ABM Industries Inc: Form 10-Q for the period ended Jan 31, 2024

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, 2023, 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 over the life of the program, which are expected to total $200 - $215 million, 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.

Macro-Economic Environment in Commercial Real Estate and Other

We actively monitor the economic environment and its potential impact on demand for our services and our financial condition. Largely driven by the lingering effects of the Pandemic, especially the normalization of hybrid work, the commercial real estate industry, particularly multi-tenant and owner-occupied commercial office buildings, is experiencing an increase in vacancy rates. Given that Class A and high-quality commercial office buildings are a key end market for the Company, we expect a decline in demand for janitorial services and work orders in these markets near-term. As a result, we expect our B&I industry to experience muted growth in the near-term. Longer term, we expect the vacancy rates of Class A and high-quality buildings to gradually decrease and our volume of work to stabilize.

A large M&D client has mostly completed rebidding and rebalancing a portion of its work needs as part of its normal procurement process. We expect M&D’s financial results to be adversely impacted in the near-term.

Insurance

We review our self-insurance liabilities on a regular basis and adjust our accruals accordingly. Actual claims activity or development may vary from our assumptions and estimates, which may result in material losses or gains. As we obtain additional information that affects the assumptions and estimates used in our reserve liability calculations, we adjust our self-insurance rates and reserves for future periods and, if appropriate, adjust our reserves for claims incurred in prior accounting periods.

During the third quarter of 2023, we performed a comprehensive actuarial review of the majority of our casualty insurance programs to evaluate changes made to claims reserves and claims payment activity for the period of November 1, 2022, through April 30, 2023 (the “Actuarial Review”). The Actuarial Review was comprehensive in nature and was based on loss development patterns, trend assumptions, and underlying expected loss costs during the period analyzed.

The claims management strategies and programs that we have implemented have resulted in improvements. Based on the results of the Actuarial Review, we increased our total reserves related to prior years for known claims as well as our estimate of the loss amounts associated with IBNR claims by $5.3 million during the nine months ended January 31, 2024. The favorable review was primarily attributable to reduced claim frequency and severity development within the workers’ compensation program. During the three months ended January 31, 2023, it was determined that there was no adjustment required for our total reserves related to prior year. We will continue to assess ongoing developments, which may result in further adjustments to reserves.

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. We typically provide these services pursuant to monthly fixed-price, square-foot, cost-plus, and parking arrangements (i.e., management reimbursement, leased location, or allowance) that are obtained through a competitive bid process as well as pursuant to work orders.

M&D provides integrated facility services, engineering, janitorial, and other specialized services to a variety of manufacturing, distribution, and data center facilities. We typically provide these services pursuant to monthly fixed-price, square-foot, and cost-plus, that are obtained through a competitive bid process as well as pursuant to work orders.

Education delivers janitorial, custodial, landscaping and grounds, facilities engineering, and parking services for public school districts, private schools, colleges, and universities. These services are typically provided pursuant to monthly fixed-price, square-foot, and cost-plus arrangements that are obtained through either a competitive bid process or re-bid upon renewal as well as pursuant to work orders.

Aviation supports airlines and airports with services ranging from parking and janitorial to passenger assistance, catering logistics, air cabin maintenance, and transportation. We typically provide services to clients in this segment under master services agreements. These agreements are typically re-bid upon renewal and are generally structured as monthly fixed-price, square-foot, cost-plus, parking, transaction-price, and hourly arrangements.

Technical Solutions specializes in facility infrastructure, mechanical and electrical services, including EV power design, installation and maintenance, as well as microgrid systems design and installation. These services can also be leveraged for cross-selling across all of our industry groups, both domestically and internationally. Contracts for this segment are generally structured as electrical contracting services for energy related products such as the installation of solar solutions, battery storage, distributed generation, and other specialized electric trade.

23

Key Financial Highlights

• Revenues increased by $78.3 million, or 3.9%, to $2,069.6 million during the three months ended January 31, 2024, as compared to the prior year period. The increase was primarily driven by the net new business and expansion of business with existing customers within M&D and Education, the recovery in volume and new business in Aviation, and the timing of completion of certain energy solution projects within Technical Solutions. The increase in revenues was partially offset by a decline in work orders and expected attrition of certain engineering clients in B&I.
• Interest expense increased by $1.5 million, to $21.3 million during the three months ended January 31, 2024, as compared to the prior year period, and was driven by higher interest rates on our Amended Credit Facility.
• Our effective tax rate on income from operations was 17.3% for the three months ended January 31, 2024, as compared to 26.9% for the three months ended January 31, 2023. Our effective tax rate for the three months ended January 31, 2024, benefited from discrete items, primarily uncertain tax positions, share-based compensation, and return to provision adjustments. Our effective tax rate for the three months ended January 31, 2023, benefited from discrete items, primarily share-based compensation.
• Net cash provided by operating activities was $0.1 million during the three months ended January 31, 2024. Our total net cash provided by operating cash flows was higher compared to the prior year period, primarily due to the timing of working capital requirements, which included a $66.0 million payment of previously deferred payroll taxes during the three months ended January 31, 2023.
• Dividends of $14.1 million were paid to shareholders, and dividends totaling $0.225 per common share were declared during the three months ended January 31, 2024.
• At January 31, 2024, total outstanding borrowings under our Amended Credit Facility were $1.3 billion. At January 31, 2024, we had up to $449.8 million of borrowing capacity.

