ABM Industries Inc: Form 10-Q for the period ended Apr 30, 2023

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to facilitate an understanding of the results of operations and financial condition of ABM. This MD&A is provided as a supplement to, and should be read in conjunction with, our Financial Statements and our Annual Report on Form 10-K for the year ended October 31, 2022, which has been filed with the SEC. This MD&A contains forward-looking statements about our business, operations, and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, and intentions. Our future results and financial condition may be materially different from those we currently anticipate. See “Forward-Looking Statements” for more information.

Throughout the MD&A, amounts and percentages may not recalculate due to rounding. Unless otherwise indicated, all information in the MD&A and references to years are based on our fiscal years, which end on October 31.

Business Overview

ABM is a leading provider of integrated facility solutions, customized by industry, with a mission to make a difference, every person, every day.

ELEVATE Strategy

In December 2021, we announced our multiyear strategic plan called ELEVATE. The ELEVATE strategy is designed to strengthen our industry leadership position through end-market repositioning and build on our core services, which we expect will drive significant long-term value for our stakeholders.

We will continue to make significant investments, which, as previously stated, are expected to total $150 – $175 million over the life of the program and we will continue to implement various measures with the aim to ELEVATE:

• the client experience, by serving as a trusted advisor who can provide innovative multiservice solutions and consistent service delivery;
• the team member experience, by investing in workforce management, training, developing the next generation of ABM leaders, and building on our inclusive culture; and
• our use of technology and data to power client and employee experiences with cutting-edge data and analytics, processes, and tools that will fundamentally change how we operate our business.

Segment Reporting

Our current reportable segments consist of B&I, M&D, Education, Aviation, and Technical Solutions, as further described below.

REPORTABLE SEGMENTS AND DESCRIPTIONS

B&I, our largest reportable segment, encompasses janitorial, facilities engineering, and parking services for commercial real estate properties (including corporate offices for high tech clients), sports and entertainment venues, and traditional hospitals and non-acute healthcare facilities. B&I also provides vehicle maintenance and other services to rental car providers.

M&D provides integrated facility services, engineering, janitorial, and other specialized services in different types of manufacturing, distribution, and data center facilities. Manufacturing facilities include traditional motor vehicles, electric vehicles, batteries, pharmaceuticals, steel, semiconductors, chemicals, and many others. Distribution facilities include e-commerce, cold storage, logistics, general warehousing, and others.

Education delivers janitorial, custodial, landscaping and grounds, facilities engineering, and parking services for public school districts, private schools, colleges, and universities.

Aviation supports airlines and airports with services ranging from parking and janitorial to passenger assistance, catering logistics, air cabin maintenance, and transportation.

Technical Solutions specializes in facility infrastructure, mechanical and electrical services, including power design, installation and maintenance, as well as microgrid systems installations. These services can also be leveraged for cross-selling across all of our industry groups, both domestically and internationally.

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Key Financial Highlights

• Revenues increased by $86.2 million, or 4.5%, to $1,984.0 million during the three months ended April 30, 2023, as compared to the prior year period. Revenue growth was comprised of organic growth of 2.3% and acquisition growth of 2.3%. Acquisition growth was driven by a $43.5 million revenue increase from the Momentum and RavenVolt acquisitions, completed in 2022. Organic growth was primarily driven by the expansion of business with existing customers as well as new business within M&D and Education and the recovery in volume of our business in Aviation. In addition, we recognized $12.6 million in revenue from an Aviation parking project, whereby all the direct labor and related costs were recognized in the prior periods. The related revenue was not recognized in the prior periods since the criteria for revenue recognition was not met until February 2023. The increase in revenues was partially offset by a decrease in work orders for disinfection-related demands (primarily in M&D, B&I, and Education).
• We had an increase in operating profit of $17.7 million, to $92.7 million during the three months ended April 30, 2023, as compared to the prior year period. The increase was primarily attributed to:
• the revenue recognized for the Aviation parking project during the three months ended April 30, 2023; and
• the decrease in the fair value of the contingent consideration related to the RavenVolt Acquisition.

