ABM Industries Inc: Form 10-Q for the period ended Jan 31, 2025

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, 2024, 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.

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 first quarter of 2025, 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 May 1, 2024, through October 31, 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, it was determined that there was no adjustment required for our total reserves related to prior years during the three months ended January 31, 2025. During the three months ended January 31, 2024, we increased our total reserves related to prior years 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, Aviation, Education, and Technical Solutions, as further described below.

REPORTABLE SEGMENTS AND DESCRIPTIONS

B&I, our largest reportable segment, encompasses comprehensive facility solutions, including janitorial and maintenance, facilities engineering, and parking and transportation management to a diverse range of clients. Our expertise extends to commercial real estate properties, including corporate offices for high-tech clients, sports and entertainment venues, and both traditional hospitals and non-acute healthcare facilities. 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 maintenance, and other specialized solutions 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.

Aviation provides comprehensive support services to airlines and airports, including parking and transportation management, janitorial and maintenance services, passenger assistance, catering logistics, aircraft cabin maintenance, and transportation solutions. 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.

Education delivers comprehensive facility services to public school districts, private schools, colleges, and universities. Our services include janitorial and custodial services, landscaping and grounds maintenance, facilities engineering, and parking management. 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.

Technical Solutions specializes in comprehensive facility infrastructure services, including mechanical and electrical systems, EV charging station design, installation, and maintenance, as well as microgrid systems encompassing uninterrupted power supply (“UPS”) systems and power distribution units. These offerings are strategically leveraged for cross-selling across all 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.

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Key Financial Highlights

• Revenues increased by $45.3 million, or 2.2%, to $2,114.9 million during the three months ended January 31, 2025, as compared to the prior year period. Revenue growth was comprised of organic growth of 1.6% and acquisition growth of 0.6%. 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 a loss of a certain customer within M&D. Acquisition growth was driven by a $12.7 million revenue increase from the Quality Uptime Acquisition, which was completed in June 2024.
• We had an increase in operating profit of $3.5 million, to $77.6 million, during the three months ended January 31, 2025, as compared to the prior year period. The increase was primarily attributed to:
• respective revenue increases and contract and service mix and operational efficiencies; and
• an absence of a $5.3 million unfavorable self-insurance reserve adjustment related to prior year claims from actuarial evaluations completed in the three months ended January 31, 2024.

The increase was partially offset by:

• base wage increases within Aviation and Education; and
• an increase in selling, general and administrative expenses, primarily due to higher compensation expenses from headcount expansion from recent acquisitions and ongoing business growth.
• Our effective tax rates from income on operations for the three months ended January 31, 2025, and January 31, 2024, were 21.4% and 17.3%, respectively. Our effective tax rate for the three months ended January 31, 2025, was reduced by discrete items, primarily return to provision adjustments related to our non-U.S. operations. Our effective tax rate for three months ended January 31, 2024, benefited from discrete items, primarily uncertain tax positions, share-based compensation, and return to provision adjustments.
• Net cash used in operating activities was $106.2 million during the three months ended January 31, 2025, as compared to net cash used in operating activities of $0.1 million during the prior year period. The change was primarily driven by an increase in working capital due to the transition to the Company’s new ERP systems for our Business and Industry and Manufacturing and Distribution segments that temporarily delayed invoicing to certain clients within these industry groups. We anticipate improvement in our operating cash flows next quarter and full normalization in the second half of fiscal year 2025.
• Dividends of $16.4 million were paid to shareholders, and dividends totaling $0.265 per common share were declared during the three months ended January 31, 2025.
• At January 31, 2025, total outstanding borrowings under our Amended Credit Facility were $1.5 billion. At January 31, 2025, we had up to $238.0 million of borrowing capacity.

Results of Operations

Three Months Ended January 31, 2025, Compared with the Three Months Ended January 31, 2024

Consolidated

(in millions, except per share amounts)

*Not meaningful

Revenues

Revenues increased by $45.3 million, or 2.2%, to $2,114.9 million during the three months ended January 31, 2025, as compared to the prior year period. Revenue growth was comprised of organic growth of 1.6% and acquisition growth of 0.6%. 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 a loss of a certain customer within M&D. Acquisition growth was driven by a $12.7 million revenue increase from the Quality Uptime Acquisition, which was completed in June 2024.

