ABM INDUSTRIES INCORPORATED The following 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. This MD&A contains both historical and forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. We make forward-looking statements related to future expectations, estimates, and projections that are uncertain and often contain words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "likely," "may," "outlook," "plan," "predict," "should," "target," or other similar words or phrases. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and assumptions that are difficult to predict. Factors that might cause such differences include, but are not limited to, those discussed in Part 1. of this Form 10-K under Item 1A. , "Risk Factors," which are incorporated herein by reference. Our future results and financial condition may be materially different from those we currently anticipate. 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 year, which ends onOctober 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. Our
principal operations are in
Strategic Growth
We remain focused on long-term, profitable growth by delivering valued service offerings to both new and existing clients within our industry groups and across our many service lines. Our revenue growth strategy is predicated on pursuing new sales and targeting a favorable retention rate among existing contracts. Cross-selling and up-selling projects and services is also an integral part of our strategy. We believe our strategic growth initiatives, coupled with our continued focus on marketing, capital, and sales resources, will increase profitability.
ELEVATE Transformation
Through our ELEVATE strategy, as described in Item 1., "Business.," we continue to focus our efforts on:
•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.
We believe that our technology and data investments will enable: the development
and deployment of client-facing technology to improve service delivery to our
clients; the use of advanced data analytics for sales targeting, employee
retention, and recruiting; and the upgrade of our Enterprise Resource Planning
and payroll systems.
22
--------------------------------------------------------------------------------Developments and Trends COVID-19 Pandemic The COVID-19 Pandemic has led to an increased demand for our services, including higher margin work orders and our EnhancedClean services. While overall demand for these services has decreased as pandemic-related restrictions continue to loosen, we experienced that ongoing concerns around COVID-19 variants combined with our ELEVATE strategy led to new and incremental opportunities for our services. Refer to "Consolidated Results of Operations" and "Results of Operations by Segment" for additional information related to the impact of the Pandemic on our financial results.
Insurance Reserves
We use a combination of insured and self-insurance programs to cover workers'
compensation, general liability, automobile liability, property damage, and
other insurable risks. Insurance claim liabilities represent our estimate of
retained risks without regard to insurance coverage. We retain a substantial
portion of the risk related to certain workers' compensation and medical claims.
Liabilities associated with these losses include estimates of both filed claims
and incurred but not reported claims ("IBNR Claims").
With the assistance of third-party actuaries, we review our estimate of ultimate
losses for IBNR Claims on a quarterly basis and adjust our required
self-insurance reserves as appropriate. As part of this evaluation, we review
the status of existing and new claim reserves as established by third-party
claims administrators. The third-party claims administrators establish the case
reserves based upon known factors related to the type and severity of the
claims, demographic factors, legislative matters, and case law, as
appropriate. We compare actual trends to expected trends and monitor claims
developments. The specific case reserves estimated by the third-party
administrators are provided to an actuary who assists us in projecting an
actuarial estimate of the overall ultimate losses for our self-insured or high
deductible programs, which includes the case reserves plus an actuarial estimate
of reserves required for additional developments, such as IBNR Claims. We
utilize the results of actuarial studies to estimate our insurance rates and
insurance reserves for future periods and to adjust reserves, if appropriate,
for prior years.
The actuarial reviews demonstrate that the changes we have made to our risk
management program continue to positively impact the frequency and severity of
claims. The claims management strategies and programs that we have implemented
have resulted in improvements. Furthermore, we continue to adjust our reserves
consistent with known fact patterns. Based on the results of the actuarial
reviews performed, we decreased our total reserves related to prior years for
known claims as well as our estimate of the loss amounts associated with IBNR
Claims during 2022 by $36.8 million . In 2021, we decreased our total reserves
related to prior year claims by $36.0 million .
23
--------------------------------------------------------------------------------Key Financial Highlights
•Revenues increased by$1,578.0 million , or 25.3%, to$7,806.6 million during 2022, as compared to 2021. Revenue growth was comprised of acquisition growth of 18.0% and organic growth of 7.3%. Acquisition growth was primarily driven by an$1,064.4 million revenue increase due to the Able Acquisition, completed in the fourth quarter of 2021. Organic growth was primarily driven by the recovery in volume of our business as pandemic disruptions eased (primarily in B&I and Aviation) and new business within M&D, Technical Solutions, and Education. The increase in revenues was partially offset by a decrease in work orders for pandemic-related demands (primarily in M&D and B&I) and the loss of certain accounts within Education in the third quarter of 2021.