The increase was partially offset by:

• a decrease in disinfection-related work orders, which have higher margins; and
• amortization of intangibles related to the RavenVolt Acquisition of $3.2 million.
• Interest expense increased by $13.3 million, to $21.1 million during the three months ended April 30, 2023, as compared to the prior year period, and was driven by increased indebtedness to fund the acquisitions made in 2022, and higher interest rates on our debt borrowings.
• Our effective tax rate on income from operations was 28.2% for the three months ended April 30, 2023, as compared to 28.0% for the three months ended April 30, 2022.
• Net cash used in operating activities was $45.0 million during the six months ended April 30, 2023. Our total net cash used in operating cash flows was lower compared to the prior year period, primarily due to the timing of certain working capital requirements, which included a $143.8 million payment for the Bucio case during the three months ended April 30, 2022.
• Dividends of $29.0 million were paid to shareholders, and dividends totaling $0.220 per common share were declared during the six months ended April 30, 2023.
• At April 30, 2023, total outstanding borrowings under our Amended Credit Facility were $1.4 billion. At April 30, 2023, we had up to $432.0 million of borrowing capacity.

Results of Operations

Three Months Ended April 30, 2023, Compared with the Three Months Ended April 30, 2022

Consolidated

(in millions, except per share amounts)

*Not meaningful

Revenues

Revenues increased by $86.2 million, or 4.5%, to $1,984.0 million during the three months ended April 30, 2023, as compared to the prior year period. Revenue growth was comprised of organic growth of 2.3% and acquisition growth of 2.3%. Acquisition growth was driven by a $43.5 million revenue increase from the Momentum and RavenVolt acquisitions, completed in 2022. Organic growth was primarily driven by the expansion of business with existing customers as well as new business within M&D and Education and the recovery in volume of our business in Aviation. In addition, we recognized $12.6 million in revenue from an Aviation parking project, whereby all the direct labor and related costs were recognized in the prior periods. The related revenue was not recognized in the prior periods since the criteria for revenue recognition was not met until February 2023. The increase in revenues was partially offset by a decrease in work orders for disinfection-related demands (primarily in M&D, B&I, and Education).

Operating Expenses

Operating expenses increased by $66.9 million, or 4.1%, to $1,715.2 million during the three months ended April 30, 2023, as compared to the prior year period. Gross margin increased by 40 bps to 13.6% in the three months ended April 30, 2023, from 13.1% in the prior year period. The increase in gross margin was primarily driven by the revenue from an Aviation parking project.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $0.2 million to $156.6 million during the three months ended April 30, 2023, as compared to the prior year period. The decrease in selling, general and administrative expenses was primarily attributable to:

• a $8.4 million decrease in the fair value of contingent consideration related to the RavenVolt Acquisition; and
• a $3.7 million decrease in costs relating to certain technology projects primarily attributable to discrete transformational costs under our ELEVATE strategy for developing the new ERP system, client-facing technology, workforce management tools, and data analytics.

This decrease was partially offset by:

• a $3.6 million increase in acquisition and integration costs primarily related to the acquisitions completed in 2022 and 2021;
• a $4.7 million increase in bad debt, of which $2.6 million relates to a favorable adjustment in the prior year; and
• a $3.5 million unfavorable self-insurance adjustment related to prior year claims as the result of actuarial evaluations completed on our medical and dental self-insurance plans.

Amortization of Intangible Assets

Amortization of intangible assets increased by $1.9 million, or 10.7%, to $19.5 million during the three months ended April 30, 2023, as compared to the prior year period. The increase was primarily due to the amortization of intangibles acquired as part of the RavenVolt Acquisition.

Interest Expense

Interest expense increased by $13.3 million, to $21.1 million during the three months ended April 30, 2023, as compared to the prior year period, and was driven by increased indebtedness to fund acquisitions made in 2022, and higher interest rates on our debt borrowings.

Income Taxes from Operations

Our effective tax rates from income on operations for the three months ended April 30, 2023, and April 30, 2022, were 28.2% and 28.0%, respectively, resulting in provisions for taxes of $20.4 million and $19.0 million, respectively.

Our effective tax rates for the three months ended April 30, 2023, and April 30, 2022, were not impacted by any significant discrete items.

Interest Rate Swaps

We had a loss of $2.5 million on interest rate swaps during the three months ended April 30, 2023, as compared to a gain of $11.3 million during the three months ended April 30, 2022, primarily due to underlying changes in the fair value of our interest rate swaps.

