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ABM Industries Inc. (NYSE:ABM) reported third-quarter 2010 operating earnings of 36 cents per share, lagging the Zacks Consensus Estimate of 41 cents by 5 cents. However, the results compare favorably with 30 cents reported in the prior-year quarter. Net operating income was $18.8 million, up 19.7% from $15.7 million in the third quarter of 2009.

A focus on client retention, restructuring the Janitorial business, as well as sales pipeline expansion and cost control measures aided the company to deliver improved year-over-year performance.

Including a $2.2 million or 4 cents per share benefit from one less day of labor expense, the company reported net income of $21 million or 40 cents per share compared to $12.3 million or 24 cents per share in the third quarter of 2009.

The prior-year quarter includes after-tax expense for corporate initiatives of $3.1 million or 6 cents per share and after-tax insurance expense related to prior years of $2.1 million or 4 cents per share. However, a tax credit of $1.8 million or 4 cents per share was a partial offset.

Total revenue in the quarter under review declined 0.2% year over year to $869 million. It also fell short of the Zacks Consensus Estimate of $890 million.

Effective cost control measures and lower compensation costs helped the company to reduce its selling, general and administrative expense in the quarter. It declined 15.5% year over year to $54.7 million. Total expenses were $833.7 million, down from $850.1 million in the year-ago period.

Earnings before interest, depreciation and amortization were $45.9 million, up 21.5% year over year.

The company reported an operating profit of $35.3 million, a whopping increase of 72.3% year over year.

Segment Update

Janitorial: Revenues decreased 2.0% year over year to $583 million in the quarter. Operating income was $38.6 million, up 10.2% year over year. The increase resulted from a benefit of one less workday.

In the third quarter of 2010, the Janitorial Division acquired Diversco Inc., a provider of outsourced facility services, particularly to manufacturing and industrial clients. This acquisition would aid the company to broaden its business in janitorial and security operation.

Parking: Revenues in the quarter were $114.2 million, down 0.4% from the prior-year quarter primarily due to lower management reimbursement revenues. Operating income, however, increased 17.2% year over year to $5.8 million in the third quarter of 2009.

Security: Revenues in the quarter under review increased 0.5% year over year to $84.9 million driven by new client sales. This was the only segment incurring a double-digit decline in operating income. Operating income in the quarter was $2.0 million, down 26.4% year over year due to cost pressures on existing clients and certain one-time items.

Engineering: This segment witnessed a double-digit revenue growth in the third quarter. The segment revenue improved 14.2% year over year to $86.6 million. The increase was attributable to improved sales to both new and existing clients. Operating income improved 21.1% year over year to $56.9 million in the reported quarter.

Corporate: Revenues were $0.3 million compared with $0.5 million in the third quarter 2009. Operating loss was $17 million compared with a loss of $27 million in the prior-year quarter.

Financial Update

The balance of cash and cash equivalents at the end of the quarter was $32.9 million, down from $34.2 million at the end of fourth-quarter 2009.

At the end of the reported quarter the line of credit balance totaled $150 million, lower than $172.5 million at the end of the fourth quarter of 2009.

Cash from operations in the third quarter 2010 was $35.2 million, a substantial jump from $9.3 million in the prior-year quarter.

Dividend

The board of directors authorized a fourth-quarter cash dividend of 135 cents per common share to stockholders of record on Oct 7, 2010. The dividend will be paid on Nov 1, 2010. With this authorization, the company will pay the 178th consecutive quarterly cash dividend.

Full-Year 2010 Guidance

Management expects adjusted income from continuing operations to be in the range of $1.33 to $1.37 per share. Including additional costs associated with the implementation of new information technology systems and other unique items impacting comparability of 18 cents, management expects income from continuing operations to be in the range of $1.15 to $1.19 per share.

ABM Industries' top-line remains under pressure due to sagging commercial office building occupancy and rental rates in the U.S. The economic meltdown has resulted in lower commercial office building occupancy and rental rates, which in turn has reduced demand for the company's services and created pricing pressure for building maintenance and other services provided by ABM Industries.

We maintain our Underperform recommendation on ABM Industries. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.

Disclosure: None

Source: ABM Industries Comes Up Short

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