•Operating profit increased by
•the absence of legal costs and settlements attributed to the legal reserve for the Bucio case;
•increase in the volume in our business due to the Able Acquisition and the easing of pandemic disruptions and net new business; and
•the absence of a non-cash impairment charge for previously capitalized internal-use software related to our ERP system implementation.
The increase was partially offset by:
•increase in compensation and related expenses primarily attributable to talent acquisition activities and limited labor supply in certain markets;
•additional overhead and amortization of intangibles related to the Able Acquisition; and
•increased expenditures for certain technology projects and other enterprise initiatives (including ELEVATE).
•Our effective tax rate on income from continuing operations was 25.7% for 2022, as compared to 29.8% during 2021.
•Net cash provided by operating activities of continuing operations was$20.4 million during 2022. Our total operating cash flows were lower, primarily due to the timing of certain working capital requirements, which included a$143.8 million payment for the Bucio case and a$66 million payment for deferred payroll taxes under the CARES Act in the current fiscal year.
•Dividends of
•AtOctober 31, 2022 , total outstanding borrowings under our Amended Credit Facility and Receivables Facility were$1,271.3 million , and we had up to$612.9 million of borrowing capacity. 24 --------------------------------------------------------------------------------
Results of Operations
Consolidated
Years Ended October 31, 2022 vs. 2021
($ in millions) 2022 2021 2020 Increase / (Decrease)
Revenues $ 7,806.6 $ 6,228.6 $ 5,987.6 $ 1,578.0 25.3%
Operating expenses 6,757.5 5,258.2 5,157.0 1,499.3 28.5%
Gross margin 13.4 % 15.6 % 13.9 % (214) bps
Selling, general and administrative
expenses 628.3 719.2 506.1 (90.9) (12.6)%
Restructuring and related expenses - - 7.6 - NM*
Amortization of intangible assets 72.1 45.0 48.4 27.1 60.2%
Impairment loss of goodwill and other
intangibles - - 172.8 - NM*
Operating profit 348.8 206.3 95.7 142.5 69.1%
Income from unconsolidated affiliates 2.4 2.1 2.2 0.3 16.5%
Interest expense (41.1) (28.6) (44.6) 12.5 (43.9)%
Income from continuing operations
before
income taxes 310.0 179.8 53.3 130.2 72.4%
Income tax provision (79.6) (53.5) (53.1) 26.1 (48.9)%
Income from continuing operations 230.4 126.3 0.2 104.1 82.4%
Income (loss) from discontinued
operations,
net of taxes - - 0.1 - NM*
Net income 230.4 126.3 0.3 104.1 82.4%
Other comprehensive income (loss)
Interest rate swaps 36.7 4.5 (7.6) 32.2 NM*
Foreign currency translation and other (19.8) 5.3 (1.8) (25.1) NM*
Income tax (provision) benefit (10.5) (1.5) 2.4 (9.0) NM*
Comprehensive income (loss) $ 236.9 $ 134.5 $ (6.6) $ 102.4 76.1%
*Not meaningful
The Year Ended
Revenues
Revenues increased by$1,578.0 million , or 25.3%, to$7,806.6 million during 2022, as compared to 2021. Revenue growth was comprised of acquisition growth of 18.0% and organic growth of 7.3%. Acquisition growth was primarily driven by an$1,064.4 million revenue increase due to the Able Acquisition, completed in the fourth quarter of 2021. Organic growth was primarily driven by the recovery in volume of our business as pandemic disruptions eased (primarily in B&I and Aviation) and new business within M&D, Technical Solutions, and Education. The increase in revenues was partially offset by a decrease in work orders for pandemic-related demands (primarily in M&D and B&I) and the loss of certain accounts within Education in the third quarter of 2021.