Foreign Currency Translation

We had a foreign currency translation gain of $2.3 million during the three months ended April 30, 2023, as compared to a foreign currency translation loss of $8.9 million during the three months ended April 30, 2022. This change was due to fluctuations in the exchange rate between the U.S. Dollar (“USD”) and the British pound sterling (“GBP”). Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of foreign currencies to the USD and the extent of our foreign assets and liabilities.

Segment Information

Financial Information for Each Reportable Segment

(in millions)

*Not meaningful

($ in millions)

B&I revenues decreased by $5.1 million, or 0.5%, to $998.5 million during the three months ended April 30, 2023, as compared to the prior year period. Revenue decrease was comprised of an organic decrease of 1.8%, which was partially offset by an acquisition growth of 1.3%. Acquisition growth was driven by a $18.0 million revenue increase from the Momentum Acquisition, completed in the second quarter of 2022. The organic revenue decrease was primarily driven by the decline in work orders, including disinfection-related work orders, and expected attrition of certain engineering clients. Management reimbursement revenues for this segment totaled $65.7 million and $53.9 million for the three months ended April 30, 2023 and 2022, respectively.

Operating profit decreased by $0.5 million, or 0.6%, to $76.2 million during the three months ended April 30, 2023, as compared to the prior year period. Operating profit margin decreased by 1 bps to 7.6% in the three months ended April 30, 2023, from 7.6% in the prior year period. The decrease in operating profit margin was primarily driven by the decrease in work orders, which have higher margins, partially offset by contract and service mix.

($ in millions)

M&D revenues increased by $16.3 million, or 4.5%, to $373.2 million during the three months ended April 30, 2023, as compared to the prior year period. The increase was primarily attributable to the expansion of business with existing customers as well as new business led by customers in life sciences and semiconductor manufacturing industries, partially offset by a decrease in work orders for disinfection-related demands.

Operating profit decreased by $1.1 million, or 2.7%, to $40.8 million during the three months ended April 30, 2023, as compared to the prior year period. Operating profit margin decreased by 81 bps to 10.9% in the three months ended April 30, 2023, from 11.7% in the prior year period. The decrease in operating profit margin was primarily attributable to the decrease in disinfection-related work orders, which have higher margins, and contract mix.

($ in millions)

Education revenues increased by $12.3 million, or 6.0%, to $216.7 million during the three months ended April 30, 2023, as compared to the prior year period. The increase was primarily attributable to net new business partially offset by a decrease in work orders for disinfection-related demands.

Operating profit increased by $0.1 million, or 0.3%, to $11.8 million for the three months ended April 30, 2023, as compared to the prior year period. Operating profit margin decreased by 31 bps to 5.4% in the three months ended April 30, 2023, from 5.7% in the prior year period. The decrease in operating profit margin was primarily attributable to an increase in start-up supplies to support new business growth and the decrease in disinfection-related work orders, which have higher margins. Operating profit margin was positively impacted by lower amortization of intangible assets.

($ in millions)

*Not meaningful

Aviation revenues increased by $41.3 million, or 22.2%, to $227.2 million during the three months ended April 30, 2023, as compared to the prior year period. The increase was primarily attributable to a recovery in consumer and business travel (both domestic and international). In addition, we recognized $12.6 million in revenue from an Aviation parking project, whereby all the direct labor and related costs were recognized in the prior periods. The related revenue was not recognized in the prior periods since the criteria for revenue recognition was not met until February 2023. Management reimbursement revenues for this segment totaled $7.7 million and $12.5 million for the three months ended April 30, 2023 and 2022, respectively.

Operating profit increased by $14.0 million, to $23.6 million during the three months ended April 30, 2023, as compared to the prior year period. Operating profit margin increased by 524 bps to 10.4% in the three months ended April 30, 2023, from 5.2% in the three months ended April 30, 2022. The increase was primarily attributable to revenue recognized for the Aviation parking project. The increase was partially offset by an absence of the prior year bad debt recovery.