Results of Operations

Three Months Ended January 31, 2024, Compared with the Three Months Ended January 31, 2023

Consolidated

(in millions, except per share amounts)

Revenues

Revenues increased by $78.3 million, or 3.9%, to $2,069.6 million during the three months ended January 31, 2024, as compared to the prior year period. The increase was primarily driven by the net new business and expansion of business with existing customers within M&D and Education, the recovery in volume and new business in Aviation, and the timing of completion of certain energy solution projects within Technical Solutions. The increase in revenues was partially offset by a decline in work orders and expected attrition of certain engineering clients in B&I.

Operating Expenses

Operating expenses increased by $76.5 million, or 4.4%, to $1,826.3 million during the three months ended January 31, 2024, as compared to the prior year period. Gross margin decreased by 37 bps to 11.8% in the three months ended January 31, 2024, from 12.1% in the prior year period. The decrease in gross margin was primarily driven by the change in contact mix as well as an unfavorable self-insurance adjustment related to prior year claims as the result of actuarial evaluations completed.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $4.0 million to $154.6 million during the three months ended January 31, 2024, as compared to the prior year period. The increase in selling, general and administrative expenses was primarily attributable to:

• a $7.8 million increase in outside professional costs primarily related to consulting costs for our technology projects and
• a $2.9 million increase in bad debt, including a favorable adjustment of $1.0 million in the prior year.

This increase was partially offset by:

• a $10.2 million decrease in 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 decreased by $4.9 million, or 24.8%, to $14.6 million during the three months ended January 31, 2024, as compared to the prior year period. The decrease was primarily due to the amortization of intangibles acquired as part of the RavenVolt Acquisition.

Interest Expense

Interest expense increased by $1.5 million, to $21.3 million during the three months ended January 31, 2024, as compared to the prior year period, and was driven by higher interest rates on our Amended Credit Facility.

Income Taxes from Operations

Our effective tax rates from income on operations for the three months ended January 31, 2024, and January 31, 2023, were 17.3% and 26.9%, respectively, resulting in provisions for taxes of $9.3 million and $14.2 million, respectively.

Our effective tax rate for the three months ended January 31, 2024, benefited from discrete items, primarily by $2.9 million for uncertain tax positions, $2.1 million for share-based compensation, and $2.0 million for return to provision adjustments related to our non-U.S. operations. Our effective tax rate for the three months ended January 31, 2023, benefited by $1.3 million for share-based compensation.

Interest Rate Swaps

We had a loss of $16.0 million on interest rate swaps during the three months ended January 31, 2024, as compared to a loss of $13.1 million during the three months ended January 31, 2023, 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 $5.4 million during the three months ended January 31, 2024, as compared to a foreign currency translation gain of $10.5 million during the three months ended January 31, 2023. 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 $3.5 million, or 0.3%, to $1,033.1 million during the three months ended January 31, 2024, as compared to the prior year period. The revenue decrease was primarily driven by the decline in work orders, soft commercial office market conditions, and expected attrition of certain engineering clients, partially offset by client expansions and increases in revenue in the sports sector and parking. Management reimbursement revenues for this segment totaled $70.5 million and $64.4 million for the three months ended January 31, 2024 and 2023, respectively.

Operating profit increased by $3.7 million, or 4.8%, to $79.6 million during the three months ended January 31, 2024, as compared to the prior year period. Operating profit margin increased by 38 bps to 7.7% in the three months ended January 31, 2024, from 7.3% in the prior year period. The increase in operating profit margin was primarily driven by labor efficiencies.

($ in millions)

M&D revenues increased by $20.4 million, or 5.4%, to $400.9 million during the three months ended January 31, 2024, as compared to the prior year period. The increase was primarily attributable to the expansion of business with existing customers.

Operating profit increased by 1.1% to $41.3 million during the three months ended January 31, 2024, as compared to the prior year period. Operating profit margin decreased by 43 bps to 10.3% in the three months ended January 31, 2024, from 10.7% in the prior year period. The decrease in operating profit margin was primarily attributable to the change in contract mix.

