ABM Industries Inc: Form 10-Q for the period ended Jul 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

On an ongoing basis, we monitor changes to the macro-economic environment and their potential impact on demand for our services and our financial conditions. One such impact is the softness of the commercial real estate industry, especially multi-tenant and owner-occupied commercial office buildings. These conditions are primarily attributable to the lingering effects of the Pandemic, especially the normalization of hybrid work, which has resulted in higher office vacancy rates. Given that Class A and high-quality commercial office buildings are a key end market for the Company, we have experienced modest declines in demand for janitorial services and work orders in these markets. Looking forward, we expect the occupancy rates of Class A and high-quality buildings to gradually improve over time and our volume of work to stabilize.

A large M&D client is now 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 2024, we performed a comprehensive actuarial review of the majority of our casualty insurance programs that considered changes in claims development and claims payment activity for the period of November 1, 2023, through April 30, 2024 (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.

Based on the results of the Actuarial Review and Interim Update at April 30, 2024, 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 $17.9 million during the nine months ended July 31, 2024. During the nine months ended July 31, 2023, we decreased our total reserves related to prior years’ claims by $5.3 million. 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 and uninterrupted power supply services. 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 $66.0 million, or 3.3%, to $2,094.2 million during the three months ended July 31, 2024, as compared to the prior year period. Revenue growth was comprised of organic growth of 2.8% and acquisition growth of 0.4%. The organic revenue growth was due to the higher project revenues due to the timing of certain microgrid systems design and installation projects within Technical Solutions, and net new business and expansion of business with existing customers within Aviation and Education. The increase in revenues was partially offset by the attrition of engineering clients within B&I and the expected rebalancing of the scope of work with an existing customer within M&D. Acquisition growth was driven by an $8.2 million revenue increase from the Quality Uptime Acquisition, which was completed in June 2024.
• We had a decrease in operating profit of $101.5 million, to $37.4 million, during the three months ended July 31, 2024, as compared to the prior year period. The decrease was primarily attributed to:
• a change in a fair value adjustment to increase the contingent consideration related to the RavenVolt Acquisition;
• an absence of employee retention credits received as compared to prior year quarter; and
• an unfavorable self-insurance reserve adjustment related to prior year claims from actuarial evaluations completed in the three months ended July 31, 2024.

The decrease was partially offset by:

• labor efficiencies within Aviation and Education, as well as contract mix within M&D and Technical Solutions; and
• a decrease in amortization of intangibles related to the RavenVolt Acquisition.
• Our effective tax rates from income on operations for the three months ended July 31, 2024, and July 31, 2023, were 74.0% and 17.7%, respectively, resulting in provisions for taxes of $13.3 million and $21.2 million, respectively. Our effective tax rate for the three months ended July 31, 2024, was impacted by discrete items related to energy efficiency incentives, and the non-taxable change in the fair value of the contingent consideration related to the RavenVolt Acquisition. Our effective tax rate for the three months ended July 31, 2023, was impacted by discrete items related to ERC refunds received from the IRS and the non-taxable change in the fair value of the contingent consideration related to the RavenVolt Acquisition.
• Net cash provided by operating activities was $196.3 million during the nine months ended July 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, including customer payments and the absence of a $66.0 million payment of previously deferred payroll taxes made during the three months ended January 31, 2023.
• Dividends of $42.4 million were paid to shareholders, and dividends totaling $0.675 per common share were declared during the nine months ended July 31, 2024.
• At July 31, 2024, total outstanding borrowings under our Amended Credit Facility were $1.3 billion. At July 31, 2024, we had up to $427.6 million of borrowing capacity.

Results of Operations

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

Consolidated

(in millions, except per share amounts)

*Not meaningful

Revenues

Revenues increased by $66.0 million, or 3.3%, to $2,094.2 million during the three months ended July 31, 2024, as compared to the prior year period. Revenue growth was comprised of organic growth of 2.8% and acquisition growth of 0.4%. The organic revenue growth was due to the higher project revenues due to the timing of certain microgrid systems design and installation projects within Technical Solutions, and net new business and expansion of business with existing customers within Aviation and Education. The increase in revenues was partially offset by attrition of engineering customers within B&I and the expected rebalancing of the scope of work with an existing customer within M&D. Acquisition growth was driven by an $8.2 million revenue increase from the Quality Uptime Acquisition, which was completed in June 2024.