Operating Expenses

Operating expenses increased by $28.8 million, or 1.6%, to $1,855.1 million during the three months ended January 31, 2025, as compared to the prior year period. Gross margin increased by 53 bps to 12.3% in the three months ended January 31, 2025, from 11.8% in the prior year period. The increase in gross margin was primarily driven by contract and service mix and operational efficiencies as well as an absence of a $5.3 million unfavorable self-insurance reserve adjustment related to prior year claims from actuarial evaluations completed in the three months ended January 31, 2024, partially offset by base wage increases within Aviation and Education.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $14.4 million, or 9.3%, to $169.0 million during the three months ended January 31, 2025, as compared to the prior year period. The increase in selling, general and administrative expenses was primarily attributable to:

• an $8.1 million increase in compensation and related expenses primarily due to higher salaries, certain incentive plans, and headcount expansion from recent acquisitions and ongoing business growth within Technical Solutions; and
• a $3.6 million increase in accruals for actual and potential legal settlements.

Amortization of Intangible Assets

Amortization of intangible assets decreased by $1.3 million, or 9.4%, to $13.3 million during the three months ended January 31, 2025, 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 Able Acquisition.

Interest Expense

Interest expense increased by $1.6 million, or 7.1%, to $22.9 million during the three months ended January 31, 2025, as compared to the prior year period, and was driven by higher borrowings from our Amended Credit Facility to fund working capital requirements.

Income Taxes from Operations

Our effective tax rates from income on operations for the three months ended January 31, 2025, and January 31, 2024, were 21.4% and 17.3%, respectively, resulting in provisions for taxes of $11.9 million and $9.3 million, respectively.

Our effective tax rate for the three months ended January 31, 2025, was reduced by discrete items, primarily return to provision adjustments related to our non-U.S. operations. Our effective tax rate for the three months ended January 31, 2024, was reduced by discrete items, primarily adjustments for uncertain tax positions, share based compensation, and return to provision adjustments related to our non-U.S operations.

Interest Rate Swaps

We had a loss of $1.1 million on interest rate swaps during the three months ended January 31, 2025, as compared to a loss of $16.0 million during the three months ended January 31, 2024, primarily due to underlying changes in the fair value of our interest rate swaps.

Foreign Currency Translation

We had a foreign currency translation loss of $7.6 million during the three months ended January 31, 2025, as compared to a foreign currency translation gain of $5.4 million during the three months ended January 31, 2024. 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 $10.2 million, or 1.0%, to $1,022.9 million during the three months ended January 31, 2025, as compared to the prior year period. The revenue decrease was primarily driven by the attrition of certain engineering clients and a decrease in work orders, partially offset by client expansions and new wins both domestic and international. Management reimbursement revenues for this segment totaled $71.3 million and $70.5 million for the three months ended January 31, 2025 and 2024, respectively.

Operating profit decreased by $0.2 million, or 0.3%, to $79.4 million during the three months ended January 31, 2025, as compared to the prior year period. Operating profit margin increased by 5 bps to 7.8% in the three months ended January 31, 2025, from 7.7% in the prior year period. The increase in operating profit margin was primarily driven by contract and service mix, lower bad debt, and legal expense as well as amortization of intangible assets.

($ in millions)

M&D revenues decreased by $6.6 million, or 1.6%, to $394.3 million during the three months ended January 31, 2025, as compared to the prior year period. The decrease was primarily attributable to a loss of a certain customer, partially offset by new business.

Operating profit decreased by $1.9 million, or 4.8%, to $39.4 million during the three months ended January 31, 2025, as compared to the prior year period. Operating profit margin decreased by 33 bps to 10.0% in the three months ended January 31, 2025, from 10.3% in the prior year period. The decrease in operating profit margin was primarily attributable to investments to hire certain technical expertise to support future growth and higher legal expense, partially offset by the contract mix.

($ in millions)

Aviation revenues increased by $20.6 million, or 8.2%, to $270.1 million during the three months ended January 31, 2025, as compared to the prior year period. The increase was primarily attributable to new business and scope expansions with the existing clients. Management reimbursement revenues for this segment totaled $10.6 million and $9.5 million for the three months ended January 31, 2025 and 2024, respectively.