($ in millions)

Technical Solutions revenues increased by $21.4 million, or 14.6%, to $168.4 million during the three months ended April 30, 2023, as compared to the prior year period. Revenue growth was comprised of acquisition growth of 20.3%, which was partially offset by an organic decrease of 5.7%. Acquisition growth was driven by an $29.8 million revenue increase from the RavenVolt Acquisition, which was completed in the fourth quarter of 2022. The organic revenue decrease was primarily driven by the decline in electric vehicle charging station installation sales as well as lower project revenues due to the timing of completions of certain bundled energy solutions projects.

Operating profit decreased $0.4 million, or 3.8%, to $10.2 million during the three months ended April 30, 2023, as compared to the prior year period. Operating profit margin decreased by 116 bps to 6.0% in the three months ended April 30, 2023, from 7.2% in the prior year period. The decrease in operating profit margin was primarily attributable to the contract mix and a $3.2 million amortization of intangibles related to RavenVolt.

($ in millions)

Corporate expenses decreased by $5.3 million, or 7.1%, to $69.2 million during the three months ended April 30, 2023, as compared to the prior year period. The decrease in corporate expenses was primarily attributable to:

• a $8.4 million decrease in the fair value of contingent consideration related to the RavenVolt Acquisition;
• a $3.7 million decrease in costs relating to certain technology projects primarily attributable to discrete transformational costs under our ELEVATE strategy for developing the new ERP system, client-facing technology, workforce management tools, and data analytics;
• a $2.3 million decrease in outside professional costs; and
• a $1.2 million decrease in legal costs and settlements, of which $0.9 million was attributed to the supplemental accrual of a legal reserve for the Bucio case during the three months ended April 30, 2022.

This decrease was partially offset by:

• a $3.6 million increase in acquisition and integration costs primarily related to the acquisitions completed in 2022 and 2021;
• the absence of a $3.5 million favorable self-insurance reserve adjustments from actuarial evaluations completed on our casualty insurance program in the three months ended April 30, 2022; and
• a $3.5 million unfavorable self-insurance adjustment related to prior year claims as the result of actuarial evaluations completed on our medical and dental self-insurance plans.

Results of Operations

Six Months Ended April 30, 2023, Compared with the Six Months Ended April 30, 2022

Consolidated

(in millions)

*Not meaningful

Revenues

Revenues increased by $141.2 million, or 3.7%, to $3,975.3 million during the six months ended April 30, 2023, as compared to the prior year period. Revenue growth was comprised of acquisition growth of 2.1% and organic growth of 1.6%. Acquisition growth was primarily driven by an $80.2 million revenue increase from the Momentum and RavenVolt acquisitions, which were completed in 2022. Organic growth was primarily driven by the expansion of business with existing customers, as well as new business within M&D and Education and recovery in volume of our business in Aviation. In addition, we recognized $11.4 million in revenue from an Aviation parking project, whereby all the direct labor and related costs were recognized in the prior periods. The related revenue was not recognized in the prior periods since the criteria for revenue recognition was not met until February 2023. The increase in revenues was partially offset by a decrease in work orders for pandemic-related demands (primarily in M&D, B&I, and Education).

Operating Expenses

Operating expenses increased by $157.1 million, or 4.7%, to $3,465.0 million during the six months ended April 30, 2023, as compared to the prior year period. Gross margin decreased by 89 bps to 12.8% in the six months ended April 30, 2023, from 13.7% in the six months ended April 30, 2022. The decrease in gross margin was primarily driven by the the absence of favorable self-insurance adjustments related to prior year claims as the result of actuarial evaluations completed. Based on the results of the Actuarial Review and Interim Update at April 30, 2023, it was determined that there was no adjustment required for our total reserves related to prior years during the three months ended April 30, 2023. In addition, there was a decrease in cleaning services for pandemic-related demands (primarily in M&D, B&I, and Education), which have higher margins. The decrease was partially offset by the revenue recognized for the Aviation parking project.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $2.7 million, or 0.9%, to $307.2 million during the six months ended April 30, 2023, as compared to the six months ended April 30, 2022. The decrease in selling, general and administrative expenses was primarily attributable to:

• a $8.4 million decrease in the fair value of contingent consideration related to the RavenVolt Acquisition;
• a $4.4 million decrease in legal costs and settlements, of which $0.9 million was attributed to the supplemental accrual of a legal reserve for the Bucio case during the six months ended April 30, 2022;
• a $3.9 million decrease in outside professional costs; and
• a $2.2 million decrease in acquisition and integration costs primarily related to the acquisitions completed in 2022 and 2021.