Operating Expenses

Operating expenses increased by $65.2 million, or 3.7%, to $1,831.0 million during the three months ended July 31, 2024, as compared to the prior year period. Gross margin decreased by 37 bps to 12.6% in the three months ended July 31, 2024, from 12.9% in the prior year period. The decrease in gross margin was primarily driven by an $8.3 million unfavorable self-insurance reserve adjustment related to prior year claims from actuarial evaluations completed in the three months ended July 31, 2024, as compared to a favorable $5.3 million adjustment recorded in the three months ended July 31, 2023, partially offset by labor efficiencies within Aviation and Education and the contract mix within M&D and Technical Solutions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $107.5 million to $211.8 million during the three months ended July 31, 2024, as compared to the prior year period. The increase in selling, general and administrative expenses was primarily attributable to:

• a $36.0 million fair value adjustment to increase the contingent consideration related to the RavenVolt Acquisition recorded during the three months ended July 31, 2024, as compared to a $37.2 million fair value

adjustment to decrease the contingent consideration recorded during the three months ended July 31, 2023;

• an absence of a $22.4 million benefit from employee retention credits received during the three months ended July 31, 2023;
• a $5.1 million increase in costs associated with systems’ go-live; and
• a $3.0 million increase in compensation and related expenses primarily due to an increase in certain incentive plans, partially offset by the headcount reduction at the end of October 2023.

This increase was partially offset by:

• a $4.2 million decrease in certain 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 $5.2 million, or 27.3%, to $14.0 million during the three months ended July 31, 2024, as compared to the prior year period. The decrease was primarily due to the lower amortization of intangibles, primarily intangibles acquired as part of the RavenVolt Acquisition.

Interest Expense

Interest expense increased by $0.3 million to $21.2 million during the three months ended July 31, 2024, as compared to the prior year period, and was driven by higher borrowings from our Amended Credit Facility to fund the Quality Uptime Acquisition.

Income Taxes from Operations

Our effective tax rates from income on operations for the three months ended July 31, 2024, and July 31, 2023, were 74.0% and 17.7%, respectively, resulting in provisions for taxes of $13.3 million and $21.2 million, respectively.

Our effective tax rate for the three months ended July 31, 2024, was impacted by discrete items related to energy efficiency incentives, and the non-taxable change in the fair value of the contingent consideration related to the RavenVolt Acquisition. Our effective tax rate for the three months ended July 31, 2023, was impacted by discrete items related to ERC refunds received from the IRS and the non-taxable change in the fair value of the contingent consideration related to the RavenVolt Acquisition.

Interest Rate Swaps

We had a loss of $12.4 million on interest rate swaps during the three months ended July 31, 2024, as compared to a gain of $12.8 million during the three months ended July 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 $2.7 million during the three months ended July 31, 2024, as compared to a foreign currency translation gain of $3.1 million during the three months ended July 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 $10.8 million, or 1.1%, to $1,010.6 million during the three months ended July 31, 2024, as compared to the prior year period. The revenue decrease was primarily driven by the attrition of certain engineering clients and soft commercial office market conditions, partially offset by client expansions both domestic and international. Management reimbursement revenues for this segment totaled $69.9 million and $70.1 million for the three months ended July 31, 2024 and 2023, respectively.

Operating profit decreased by $1.1 million, or 1.3%, to $77.8 million during the three months ended July 31, 2024, as compared to the prior year period. Operating profit margin decreased by 2 bps to 7.7% in the three months ended July 31, 2024, from 7.7% in the prior year period. The decrease in operating profit margin was primarily driven by contract and service mix and higher bad debt expense, partially offset by lower amortization of intangible assets.

($ in millions)

M&D revenues decreased by $4.8 million, or 1.2%, to $377.1 million during the three months ended July 31, 2024, as compared to the prior year period. The decrease was primarily attributable to the expected rebalancing of the scope of work with an existing customer and a loss of a certain customer, partially offset by new business.

Operating profit increased by 7.5% to $40.9 million during the three months ended July 31, 2024, as compared to the prior year period. Operating profit margin increased by 89 bps to 10.9% in the three months ended July 31, 2024, from 10.0% in the prior year period. The increase in operating profit margin was primarily attributable to the contract mix.

($ in millions)

Education revenues increased by $9.2 million, or 4.2%, to $228.3 million during the three months ended July 31, 2024, as compared to the prior year period. The increase was primarily attributable to expansion of business with existing customers, partially offset by a decrease in work orders.

Operating profit increased by $2.1 million, or 13.3%, to $18.0 million for the three months ended July 31, 2024, as compared to the prior year period. Operating profit margin increased by 63 bps to 7.9% in the three months ended July 31, 2024, from 7.3% in the prior year period. The increase in operating profit margin was primarily attributable to labor efficiencies, partially offset by base wage increases.