Operating Expenses
Operating expenses increased by$1,499.3 million , or 28.5%, to$348.8 million during 2022, as compared to 2021. Gross margin decreased by 214 bps to 13.4% in 2022 from 15.6% in 2021. The decrease in gross margin was primarily driven by the decrease in cleaning services for pandemic-related demands (primarily in M&D and B&I), which have higher margins, and the changes in contract mix due to the Able Acquisition. In addition, gross margin was negatively impacted by an increase in direct labor and related costs (primarily in B&I, Aviation, and Education) and the amortization of intangibles acquired as part of the Able Acquisition.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by
25
--------------------------------------------------------------------------------
•a
•the absence of a$9.1 million non-cash impairment charge for previously capitalized internal-use software related to our ERP system implementation as we determined that certain components developed will no longer be incorporated into the new ERP system during 2021;
•a
•a
•a
This decrease was partially offset by:
•a
•a$31.4 million increase 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;
•a
•a
Amortization of Intangible Assets
Amortization of intangible assets increased by$27.1 million , or 60.2%, to$72.1 million during 2022, as compared to 2021. This increase was primarily due to the amortization of intangibles acquired as part of the Able Acquisition.
Interest Expense
Interest expense increased by$12.5 million , or 43.9%, to$41.1 million during 2022, as compared to 2021, primarily driven by the indebtedness to fund acquisitions and working capital requirements and an increase in the reference rates on our debt borrowings beginning the second quarter of 2022. This increase was partially offset by more favorable terms in the current year as the result of amending our credit facility in the third quarter of 2021.
Income Taxes from Continuing Operations
During 2022 and 2021, we had effective tax rates of 25.7% and 29.8%, respectively, resulting in a provision for tax of$79.6 million and$53.5 million , respectively. Our effective tax rate for 2022 was impacted by the following items: a$8.1 million benefit for expiring statutes of limitations; a$1.4 million benefit for share-based compensation; and a$1.3 million provision for true-ups. Our effective tax rate for 2021 was also impacted by the following items: a$3.0 million provision for nondeductible transaction costs; a$2.6 million provision for change in tax reserves; a$1.4 million provision for true-ups; and a$1.2 million benefit for energy efficiency incentives.
Interest Rate Swaps
We had a gain of$36.7 million on interest rate swaps during the year endedOctober 31, 2022 , as compared to a gain of$4.5 million during the year endedOctober 31, 2021 , primarily due to underlying changes in the fair value of our interest rate swaps.
Foreign Currency Translation and Other
We had a foreign currency translation loss of
26
--------------------------------------------------------------------------------("GBP"). Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of foreign currencies to the USD and the extent of our foreign assets and liabilities.
The Year Ended
For a comparison of our Results of Operations for the year endedOctober 31, 2021 , to the year endedOctober 31, 2020 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the fiscal year endedOctober 31, 2021 , filed with theSEC onDecember 22, 2021 . 27 --------------------------------------------------------------------------------
Segment Information
Our current reportable segments consist of B&I, M&D, Education, Aviation, and Technical Solutions.
Financial Information for Each Reportable Segment
Years Ended October 31, 2022 vs. 2021
($ in millions) 2022 2021 2020 Increase / (Decrease)
Revenues
Business & Industry $ 4,095.9 $ 2,853.8 $ 2,856.4 $ 1,242.1 43.5%
Manufacturing & Distribution 1,445.2 1,363.1 1,151.4 82.1 6.0%
Education 834.7 830.8 805.1 3.9 0.5%
Aviation 804.0 651.1 670.7 152.9 23.5%
Technical Solutions 626.8 529.8 504.0 97.0 18.3%
$ 7,806.6 $ 6,228.6 $ 5,987.6 $ 1,578.0 25.3%
Operating profit (loss)
Business & Industry $ 334.9 $ 285.9 $ 229.2 $ 49.0 17.1%
Operating profit margin 8.2 % 10.0 % 8.0 % (184) bps
Manufacturing & Distribution 161.8 155.5 108.0 6.3 4.0%
Operating profit margin 11.2 % 11.4 % 9.4 % (21) bps
Education 47.1 61.5 (39.9) (14.4) (23.4)%
Operating profit margin 5.6 % 7.4 % (5.0 %) (176) bps
Aviation 29.3 32.1 (60.1) (2.8) (8.6)%
Operating profit margin 3.6 % 4.9 % (9.0 %) (128) bps