This decrease was partially offset by:

• the absence of a $7.7 million gain on the sale of a group of customer contracts related to healthcare technology management services within Technical Solutions during the three months ended January 31, 2022;
• a $3.5 million unfavorable self-insurance adjustment related to prior year claims as the result of actuarial evaluations completed on our medical and dental self-insurance plans;
• a $2.9 million increase in bad debt, of which $1.4 million relates to a favorable adjustment in the prior year; and
• a $2.1 million increase in costs relating to certain technology projects primarily attributable to discrete transformational costs under our ELEVATE strategy for developing the new ERP system, client-facing technology, workforce management tools, and data analytics.

Amortization of Intangible Assets

Amortization of intangible assets increased by $3.8 million, or 10.9%, to $39.0 million during the six months ended April 30, 2023, as compared to the six months ended April 30, 2022. This increase was primarily due to the amortization of intangibles acquired as part of the RavenVolt Acquisition.

Interest Expense

Interest expense increased by $26.8 million, to $40.9 million during the six months ended April 30, 2023, as compared to the six months ended April 30, 2022. The increase was driven by increased indebtedness to fund acquisitions made in 2022, and higher interest rates on our debt borrowings.

Income Taxes from Operations

Our effective tax rates on income from operations for the six months ended April 30, 2023, and April 30, 2022, were 27.6% and 25.7%, respectively, resulting in provisions for taxes of $34.5 million and $43.2 million, respectively.

Our effective tax rate for the six months ended April 30, 2023, was benefited by discrete items, primarily by $1.4 million for share-based compensation. Our effective tax rate for the six months ended April 30, 2022, was benefited by discrete items, primarily $3.4 million change in tax reserves.

Interest Rate Swaps

We had a loss of $15.6 million during the six months ended April 30, 2023, as compared to a gain of $11.9 million during the six months ended April 30, 2022, primarily due to underlying changes in the fair value of our interest rate swaps.

Foreign Currency Translation

We had a foreign currency translation gain of $12.8 million during the six months ended April 30, 2023, as compared to a foreign currency translation loss of $11.4 million during the six months ended April 30, 2022. This change was due to fluctuations in the exchange rate between the USD and the GBP. Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of foreign currencies to the USD and the extent of our foreign assets and liabilities.

Segment Information

Financial Information for Each Reportable Segment

(in millions)

*Not meaningful

($ in millions)

B&I revenues increased by $1.9 million, or 0.1%, to $2,035.0 million during the six months ended April 30, 2023, as compared to the prior year period. Revenue growth was comprised of acquisition growth of 1.6% and organic decrease of 1.5%. Acquisition growth was primarily driven by a $32.1 million revenue increase from the Momentum Acquisition, which was completed in the second quarter of 2022. The organic revenue decrease was primarily driven by the decline in work orders, including disinfection-related work orders. Management reimbursement revenues for this segment totaled $130.1 million and $106.4 million for the six months ended April 30, 2023 and 2022, respectively.

Operating profit decreased by $7.8 million, or 4.9%, to $152.2 million during the six months ended April 30, 2023, as compared to the prior year period. Operating profit margin decreased by 39 bps to 7.5% in the six months ended April 30, 2023, from 7.9% in the six months ended April 30, 2022. The decrease in operating profit margin was primarily driven by the decrease in work orders, which have higher margins, and contract and service mix.

($ in millions)

M&D revenues increased by $37.7 million, or 5.3%, to $753.7 million during the six months ended April 30, 2023, as compared to the prior year period. The increase was primarily attributable to the expansion of business with existing customers as well as new business led by customers in life sciences and semiconductor manufacturing industries, partially offset by a decrease in work orders for disinfection-related demands.

Operating profit decreased by $0.8 million, or 1.0%, to $81.7 million during the six months ended April 30, 2023, as compared to the prior year period. Operating profit margin decreased by 69 bps to 10.8% in the six months ended April 30, 2023, from 11.5% in the six months ended April 30, 2022. The decrease in operating profit margin was primarily attributable to the decrease in disinfection-related work orders, which have higher margins, and contract mix.

