ABM Comfortably Beats on Q1 Earnings, Ups Fiscal Guidance

Business services provider ABM Industries Incorporated ABM started fiscal 2016 on a strong note, recording relatively healthy first-quarter results. The company reported first-quarter fiscal 2016 adjusted earnings (from continuing operations) of 38 cents per share, comfortably beating the Zacks Consensus Estimate by 12 cents and rising 18.8% year over year on the back of solid revenue growth.

ABM's net income, on a GAAP basis, was $14 million or 24 cents per share compared with $17.7 million or 31 cents per share in the year-earlier quarter. The year-over-year decrease in earnings, despite modest top-line improvement, was primarily due to higher operating expenses.

Inside the Headlines

Revenues for the reported quarter increased 6.2% year over year to $1,268.4 million and exceeded the Zacks Consensus Estimate of $1,256 million, largely driven by higher work order (tag) sales and a solid ABES (Technical Services) business. Organic growth improved 3.7% year over year, while inorganic growth added $29.3 million of incremental revenues during the quarter, primarily related to the ABES business.

Operating profit for the reported quarter declined to $13.6 million from $16.8 million in the year-ago period owing to higher insurance-related expenses. Adjusted EBITDA increased 12.9% year over year to $43.7 million from $38.7 million in the first quarter of fiscal 2015 for respective margins of 3.4% and 3.2%.

Segment Performance

Revenues from the Janitorial segment increased 3% year over year to $685.7 million, driven by strong Work Order revenues. However, segment operating profit for the reported quarter declined 2% year over year to $33.7 million.

Facility Services' segment revenues were up 1.5% year over year to $158.5 million, while operating profit declined 13.6% to $5.1 million owing to a challenging macroeconomic environment.

Revenues from the Parking segment improved 4% year over year to $162.0 million, while operating profit from the segment was down 23.1% to $5.0 million.

Building & Energy Solutions' revenues increased 25.5% to $149.8 million, while that from Other segment improved 15.6% year over year to $112.4 million.

Business Restructuring Update

During the quarter, ABM announced the acquisition of Westway Services Holdings Ltd. – a provider of technical engineering services in the U.K. – to augment its presence in the region. Based in South Ruislip, West London, Westway offers specialized services such as heating, ventilation, air conditioning, refrigeration, electrical installations, building management systems, planned preventative maintenance and reactive maintenance services.

The acquisition is a strategic fit for ABM and opens up cross-selling opportunities for its existing customers in the U.K. ABM serves over 370 clients throughout the U.K., including over 200 commercial office locations, approximately 50 centers and retail parks, 15 airports and about 1 million square feet of public and entertainment venue space.

The transaction is also in sync with the Vision 2020 plan of ABM that outlines its prospects for the next five years. The plan hinges on three primary phases, the first of which is aimed at increasing the efficiency of the company through diligent execution of the operating plan and stringent cost-reduction activities.

The second phase will focus on driving growth across the realigned verticals through effective realization of cost savings by way of procurement, account management and other organizational changes. The final phase of the transformation will include accelerated growth impetus from the vertical alignment and account planning systems with a focus on additional cost savings.

Financial Position

Cash and cash equivalents at quarter end were $55.9 million. Net cash used in operating activities during the quarter was $31.4 million, compared with $32.4 million of cash utilization in the prior-year period. ABM ended the quarter with total debt of $415.5 million.

During the quarter, the company repurchased approximately 0.4 million shares for $11.3 million. As of Jan 31, 2016, ABM had shares worth $177.3 million remaining for repurchase under its $200 million share buyback program.

Updated Guidance

With relatively decent quarterly results and Work Opportunity Tax Credit adjustments, ABM updated its fiscal guidance. For fiscal 2016, ABM currently expects adjusted income from continuing operations in the range of $1.50–$1.60, up from $1.30–$1.40 expected earlier.

Going Forward

ABM announced a comprehensive strategic and transformation initiative focused on driving sustainable profitability by effectively allocating resources to higher margin services and business verticals with a strong competitive edge. We expect this to fuel the company's growth momentum in the coming quarters.

ABM currently has a Zacks Rank #3 (Hold). Some better-ranked stocks include Rollins Inc. ROL, ServiceMaster Global Holdings, Inc. SERV and The Hackett Group, Inc. HCKT, each carrying a Zacks Rank #2 (Buy).

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