Technical Solutions 63.8 49.4 9.7 14.4 29.2%
Operating profit margin 10.2 % 9.3 % 1.9 % 86 bps
Government Services (0.3) (0.2) (0.1) (0.1) (72.4)%
Operating profit margin NM* NM* NM* NM*
Corporate (284.5) (374.6) (146.9) (90.1) 24.0%Adjustment for income from unconsolidated
affiliates, included in Aviation (2.4) (2.1) (2.2) (0.3) (16.5)%
Adjustment for tax deductions for energy
efficient government buildings, included
in
Technical Solutions (0.9) (1.2) (2.1) 0.3 27.7%
$ 348.8 $ 206.3 $ 95.7 $ 142.5 69.1%
*Not meaningful
28-------------------------------------------------------------------------------- The Year EndedOctober 31, 2022 Compared with the Year EndedOctober 31, 2021 Business & Industry Years Ended October 31, ($ in millions) 2022 2021 Increase Revenues$ 4,095.9 $ 2,853.8 $ 1,242.1 43.5% Operating profit 334.9 285.9 49.0 17.1% Operating profit margin 8.2 % 10.0 % (184) bps B&I revenues increased by$1,242.1 million , or 43.5%, to$4,095.9 million during 2022, as compared to 2021. Revenue growth was comprised of acquisition growth of 38.5% and organic growth of 5.0%. Acquisition growth was primarily driven by a$1,058.9 million revenue increase due to the Able Acquisition, completed in the fourth quarter of 2021. Organic growth was primarily driven by the recovery of certain accounts as pandemic-related disruptions continue to ease and targeted expansion of certain key clients, as well as lower sales allowance reserve, while partially offset by decrease in pandemic-related cleaning services. Management reimbursement revenues for this segment totaled$227.8 million and$185.8 million during 2022 and 2021, respectively. Operating profit increased by$49.0 million , or 17.1%, to$334.9 million during 2022, as compared to 2021. Operating profit margin decreased by 184 bps to 8.2% in 2022 from 10.0% in 2021. The decrease in operating profit margin was primarily driven by an increase in direct labor and related costs due to a limited labor supply in certain non-union markets; a decrease in pandemic-related cleaning services, which have higher margins; and changes in contract mix as a result of the Able Acquisition, partially offset by lower bad debt expense. In addition, operating profit margin was negatively impacted by the amortization of intangibles acquired as part of the Able Acquisition. Manufacturing & Distribution Years Ended October 31, ($ in millions) 2022 2021 Increase Revenues$ 1,445.2 $ 1,363.1 $ 82.1 6.0% Operating profit 161.8 155.5 6.3 4.0% Operating profit margin 11.2 % 11.4 % (21) bps
M&D revenues increased by
Operating profit increased by$6.3 million , or 4.0%, to$161.8 million during 2022, as compared to 2021. Operating profit margin decreased by 21 bps to 11.2% in 2022 from 11.4% in 2021. The decrease in operating profit margin was primarily attributable to the decrease in pandemic-related work orders, which have higher margins. Education Years Ended October 31, ($ in millions) 2022 2021 Increase / (Decrease) Revenues$ 834.7 $ 830.8 $ 3.9 0.5% Operating profit 47.1 61.5 (14.4) (23.4)% Operating profit margin 5.6 % 7.4 % (176) bps Education revenues increased by$3.9 million , or 0.5%, to$834.7 million during 2022, as compared to 2021. The increase was primarily attributable to new business and recovery in the volume of our business as schools reopened to full capacity. The increase was partially offset by a loss of certain accounts in the third quarter of 2021. Operating profit decreased by$14.4 million , or 23.4% to$47.1 million during 2022, as compared to 2021. Operating margin decreased to 5.6% in 2022 from 7.4% in 2021. The decrease in operating margin was primarily attributable to an increase in direct labor and related costs due to the return to in-person learning and a limited labor supply in certain geographies. Operating margin was positively impacted by lower amortization of intangible assets. 29 --------------------------------------------------------------------------------
Aviation
Years Ended October 31,
($ in millions) 2022 2021 Increase / (Decrease)
Revenues $ 804.0 $ 651.1 $ 152.9 23.5%
Operating profit 29.3 32.1 (2.8) (8.6)%
Operating profit margin 3.6 % 4.9 % (128) bps
Aviation revenues increased by $152.9 million , or 23.5% to $804.0 million ,
during 2022, as compared to 2021. The increase was primarily attributable to a
recovery in consumer and business travel (both domestic and international) and
new parking-related services. Management reimbursement revenues for this segment
totaled $52.6 million and $54.5 million during 2022 and 2021, respectively.