($ in millions)

Education revenues increased by $21.5 million, or 5.2%, to $431.6 million during the six months ended April 30, 2023, as compared to the prior year period. The increase was primarily attributable to net new business partially offset by a decrease in work orders for disinfection-related demands.

Operating profit decreased by $0.7 million, or 3.1%, during the six months ended April 30, 2023, as compared to the prior year period. Operating profit margin decreased by 47 bps to 5.5% in the six months ended April 30, 2023, from 5.9% in the six months ended April 30, 2022. The decrease in operating profit margin was primarily attributable to an increase in start-up supplies to support new business growth and the decrease in disinfection-related work orders, which have higher margins. Operating profit margin was positively impacted by lower amortization of intangible assets.

($ in millions)

Aviation revenues increased by $53.4 million, or 13.8%, to $439.5 million during the six months ended April 30, 2023, as compared to the prior year period. The increase was primarily attributable to a recovery in consumer and business travel (both domestic and international) and new parking-related services. In addition, we recognized $11.4 million in revenue from an Aviation parking project, whereby all the direct labor and related costs were recognized in the prior periods. The related revenue was not recognized in the prior periods since the criteria for revenue recognition was not met until February 2023. Management reimbursement revenues for this segment totaled $15.6 million and $24.8 million for the six months ended April 30, 2023 and 2022, respectively.

Operating profit increased by $13.4 million, or 72.4%, to $31.9 million during the six months ended April 30, 2023, as compared to the prior year period. Operating profit margin increased by 247 bps to 7.3% in the six months ended April 30, 2023, from 4.8% in the six months ended April 30, 2022. The increase was primarily attributable to revenue recognized for the Aviation parking project. Operating profit margin was negatively impacted by an increase in direct labor and related costs due to increased headcounts as travel continues to recover.

($ in millions)

Technical Solutions revenues increased by $26.7 million, or 9.3%, to $315.5 million during the six months ended April 30, 2023, as compared to the prior year period. Revenue growth was comprised of acquisition growth of 16.7%, which was partially offset by an organic decrease of 7.4%. Acquisition growth was driven by $48.1 million revenue increase from the RavenVolt Acquisition, which was completed in the fourth quarter of 2022. The organic revenue decrease was primarily driven by the decline in electric vehicle charging station installation sales, the sale of a group of customer contracts related to healthcare technology management services in the first quarter of 2022, as well as lower project revenues due to the timing of completions of certain bundled energy solutions projects.

Operating profit decreased by $10.0 million, or 36.7%, to $17.4 million during the six months ended April 30, 2023, as compared to the prior year period. Operating profit margin decreased by 399 bps to 5.5% in the six months ended April 30, 2023, from 9.5% in the six months ended April 30, 2022. The decrease in operating profit margin was primarily attributable to the $7.7 million gain recognized on the sale of a group of customer contracts in the first quarter of 2022 and a $6.3 million amortization of intangibles related to RavenVolt.

($ in millions)

Corporate expenses increased by $10.4 million, or 8.0%, to $140.8 million during the six months ended April 30, 2023, as compared to the prior year period. The increase in corporate expenses was primarily attributable to:

• the absence of a $28.7 million favorable self-insurance reserve adjustments from actuarial evaluations completed on our casualty insurance program in the six months ended April 30, 2022;
• a $3.5 million unfavorable self-insurance adjustment related to prior year claims as the result of actuarial evaluations completed on our medical and dental self-insurance plans; and
• a $2.1 million increase in costs relating to certain technology projects primarily attributable to discrete transformational costs under our ELEVATE strategy for developing the new ERP system, client-facing technology, workforce management tools, and data analytics.

This increase was partially offset by:

• a $8.4 million decrease in the fair value of contingent consideration related to the RavenVolt Acquisition;
• a $4.7 million decrease in compensation and related expenses primarily due to year-end compensation true-up for certain incentive plans and lower share-based compensation expense;
• a $4.2 million decrease in outside professional costs;
• a $3.2 million decrease in legal costs and outside settlements, of which $0.9 million was attributed to the supplemental accrual of a legal reserve for the Bucio case during the six months ended April 30, 2022; and
• a $2.2 million decrease in acquisition and integration costs primarily related to the acquisitions completed in 2022 and 2021.

