; while the operating profit declined 4.7% on a year-over-year basis to $0.90 million.
Corporate: Net sales of the segment decreased 28% substantially to $0.37 million, during the quarter. However, the segment’s operating loss improved to $21.7 million compared with $24.5 million in the prior-year quarter.
Financial Position
Cash and cash equivalents of the company decreased to $23.3 million as of April 30, 2011, from $39.4 million as of October 31, 2010. Cash provided from operating activities also decreased to $31.9 million at the end of second quarter of fiscal 2011, from $53.2 million, during the same period in fiscal 2010. ABM also announced a third quarter cash dividend of 14 cents per share, payable on August 1, 2011, to stockholders of record on July 7, 2011.
Guidance
The company reaffirmed its guidance which projects GAAP EPS in the range of $1.23 to $1.33 and adjusted EPS in the range of $1.43 to $1.53.
Our Take
Even though revenues have shown an improvement in the first quarter, they mostly came from acquisitions. ABM Industries’ acquisition driven growth strategy has its own inherent risks. A slowdown in acquisitions could lead to a slower growth rate, constant or lower margins, as well as lower revenue growth. Further, the process of integration may create unforeseen difficulties and expenses. We await the company’s return to solid organic growth.
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.
The company’s 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. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
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