Operating profit decreased by $2.8 million , or 8.6%, to $29.3 million during
2022, as compared to 2021. Operating margin decreased to 3.6% during 2022, from
4.9% during 2021. The decrease was primarily attributable to delays in work
order acceptance from a client related to a parking project, whereby direct
labor and related costs were incurred in the current year while related revenue
did not meet the criteria for revenue recognition. It is expected that the
revenue that was not recognized in 2022 will be recognized in a future period.
The decrease was partially offset by the contract mix.
Technical Solutions
Years Ended October 31,
($ in millions) 2022 2021 Increase
Revenues $ 626.8 $ 529.8 $ 97.0 18.3%
Operating profit 63.8 49.4 14.4 29.2%
Operating profit margin 10.2 % 9.3 % 86 bps
Technical Solutions revenues increased by $97.0 million , or 18.3%, to $626.8
million during 2022, as compared to 2021. Revenue growth was comprised of
acquisition growth of 2.8% and organic growth of 15.5%. The organic revenue
growth was primarily driven by the growth in electric vehicle charging station
installation sales. Acquisition growth was primarily driven by a $14.7 million
revenue increase due to the RavenVolt Acquisition, completed in the fourth
quarter of 2022.
Operating profit increased by $14.4 million , or 29.2%, to $63.8 million during
2022, as compared to 2021. Operating profit margin increased by 86 bps to 10.2%
in 2022 from 9.3% in 2021. The increase in operating profit margin was primarily
attributable to the $7.6 million gain recognized on the sale of a group of
customer contracts related to healthcare technology management services and
lower bad debt expense partially offset by the contract mix.
Corporate
Years Ended October 31,
($ in millions) 2022 2021 Decrease
Corporate expenses $ (284.5) $ (374.6) $ (90.1) 24.0%
Corporate expenses decreased by
•a
•the absence of a$9.1 million non-cash impairment charge for previously capitalized internal-use software related to our ERP system implementation as we determined that certain components developed will no longer be incorporated into the new ERP system during 2021; and
•a
30
--------------------------------------------------------------------------------This decrease was partially offset by:
•a
•a$32.2 million increase 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;
•a
•a
The Year Ended
For a comparison of our Segment Information for the year endedOctober 31, 2021 , to the year endedOctober 31, 2020 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the fiscal year endedOctober 31, 2021 , filed with theSEC onDecember 22, 2021 . 31 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our primary sources of liquidity are operating cash flows and borrowing capacity under our 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 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 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 credit facility are sufficient to fund our cash requirements for the next 12 months. In the event that our plans change or our cash requirements are greater than we anticipate, we may need to access the capital markets to finance future cash requirements. However, there can be no assurance that such financing will be available to us should we need it or, if available, that the terms will be satisfactory to us and not dilutive to existing shareholders.