Liquidity and Capital Resources

Our primary sources of liquidity are operating cash flows and borrowing capacity under our Amended Credit Facility. We assess our liquidity in terms of our ability to generate cash to fund our short- and long-term cash requirements. As such, we project our anticipated cash requirements as well as cash flows generated from operating activities to meet those needs.

In addition to normal working capital requirements, we anticipate that our short- and long-term cash requirements will include funding legal settlements, insurance claims, dividend payments, capital expenditures, share repurchases, mandatory loan repayments, and systems and technology transformation initiatives under our ELEVATE strategy. We anticipate long-term cash uses may also include strategic acquisitions. On a long-term basis, we will continue to rely on our Amended Credit Facility for any long-term funding not provided by operating cash flows.

We believe that our operating cash flows and borrowing capacity under our Amended Credit Facility are sufficient to fund our cash requirements for the next 12 months. In the event that our plans change or our cash requirements are greater than we anticipate, we may need to access the capital markets to finance future cash requirements. However, there can be no assurance that such financing will be available to us should we need it or, if available, that the terms will be satisfactory to us and not dilutive to existing shareholders.

Debt

On September 1, 2017, we refinanced and replaced our then-existing $800.0 million credit facility with a new senior, secured five-year syndicated credit facility, consisting of a $900.0 million revolver and an $800.0 million amortizing term loan, both of which were scheduled to mature on September 1, 2022. In accordance with terms of the Credit Facility, the revolver was reduced to $800.0 million on September 1, 2018.

On June 28, 2021, the Company amended and restated the Credit Facility, extending the maturity date to June 28, 2026, and increasing the capacity of the revolving credit facility from $800.0 million to $1.3 billion and the then-remaining term loan outstanding from $620.0 million to $650.0 million. The Amended Credit Facility provides for the issuance of up to $350.0 million for standby letters of credit and the issuance of up to $75.0 million in swingline advances. The obligations under the Amended Credit Facility are secured on a first-priority basis by a lien on substantially all of our assets and properties, subject to certain exceptions. Additionally, we may repay amounts borrowed under the Amended Credit Facility at any time without penalty.

At November 1, 2022, we amended our Amended Credit Facility pursuant to the LIBOR Transition Amendment and the Fifth Amendment to replace the benchmark rate at which U.S.-dollar-denominated borrowings bear interest from LIBOR to the forward-looking SOFR term rate administered by CME Group Benchmark Administration Limited. As a result of these amendments, we can borrow at Term SOFR plus a credit spread adjustment of 0.10% subject to a floor of zero.

The Amended Credit Facility contains certain covenants, including a maximum total net leverage ratio of 5.00 to 1.00, a maximum secured net leverage ratio of 4.00 to 1.00, and a minimum interest coverage ratio of 1.50 to 1.00, as well as other financial and non-financial covenants. In the event of a material acquisition, as defined in the Amended Credit Facility, we may elect to increase the maximum total net leverage ratio to 5.50 to 1.00 for a total of four fiscal quarters and increase the maximum secured net leverage ratio to 4.50 to 1.00 for a total of four fiscal quarters. Our borrowing capacity is subject to, and limited by, compliance with the covenants described above. At April 30, 2023, we were in compliance with these covenants.

On March 1, 2022, we entered into an uncommitted receivable repurchase facility (the “Receivables Facility”) of up to $150 million, which expired on March 30, 2023. The Receivables Facility allowed the Company to sell a portfolio of available and eligible outstanding U.S. trade accounts receivable to a participating institution and simultaneously agree to repurchase them generally on a monthly basis. Under this arrangement, we made floating rate interest payments equal to the forward-looking term rate based on SOFR plus 1.05%. These interest payments were payable monthly in arrears. The repurchase price of the receivables in the facility was the original face value. Outstanding receivables were repurchased on a date agreed upon by both the buyer and seller, generally on a monthly basis, and on the termination date of the repurchase facility. This facility was considered a secured borrowing and provided the buyer with customary rights of termination upon the occurrence of certain events of default. We guaranteed all of the sellers’ obligations under the facility.