Operating profit increased by $2.5 million, or 25.9%, to $12.2 million for the three months ended January 31, 2025, as compared to the prior year period. Operating profit margin increased by 63 bps to 4.5% in the three months ended January 31, 2025. The operating profit margin increased primarily due to contract mix, partially offset by base wage increases.

($ in millions)

Education revenues increased by $5.2 million, or 2.4%, to $225.3 million during the three months ended January 31, 2025, as compared to the prior year period. The increase was primarily attributable to new business wins and an increase in work orders.

Operating profit increased by $1.3 million, or 9.9%, to $14.0 million for the three months ended January 31, 2025, as compared to the prior year period. Operating profit margin increased by 43 bps to 6.2% in the three months ended January 31, 2025, from 5.8% in the prior year period. The increase in operating profit margin was primarily attributable to operational efficiencies, particularly in managing overtime, materials and supplies, and general and administrative headcount, partially offset by base wage increases.

($ in millions)

Technical Solutions revenues increased by $36.4 million, or 21.9%, to $202.3 million during the three months ended January 31, 2025, as compared to the prior year period. Revenue growth was comprised of organic growth of 14.2% and acquisition growth of 7.7%. 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 a $12.7 million revenue increase from the Quality Uptime Acquisition, which was completed in June 2024.

Operating profit increased by $10.0 million to $16.6 million during the three months ended January 31, 2025, as compared to the prior year period. Operating profit margin increased by 424 bps to 8.2% in the three months ended January 31, 2025, from 4.0% in the prior year period. The increase in operating profit margin was primarily attributable to the contract mix, partially offset by higher selling, general, and administrative expenses, mainly due to increased compensation costs associated with headcount expansion from recent acquisitions and ongoing business growth.

($ in millions)

Corporate expenses increased by $8.5 million, or 11.4%, to $83.2 million during the three months ended January 31, 2025, as compared to the prior year period. The increase in corporate expenses was primarily attributable to:

• a $4.9 million increase in accruals for actual and potential legal settlements;
• a $4.3 million increase in compensation and related expenses primarily due to higher salaries and certain incentive plans; and
• a $2.0 million increase in acquisition and integration costs.

The increase was partially offset by:

• an absence of a $5.3 million unfavorable self-insurance reserve adjustment from actuarial evaluations completed in the three months ended January 31, 2024.

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, contingent consideration payments from acquisitions 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, 2025, we were in compliance with these covenants.

During the three months ended January 31, 2025, we made principal payments under the term loan of $8.1 million. At January 31, 2025, the total outstanding borrowings under our Amended Credit Facility in the form of cash borrowings and standby letters of credit were $1.5 billion and $29.7 million, respectively, and our weighted average interest rate on all outstanding borrowings, excluding letters of credit, was 6.17%. At January 31, 2025, we had up to $238.0 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.

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 repurchased shares under the share repurchase program during the three months ended January 31, 2025, as summarized below. 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, 2025, authorization for $133.2 million of repurchases remained under our share repurchase program.

(in millions, except per share amounts)

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 $106.2 million during the three months ended January 31, 2025, as compared to net cash used in operating activities of $0.1 million during the prior year period.The change was primarily driven by an increase in working capital due to the transition to the Company’s new ERP systems for our Business and Industry and Manufacturing and Distribution segments that temporarily delayed invoicing to certain clients within these industry groups. We anticipate improvement in our operating cash flows next quarter and full normalization in the second half of fiscal year 2025.

Investing Activities

Net cash used in investing activities increased by $1.4 million during the three months ended January 31, 2025, as compared to the prior year period. This quarter’s activity was primarily related to purchases of property, plant and equipment.

Financing Activities

Net cash provided by financing activities was $116.9 million during the three months ended January 31, 2025, as compared to net cash provided by financing activities of $0.5 million during the prior year period. The change was primarily related to an increase in net borrowings from our Amended Credit Facility to fund $106.2 million of net cash used 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, 2024.

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, 2024.

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 third quarter of 2023 and first quarter of 2025, we had a change in our internal control over financial reporting as a result of our implementation of a new ERP and key boundary systems for the Education, Business & Industry, and Manufacturing & Distribution industry groups that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The new ERP system and key boundary systems for these industry groups is replacing 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 and key boundary systems over the next several years. Our new ERP system and key boundary systems are 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 and key boundary systems 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 first quarter of 2025 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, 2024, in response to Item 1A., “Risk Factors,” of Part I of the Annual Report.