ABM Industries Inc. (ABM) delivered net income of $14.6 million, or 28 cents per share in its second quarter ended Apr 30, 2010, down from $16.4 million or 32 cents per share in the year-ago period. The company exceeded the Zacks Consensus Estimate of 26 cents per share.
 
Overall, the reported quarter was lackluster with growth at the Engineering and Parking divisions being offset by the declines at the other two divisions — Janitorial and Security.
 
Earnings per share (EPS) of 28 cents excluded some after-tax items — a charge of 5 cents related to a specific legal contingency, a 4 cents per share charge from one additional day of labor expense and higher-than-anticipated state unemployment insurance expense of 3 cents per share.
 
Revenues in the quarter were $855.5 million, flat with $855.7 million in the year-ago period. ABM Industries’ sales are directly dependent on commercial real estate occupancy levels. The company has seen a slump in revenues subsequent to an economic slowdown, which resulted in declining commercial office building occupancy and rental rates.
 
Despite the adverse impact of the weak economic conditions on its revenue, ABM Industries continues to drive profits through aggressive cost containment. Since 2007, the company has been implementing Project Transform to increase alignment across the company and curtail costs. Material changes put into practice under Project Transform included consolidation of back-office functions and systems integration.
 
Segment Performance
 
Engineering had an overall strong quarter with revenues increasing 23% and operating profit up 20.3%.
 
Revenues at the Parking division were flat whereas its operating profit increased 6.7% driven by strong performance at several airport accounts and an ongoing focus on management of indirect expenses.
 
Janitorial revenues dropped 2.6% and its operating profit plunged 16.8% primarily due to an additional day of labor expense in the second quarter and higher state unemployment insurance costs.
 
Security division’s revenues declined 2.1% and its operating profit plummeted 32.6% as a result of higher-than-expected state unemployment insurance tax rates.
 
Financial Position
                         
ABM Industries had cash and cash equivalents of $20.9 million as of April 30, 2010, down from $21.2 million as of Jan 31, 2010.
 
The company generated net cash of $50 million from continuing operating activities in second-quarter 2010 compared with $31 million in the year-ago period.
 
During the quarter, ABM Industries utilized its cash flow to reduce its debt by $27 million to $145 million. Debt-to-capitalization ratio was 17.1% as of Apr 30, 2010, compared with 18.1% as of Jan 31, 2010.
 
Outlook
 
ABM Industries reaffirmed its fiscal 2010 earnings guidance in the range of $1.35 to $1.45 per share, compared with $1.33 reported in fiscal 2009. The guidance excludes the additional costs associated with the implementation of new information technology systems and other one-time items.
 
The guidance assumes year-over-year growth in revenues in the second half of 2010 given the recent sales wins and its existing sales pipeline. Profitability is also expected to improve driven by seasonal reductions in labor expense and one less working day in the third quarter.
 
ABM Industries expects to mitigate the impact of higher unemployment insurance expense during the second half of the year through a combination of government hiring incentives, working with clients and improved operating efficiencies.
 
ABM Industries’ top-line growth remains affected by the decline in commercial office building occupancy and rental rates in the U.S. However, the company manages to remain profitable through stringent cost-control measures. The office, warehouse and retail sectors continue to experience the delayed effects of the recession.
 
These sectors should see gradual improvement after employment picks up and create additional demand for space, implying a broader improvement in commercial real estate in 2011. Commercial rents will continue to dip in 2010, though apartment and industrial rents are close to stabilizing. In the absence of any near-term catalysts, we maintain our “Neutral” rating on the stock.
 
ABM Industries operates through its subsidiaries and is a 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 . ABM Industries’ business services include ABM Janitorial Services, ABM Facility Services, ABM Engineering Services, Ampco System Parking and ABM Security Services.
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