During the three and six months ended April 30, 2023, we made principal payments of $8.1 million and $16.3 million, respectively, under the term loan. At April 30, 2023, the total outstanding borrowings under our Amended Credit Facility in the form of cash borrowings and standby letters of credit were $1.4 billion and $58.6 million, respectively, and our weighted average interest rate on all outstanding borrowings, excluding letters of credit, was 6.70%. At April 30, 2023, we had up to $432.0 million of borrowing capacity.

Reinvestment of Foreign Earnings

We plan to reinvest our foreign earnings to fund future non-U.S. growth and expansion, and we do not anticipate remitting such earnings to the United States. While U.S. federal tax expense has been recognized as a result of the Tax Cuts and Jobs Act of 2017, no deferred tax liabilities with respect to federal and state income taxes or foreign withholding taxes have been recognized.

IFM Insurance Company

IFM Assurance Company (“IFM”) is a wholly owned captive insurance company that we formed in 2015. IFM is part of our enterprise-wide, multiyear insurance strategy that is intended to better position our risk and safety programs and provide us with increased flexibility in the end-to-end management of our insurance programs. IFM began providing coverage to us as of January 1, 2015.

Share Repurchases

We did not repurchase shares under our share repurchase program during the three and six months ended April 30, 2023. Share repurchases may take place on the open market or otherwise, and all or part of the repurchases may be made pursuant to Rule 10b5-1 plans or in privately negotiated transactions. The timing of repurchases is at our discretion and will depend upon several factors, including market and business conditions, future cash flows, share price, share availability, and other factors. Repurchased shares are retired and returned to an authorized but unissued status. The share repurchase program may be suspended or discontinued at any time without prior notice. At April 30, 2023, authorization for $197.4 million of repurchases remained under our share repurchase program.

Cash Flows

In addition to revenues and operating profit, our management views operating cash flows as a good indicator of financial performance, because strong operating cash flows provide opportunities for growth both organically and through acquisitions. Operating cash flows primarily depend on: revenue levels; the quality and timing of collections of accounts receivable; the timing of payments to suppliers and other vendors; the timing and amount of income tax payments; and the timing and amount of payments on insurance claims and legal settlements.

(in millions)

Operating Activities

Net cash used in operating activities was $45.0 million during the six months ended April 30, 2023, as compared to net cash used by operating activities of $137.5 million during the prior year period. The change was primarily driven by the timing of working capital requirements, which included a $143.8 million payment for the Bucio case during the three months ended April 30, 2022.

Investing Activities

Net cash used in investing activities decreased by $53.3 million during the six months ended April 30, 2023, as compared to the prior year period. This decrease was primarily related to the Momentum Acquisition in prior year.

Financing Activities

Net cash provided by financing activities was $62.8 million during the six months ended April 30, 2023, as compared to net cash provided by financing activities of $201.2 million during the prior year period. The change was primarily related to a decrease in net borrowings from our Amended Credit Facility and Receivables Facility.

Contingencies

For disclosures on contingencies, see Note 10, “Commitments and Contingencies,” of the Notes to unaudited Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Critical Accounting Policies and Estimates

Our Financial Statements are prepared in accordance with U.S. GAAP, which require us to make certain estimates in the application of our accounting policies based on the best assumptions, judgments, and opinions of our management. There have been no significant changes to our critical accounting policies and estimates. For a description of our critical accounting policies, see Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended October 31, 2022.

Recently Issued Accounting Pronouncements

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There are no material changes related to market risk from the disclosures in our Annual Report on Form 10-K for the year ended October 31, 2022.

a. Disclosure Controls and Procedures.

As of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer evaluated our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and (2) accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

b. Changes in Internal Control Over Financial Reporting.

To support the growth of our financial shared service capabilities and standardize our financial systems, we continue to update several key platforms, including our enterprise resource planning system. The implementation of several key platforms involves changes in the systems that include internal controls. Although some of the transitions have proceeded to date without material adverse effects, the possibility exists that they could adversely affect our internal controls over financial reporting and procedures.

There were no other changes in our internal control over financial reporting during the second quarter of 2023 identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors identified in our Annual Report on Form 10-K for the year ended October 31, 2022, in response to Item 1A., “Risk Factors,” of Part I of the Annual Report.