($ in millions)

Aviation revenues increased by $30.4 million, or 12.8%, to $268.4 million during the three months ended July 31, 2024, as compared to the prior year period. The increase was primarily attributable to new business and scope expansions with the existing clients as well as continuing recovery in travel volume. Management reimbursement revenues for this segment totaled $9.6 million and $7.7 million for the three months ended July 31, 2024 and 2023, respectively.

Operating profit increased by $6.1 million, or 51.6%, to $17.8 million for the three months ended July 31, 2024, as compared to the prior year period. Operating profit margin increased by 170 bps to 6.6% in the three months ended July 31, 2024. The operating profit margin increased primarily due to labor efficiencies, primarily due to an increase in travel volume, and contract mix.

($ in millions)

Technical Solutions revenues increased by $41.8 million, or 24.9%, to $209.7 million during the three months ended July 31, 2024, as compared to the prior year period. Revenue growth was comprised of organic growth of 20.0% and acquisition growth of 4.9%. The organic revenue growth was primarily driven by higher project revenues due to the timing of certain microgrid systems design and installation projects, partially offset by a decrease in electric vehicle charging station sales. Acquisition growth was driven by an $8.2 million revenue increase from the Quality Uptime Acquisition, which was completed in June 2024.

Operating profit increased by $6.5 million, or 56.1%, to $17.9 million during the three months ended July 31, 2024, as compared to the prior year period. Operating profit margin increased by 170 bps to 8.5% in the three months ended July 31, 2024, from 6.8% in the prior year period. The increase in operating profit margin was primarily attributable to the contract mix and lower amortization of intangible assets.

($ in millions)

*Not meaningful

Corporate expenses increased by $114.7 million to $130.6 million during the three months ended July 31, 2024, as compared to the prior year period. The increase in corporate expenses was primarily attributable to:

• a $36.0 million fair value adjustment to increase the contingent consideration related to the RavenVolt Acquisition recorded during the three months ended July 31, 2024, as compared to a $37.2 million fair value adjustment to decrease the contingent consideration recorded during the three months ended July 31, 2023;
• an absence of a $22.4 million benefit from employee retention credits received during the three months ended July 31, 2023;
• a $8.3 million unfavorable self-insurance reserve adjustment related to prior year claims from actuarial evaluations completed in the three months ended July 31, 2024, as compared to a favorable $5.3 million adjustment recorded in the three months ended July 31, 2023; and
• a $4.8 million increase in costs associated with systems’ go-live.

The increase was partially offset by:

• a $4.2 million decrease in certain discrete transformational costs under our ELEVATE strategy for developing the new ERP system, client-facing technology, workforce management tools, and data analytics.

Results of Operations

Nine Months Ended July 31, 2024, Compared with the Nine Months Ended July 31, 2023

Consolidated

(in millions)

*Not meaningful

Revenues

Revenues increased by $178.5 million, or 3.0%, to $6,182.0 million during the nine months ended July 31, 2024, as compared to the prior year period. Revenue growth was comprised of organic growth of 2.8% and acquisition growth of 0.1%. Acquisition growth was driven by an $8.2 million revenue increase from the Quality Uptime Acquisition, which was completed in June 2024. The organic revenue growth primarily driven by the net new business and expansion of business with existing customers within Aviation, M&D, and Education and the timing of completion of microgrid systems design and installation projects within Technical Solutions. The increase in revenues was partially offset by attrition of engineering customers and soft commercial office market conditions within B&I.

Operating Expenses

Operating expenses increased by $190.1 million, or 3.6%, to $5,420.8 million during the nine months ended July 31, 2024, as compared to the prior year period. Gross margin decreased by 56 bps to 12.3% in the nine months ended July 31, 2024, from 12.9% in the nine months ended July 31, 2023. The decrease in gross margin was primarily driven by the $11.4 million in revenue recognized for the Aviation parking project during the six months ended April 30, 2023, whereby all the direct labor and related costs were recognized prior to October 31, 2022, and unfavorable self-insurance reserve adjustment related to prior year claims from actuarial evaluations completed in the nine months ended July 31, 2024, partially offset by labor efficiencies within Aviation and Education and the contract mix within M&D and Technical Solutions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $114.8 million, or 27.9%, to $526.3 million during the nine months ended July 31, 2024, as compared to the nine months ended July 31, 2023. The increase in selling, general and administrative expenses was primarily attributable to:

• a $36.0 million fair value adjustment to increase the contingent consideration related to the RavenVolt Acquisition recorded during the nine months ended July 31, 2024, as compared to a $45.6 million fair value

adjustment to decrease the contingent consideration recorded during the three months ended July 31, 2023;

• an absence of a $22.4 million benefit from employee retention credits received during the three months ended July 31, 2023;
• a $16.9 million increase in costs associated with systems’ go-live; and
• a $5.0 million increase in bad debt expense.

