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Business services provider ABM Industries Incorporated (ABM - Analyst Report) reported second-quarter fiscal 2014 adjusted earnings of 33 cents per share, well below the Zacks Consensus Estimate of 40 cents. The recurring earnings compared unfavorably with the year-ago adjusted tally of 36 cents, which benefited from a lower share count.

GAAP earnings for the reported quarter were $15.2 million or 27 cents per share compared with $19.3 million or 35 cents per share in the year-earlier quarter. The year-over-year decrease in earnings was primarily attributable to higher legal expenses, additional start-up costs due to newer contracts and inclement weather conditions.

Total quarterly revenue increased 4.9% year over year to an all-time high of $1,231.3 million with healthy organic growth of 4.1% from new business and expansion of services. Revenues for the reported quarter beat the Zacks Consensus Estimate of $1,227 million.

Segment Performance

Janitorial: Quarterly revenues from the segment increased 3.1% year over year to $631.7 million due to significant new business wins and robust discretionary tag sales. However, segment operating profit declined 3.5% to $29.1 million owing to higher initial costs associated with a new contract and steep rise in legal expenses.  

Facility Services: Revenues improved 1.4% year over year to $149.5 million, while operating profit declined 12.9% to $5.4 million.

Parking: Revenues from this segment were marginally up by 0.7% year over year to $152.6 million, while operating profit expanded 4.9% to $6.4 million due to the termination of lower margin contracts and stringent cost management.

Security: The segment reported revenues of $93.8 million compared with $91.5 million in the year-ago quarter, representing a 2.5% year-over-year increase. Operating profit increased 4.8% to $2.2 million, benefiting from new business and sales associated with bundled services.

Building & Energy Solutions: Revenues from the segment were up 26.2% to $118.5 million, driven by healthy government business, bundled energy solutions and the accretive acquisition of BEST Infrared Services and Alpha Mechanical. Operating profit more than doubled to $3.5 million with stringent cost-cutting measures, top-line growth and benefits from investments in healthcare vertical and energy businesses.

Other: Revenues improved 12.0% year over year to $85.2 million due to strong organic growth and the Aug 2013 acquisition of Blackjack, while operating profit declined 4.0% to $2.4 million owing to high start-up costs.

Adjusted EBITDA decreased 5.0% in the reported quarter to $49.4 million, driven by increased legal expenses of $1.6 million, higher start-up costs of $1.5 million related to new contracts, and $0.8 million charges due to adverse weather conditions.

ABM has a healthy pipeline of future businesses with strength particularly seen in its government business. The company expects to improve its profitability in the coming quarters with seamless integration of acquired businesses and newer contracts. Management also reiterated that corporate restructuring initiatives were well on track to yield sustained long-term growth momentum.

Financial Position

Cash and cash equivalents at quarter end were $37.7 million. Net cash from operations improved 55.4% to $76.6 million, which enabled the company to reduce its debt and pay quarterly dividend. Outstanding debt under its credit facility was down to $327.2 million from $367.0 million in the previous quarter.

ABM maintained its quarterly cash dividend at 15.5 cents per share, which represented its 193rd consecutive quarterly dividend.

Outlook

ABM reiterated its guidance for fiscal 2014. The company expects income from continuing operations in the range of $1.38 to $1.48 per share. Adjusted income is expected in the range of $1.58 to $1.68 per share.

Moving Forward

ABM’s strategy entails growth through acquisitions. The company expects to extend its global footprint as well as strengthen its position in existing markets through successful integration and organic growth across industry verticals.

ABM presently has a Zacks Rank #3 (Hold). Other players in the industry that warrant a look include Huron Consulting Group Inc. (HURN - Snapshot Report), Xoom Corporation (XOOM - Snapshot Report) and Global Payments Inc. (GPN - Snapshot Report), all of which carry a Zacks Rank #2 (Buy).

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