Debt Facilities
OnSeptember 1, 2017 , we refinanced and replaced our then-existing$800.0 million credit facility with a new senior, secured five-year syndicated credit facility (the "Credit Facility"), consisting of a$900.0 million revolving line of credit and an$800.0 million amortizing term loan. In accordance with the terms of the Credit Facility, the revolving line of credit was reduced to$800.0 million onSeptember 1, 2018 . OnJune 28, 2021 , the Company amended and restated the Credit Facility (the "Second Amendment," and the Credit Facility as amended, the "Amended Credit Facility"), extending the maturity date toJune 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. We may repay amounts borrowed under the Amended Credit Facility at any time without penalty. Under the Amended Credit Facility, the term loan andU.S. -dollar-denominated borrowings under the revolver bear interest at a rate equal to the one-month London Interbank Offered Rate ("LIBOR") plus a spread based upon our leverage ratio. Euro- and sterling-denominated borrowings under the revolver bear at the interest rate of the Euro Interbank Offered Rate (EURIBOR) and the daily Sterling Overnight Index Average (SONIA) reference rate, respectively, plus a spread that is based upon our leverage ratio. The spread ranges from 1.375% to 2.250% for Eurocurrency loans and 0.375% to 1.250% for base rate loans. AtOctober 31, 2022 , the weighted average interest rate on our outstanding borrowings was 4.97%. We also pay a commitment fee, based on our leverage ratio and payable quarterly in arrears, ranging from 0.20% to 0.40% on the average daily unused portion of the line of credit. For purposes of this calculation, irrevocable standby letters of credit, which are issued primarily in conjunction with our insurance programs, and cash borrowings are included as outstanding under the line of credit. 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. We did not make this election for the Able Acquisition. Our borrowing capacity is subject to, and limited by, compliance with the covenants described above. AtOctober 31, 2022 , we were in compliance with these covenants and expect to be in compliance in the foreseeable future. OnMarch 1, 2022 , we entered into a new uncommitted receivable repurchase facility (the "Receivables Facility") of up to$150 million , which expires onFebruary 28, 2023 . The Receivables Facility allows the Company to sell a portfolio of available and eligible outstandingU.S. trade accounts receivable to a participating institution and simultaneously agree to repurchase them generally on a monthly basis. Under this arrangement, we make floating 32 -------------------------------------------------------------------------------- rate interest payments equal to the forward-looking term rate based on Secured Overnight Financing Rate ("SOFR") plus 1.05%. These interest payments are payable monthly in arrears. The repurchase price of the receivables in the facility is the original face value. Outstanding receivables must be repurchased on a date agreed upon by both the buyer and seller, generally on a monthly basis, and on the termination date of the repurchase facility. This facility is considered a secured borrowing and provides the buyer with customary rights of termination upon the occurrence of certain events of default. We have guaranteed all of the sellers' obligations under the facility. During 2022, we made$32.5 million of principal payments under the term loan. AtOctober 31, 2022 , the total outstanding borrowings and standby letters of credit were$1,271.3 million and$158.3 million , respectively. AtOctober 31, 2022 , we had up to$612.9 million of borrowing capacity. OnMarch 5, 2021 , theUnited Kingdom's Financial Conduct Authority , the regulator of LIBOR, announced that the USD LIBOR rates will no longer be published afterJune 30, 2023 . The Alternative Reference Rates Committee, a group of market participants convened by theU.S. Federal Reserve Board and theFederal Reserve Bank of New York , has recommended SOFR, a rate calculated based on repurchase agreements backed by treasury securities, as its recommended alternative benchmark rate to replace USD LIBOR. We transitioned the outstanding debt from a LIBOR-based interest rate to a term SOFR-based interest rate, which is set to take effect onNovember 1, 2022 .
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 tothe United States . WhileU.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. We believe that our cash on hand inthe United States , along with our Amended Credit Facility and future domestic cash flows, are sufficient to satisfy our domestic liquidity requirements.
Share Repurchases
EffectiveDecember 18, 2019 , our Board of Directors replaced our then-existing share repurchase program with a new share repurchase program under which we may repurchase up to$150.0 million of our common stock. We repurchased shares under the Share Repurchase Program during 2022, as summarized below. AtOctober 31, 2022 , authorization for$47.4 million of repurchases remained under the Share Repurchase Program. EffectiveDecember 9, 2022 , our Board of Directors expanded the Share Repurchase Program by an additional$150.0 million . There were no share repurchases during 2021. Years EndedOctober 31 , (in millions, except per share amounts) 2022
2021
Total number of shares purchased 2.3
-
Average price paid per share $ 42.15
N/A
Total cash paid for share repurchases $ 97.5
$ -
Proceeds from Federal Energy Savings Performance Contracts
As part of our Technical Solutions business, we enter into energy savings
performance contracts ("ESPC") with the federal government pursuant to which we
agree to develop, design, engineer, and construct a project and guarantee that
the project will satisfy agreed-upon performance standards. Proceeds from ESPC
projects are generally received in advance of construction through agreements to
sell the ESPC receivables to unaffiliated third parties. We use the advances
from the third parties under these agreements to finance the projects, which are
recorded as cash flows from financing activities. The use of the cash received
under these arrangements to pay project costs is classified as operating cash
flows.
Effect of Inflation
The rates of inflation experienced in recent years have not had a material impact on our Financial Statements. We attempt to recover increased costs by increasing prices for our services to the extent permitted by contracts and competition.