This increase was partially offset by:

• an $18.1 million decrease in certain 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 $16.0 million, or 27.5%, to $42.2 million during the nine months ended July 31, 2024, as compared to the nine months ended July 31, 2023. This decrease was due to lower amortization of intangibles, primarily intangibles acquired as part of the RavenVolt Acquisition.

Interest Expense

Interest expense increased by $1.3 million to $63.1 million during the nine months ended July 31, 2024, as compared to the nine months ended July 31, 2023. The increase was driven by higher borrowings from our Amended Credit Facility to fund the Quality Uptime Acquisition.

Income Taxes from Operations

Our effective tax rates on income from operations for the nine months ended July 31, 2024, and July 31, 2023, were 30.7% and 22.8%, respectively, resulting in provisions for taxes of $41.3 million and $55.7 million, respectively.

Our effective tax rate for the nine months ended July 31, 2024, was impacted by discrete items, primarily from a change for uncertain tax positions, energy efficiency incentives, a return to provision adjustment related to our non-U.S. operations, a benefit for share-based compensation, and the non-taxable change in fair value of the contingent consideration related to the RavenVolt Acquisition. Our effective tax rate for the nine months ended July 31, 2023, was impacted by discrete items, primarily from share-based compensation, ERC refunds received from the IRS, and the non-taxable change in the fair value of the contingent consideration related to the RavenVolt Acquisition.

Interest Rate Swaps

We had a loss of $18.1 million during the nine months ended July 31, 2024, as compared to a loss of $2.7 million during the nine months ended July 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 $6.4 million during the nine months ended July 31, 2024, as compared to a foreign currency translation gain of $15.9 million during the nine months ended July 31, 2023. 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 decreased by $23.0 million, or 0.8%, to $3,033.4 million during the nine months ended July 31, 2024, as compared to the prior year period. The revenue decrease was primarily driven by attrition of certain engineering clients and the soft commercial office market conditions, partially offset by client expansions both domestic and international. Management reimbursement revenues for this segment totaled $209.0 million and $200.2 million for the nine months ended July 31, 2024 and 2023, respectively.

Operating profit increased by $3.9 million, or 1.7%, to $235.0 million during the nine months ended July 31, 2024, as compared to the prior year period. Operating profit margin increased by 19 bps to 7.7% in the nine months ended July 31, 2024, from 7.6% in the nine months ended July 31, 2023. The increase in operating profit margin was primarily driven by the contract and service mix and lower amortization of intangible assets.

($ in millions)

M&D revenues increased by $31.1 million, or 2.7%, to $1,166.6 million during the nine months ended July 31, 2024, as compared to the prior year period. The increase was primarily attributable to the expansion of business with existing customers, partially offset by the expected rebalancing of the scope of work with an existing customer and a loss of a certain customer.

Operating profit increased by $6.2 million, or 5.1%, to $125.9 million during the nine months ended July 31, 2024, as compared to the prior year period. Operating profit margin increased by 25 bps to 10.8% in the nine months ended July 31, 2024, from 10.5% in the nine months ended July 31, 2023. The increase in operating profit margin was primarily attributable to the change in the contract mix.

($ in millions)

Education revenues increased by $23.3 million, or 3.6%, to $674.0 million during the nine months ended July 31, 2024, as compared to the prior year period. The increase was primarily attributable to net new business and expansion of business with existing customers, partially offset by a decrease in work orders.

Operating profit increased by $2.8 million, or 7.1%, during the nine months ended July 31, 2024, as compared to the prior year period. Operating profit margin increased by 20 bps to 6.3% in the nine months ended July 31, 2024, from 6.1% in the nine months ended July 31, 2023. The increase in operating profit margin was primarily attributable to labor efficiencies and lower start-up supplies expenses.

($ in millions)

Aviation revenues increased by $78.6 million, or 11.6%, to $756.1 million during the nine months ended July 31, 2024, as compared to the prior year period. The increase was primarily attributable to new business and scope expansions with the existing clients as well as continuing recovery in travel volume. In addition, during the nine months ended July 31, 2023, we recognized $11.4 million in revenue from an Aviation parking project, whereby all the direct labor and related costs were recognized prior to October 31, 2022. Management reimbursement revenues for this segment totaled $27.3 million and $23.3 million for the nine months ended July 31, 2024 and 2023, respectively.