($ in millions)

Education revenues increased by $5.2 million, or 2.4%, to $220.1 million during the three months ended January 31, 2024, as compared to the prior year period. The increase was primarily attributable to net new business and increases in scope of work with existing customers.

Operating profit increased by $0.9 million, or 7.6%, to $12.7 million for the three months ended January 31, 2024, as compared to the prior year period. Operating profit margin increased by 28 bps to 5.8% in the three months ended January 31, 2024, from 5.5% in the prior year period. The increase in operating profit margin was primarily attributable to labor efficiencies and lower amortization of intangible assets.

($ in millions)

Aviation revenues increased by $37.2 million, or 17.5%, to $249.5 million during the three months ended January 31, 2024, 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 business. Management reimbursement revenues for this segment totaled $9.5 million and $7.9 million for the three months ended January 31, 2024 and 2023, respectively.

Operating profit increased by $1.4 million, to $9.7 million during the three months ended January 31, 2024, as compared to the prior year period. Operating profit margin of 3.9% was consistent with the three months ended January 31, 2023. The operating profit margin was positively impacted by labor efficiencies, offset by certain costs related to reconciliations of funds due under long-term contracts.

($ in millions)

Technical Solutions revenues increased by $18.9 million, or 12.9%, to $165.9 million during the three months ended January 31, 2024, as compared to the prior year period. The increase was primarily driven by higher project revenues due to the timing of completions of certain energy solutions projects, including microgrid systems installation, partially offset by a decrease in electric vehicle charging station installation sales.

Operating profit decreased $0.6 million, or 8.8%, to $6.6 million during the three months ended January 31, 2024, as compared to the prior year period. Operating profit margin decreased by 94 bps to 4.0% in the three months ended January 31, 2024, from 4.9% in the prior year period. The decrease in operating profit margin was primarily attributable to the contract mix, partially offset by lower amortization of intangible assets.

($ in millions)

Corporate expenses increased by $3.2 million, or 4.4%, to $74.7 million during the three months ended January 31, 2024, as compared to the prior year period. The increase in corporate expenses was primarily attributable to:

• a $7.2 million increase in outside professional costs primarily related to consulting costs for our technology projects; and
• a $5.3 million unfavorable self-insurance reserve adjustments from actuarial evaluations completed in the three months ended January 31, 2023.

The increase was partially offset by:

• a $10.2 million decrease in 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.

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.

Credit Facility

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. 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 January 31, 2024, we were in compliance with these covenants.

During the three months ended January 31, 2024, we made principal payments of $8.1 million under the term loan. At January 31, 2024, the total outstanding borrowings under our Amended Credit Facility in the form of cash borrowings and standby letters of credit were $1.3 billion and $58.2 million, respectively, and our weighted average interest rate on all outstanding borrowings, excluding letters of credit, was 7.20%. At January 31, 2024, we had up to $449.8 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 the share repurchase program during the three months ended January 31, 2024 and 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 January 31, 2024, authorization for $210.3 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 $0.1 million during the three months ended January 31, 2024, as compared to net cash used by operating activities of $70.9 million during the prior year period. The change was primarily driven by the timing of working capital requirements, which included a $66.0 million payment for the deferred payroll taxes during the three months ended January 31, 2023.

Investing Activities

Net cash used in investing activities increased by $0.5 million during the three months ended January 31, 2024, as compared to the prior year period. This quarter’s activity primarily related to purchases of property, plant and equipment.

Financing Activities

Net cash provided by financing activities was $0.5 million during the three months ended January 31, 2024, as compared to net cash provided by financing activities of $96.2 million during the prior year period. The change was primarily related to a decrease in net borrowings from our Amended Credit 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, 2023.

Recently Issued Accounting Pronouncements

32

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, 2023.

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 Securities and Exchange Commission 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 HR information systems, enterprise resource planning (“ERP”) system, and labor management system. The implementation of several key platforms involves changes in the systems that include internal controls. During the year ended October 31, 2023, we had a change in our internal control over financial reporting as a result of our implementation of a new ERP for the Education industry group that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The new ERP system for the Education industry group replaced our legacy system in which a significant portion of our business transactions originate, are processed, and recorded. The rest of our industry groups will transition to our new ERP system over the next several years. Our new ERP system is intended to provide us with enhanced transactional processing and management tools compared with our legacy system and is intended to enhance internal controls over financial reporting. We believe our new ERP system will facilitate better transactional reporting and oversight, enhance our internal control over financial reporting, and function as an important component of our disclosure controls and procedures. 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.

Other than continued enhancements to our ERP system for the Education industry group, there have been no other changes in our internal control over financial reporting during the first quarter of 2024 identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that have materially affected, or are 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, 2023, in response to Item 1A., “Risk Factors,” of Part I of the Annual Report.