Operating profit decreased by $3.0 million, or 7.1%, to $40.6 million during the nine months ended July 31, 2024, as compared to the prior year period. Operating profit margin decreased by 108 bps to 5.4% in the nine months ended July 31, 2024, from 6.4% in the nine months ended July 31, 2023. The decrease was primarily attributable to $11.4 million in revenue from an Aviation parking project recognized during the six months ended April 30, 2023, whereby all the direct labor and related costs were recognized prior to October 31, 2022. The decrease in operating profit was partially offset by contract mix and labor efficiencies primarily due to an increase in travel volume.

($ in millions)

Technical Solutions revenues increased by $68.5 million, or 14.2%, to $551.9 million during the nine months ended July 31, 2024, as compared to the prior year period. Revenue growth was comprised of organic growth of 12.5% and acquisition growth of 1.7%. The organic revenue increase was primarily driven by higher project revenues due to the timing of completions of certain energy solutions projects, microgrid systems and generators installation projects, partially offset by a decrease in electric vehicle charging station sales. Acquisition growth was driven by an $8.2 million revenue increase from the Quality Uptime Acquisition, which was completed in June 2024.

Operating profit increased by $12.6 million, or 43.6%, to $41.4 million during the nine months ended July 31, 2024, as compared to the prior year period. Operating profit margin increased by 154 bps to 7.5% in the nine months ended July 31, 2024, from 6.0% in the nine months ended July 31, 2023. The increase in operating profit margin was primarily attributable to the contract mix and lower amortization of intangible assets.

($ in millions)

Corporate expenses increased by $128.3 million, or 81.9%, to $285.0 million during the nine months ended July 31, 2024, as compared to the prior year period. The increase in corporate expenses was primarily attributable to:

• a $36.0 million fair value adjustment to increase the contingent consideration related to the RavenVolt Acquisition recorded during the three months ended July 31, 2024, as compared to a $45.6 million fair value adjustment to decrease the contingent consideration recorded during the three months ended July 31, 2023;
• a $17.9 million unfavorable self-insurance reserve adjustment related to prior year claims from actuarial evaluations completed in the three months ended July 31, 2024, as compared to a favorable $5.3 million adjustment recorded in the three months ended July 31, 2023;
• an absence of a $22.4 million benefit from employee retention credits received during the three months ended July 31, 2023; and
• a $16.6 million increase in costs associated with systems’ go-live.

This increase was partially offset by:

• a $18.1 million decrease in certain 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 July 31, 2024, we were in compliance with these covenants.

During the three and nine months ended July 31, 2024, we made principal payments of $8.1 million and $24.4 million, respectively, under the term loan. At July 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 $57.9 million, respectively, and our weighted average interest rate on all outstanding borrowings, excluding letters of credit, was 7.19%. At July 31, 2024, we had up to $427.6 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 July 31, 2024. 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 July 31, 2024, authorization for $186.5 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 provided by operating activities was $196.3 million during the nine months ended July 31, 2024, as compared to net cash provided by operating activities of $104.1 million during the prior year period. The change was primarily driven by the timing of working capital requirements, including customer payments and an absence of a $66.0 million payment for the deferred payroll taxes made during the three months ended January 31, 2023.

Investing Activities

Net cash used in investing activities increased by $113.0 million during the nine months ended July 31, 2024, as compared to the prior year period. This quarter’s activity was primarily related to the Quality Uptime Acquisition completed in June 2024.

Financing Activities

Net cash used in financing activities was $23.0 million during the nine months ended July 31, 2024, as compared to net cash used in financing activities of $38.4 million during the prior year period. The change was primarily related to a decrease in net borrowings from our Amended Credit Facility due to the $196.3 million of net cash provided by operating activities.

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

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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, 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.

During the third quarter of fiscal year 2024, we completed the acquisition of Quality Uptime, as described in Note 3, “Acquisitions,” to the unaudited Consolidated Financial Statements in this Form 10-Q. We continue to integrate policies, processes, personnel, technology, and operations relating to this transaction and will continue to evaluate the impact of any related changes to our internal controls over financial reporting. Additionally, 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, as 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.

There were no other changes in our internal control over financial reporting during the third quarter of 2024 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, 2023, in response to Item 1A., “Risk Factors,” of Part I of the Annual Report.