33
--------------------------------------------------------------------------------Regulatory Environment
Our operations are subject to various federal, state, and/or local laws, rules, and regulations regulating among other things, labor, wages, and health and safety matters, as well as laws and regulations relating to the discharge of materials into the environment or otherwise relating to the protection of the environment. Historically, the cost of complying with these laws, rules, and regulations has not had a material adverse effect on our financial position, results of operations, or cash flows.
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.
Years Ended October 31,
(in millions) 2022 2021 2020Net cash provided by operating activities of continuing operations
$ 20.4
- - 0.1
Net cash provided by operating activities 20.4 314.3 457.5
Net cash used in investing activities (241.5) (740.0) (27.5)
Net cash provided by (used in) financing activities 235.5 92.4 (94.1)
Operating Activities of Continuing Operations
Net cash provided by operating activities of continuing operations decreased by$293.9 million during 2022, as compared to 2021. The decrease was primarily driven by payments made for the Bucio settlement, which was recorded within "Other Accrued Liabilities" in the Consolidated Balance Sheets, and deferred remittance of payroll taxes in the current year and the timing of client receivable collections and vendor payments. Net cash provided by operating activities of continuing operations decreased by$143.1 million during 2021, as compared to 2020. The decrease was primarily related to the timing of client receivable collections and deferred remittance of payroll taxes under the CARES Act in 2021, partially offset by the timing of vendor payments. Investing Activities Net cash used in investing activities changed by$498.5 million during 2022, as compared to 2021. The change was primarily related to the Able Acquisition during the fourth quarter of 2021, partially offset by Momentum and RavenVolt acquisitions.
Net cash used in investing activities changed by
Financing Activities
Net cash provided by financing activities was$235.5 million in 2022, as compared to net cash used in financing activities of$92.4 million in 2021. The change was primarily related to an increase in net borrowings from our Amended Credit Facility and Receivable Facility to fund acquisitions and working capital requirements. Net cash provided by financing activities was$92.4 million in 2021, as compared to net cash used in financing activities of$94.1 million in 2020, primarily due to higher net borrowings to partially fund the purchase price of the Able Acquisition.
Dividends
OnDecember 5, 2022 , we announced a quarterly cash dividend of$0.22 per share on our common stock, payable onFebruary 6, 2023 . We declared a quarterly cash dividend on our common stock every quarter during 34 --------------------------------------------------------------------------------
2022, 2021, and 2020. We paid total annual dividends of
Material Cash Requirements from Contractual and Other Obligations
As of
•Debt Obligations and Interest Payments - Outstanding payments on our Amended Credit Facility were$1,271.3 million , with$32.5 million payable within 12 months. In addition, we have$150.0 million payable under our Receivables Facility that allows us to sell a portfolio of available and eligible outstandingU.S. trade accounts receivable of up to$150.0 million to a participating institution and simultaneously agree to repurchase them generally on a monthly basis. We had future interest payments based on our hedged borrowings under our Amended Credit Facility of$16.3 million , which is payable within 12 months. The interest payments on our remaining borrowings under the Amended Credit Facility will be determined based upon the average outstanding balance of our borrowings and the prevailing interest rate during that time. See Note 11, "Credit Facility," in the Financial Statements for further detail of our debt and the timing of expected future principal and interest payments. •Operating and Finance Leases - We enter into various noncancelable lease agreements for office space, parking facilities, warehouses, vehicles, and equipment used in the normal course of business. Operating and finance lease obligations were$161.1 million , with$38.4 million payable within 12 months. See Note 5, "Leases," in the Financial Statements for further detail of our obligations and the timing of expected future payments.
•Service Concession Arrangements - As defined under Topic 853, Service
Concession Arrangements, our leased location parking arrangements are
represented as service concession arrangements. We had contractual payments for
these arrangements of
•Information Technology Service Agreements - Information technology service agreements represent outsourced services and licensing costs pursuant to our information technology agreements. We had contractual payments for these agreements of$61.4 million , with$38.8 million payable within 12 months. •Benefit Obligations - Expected future payments relating to our defined benefit, postretirement, and deferred compensation plans were$39.0 million , with$3.2 million payable in 12 months. These amounts are based on expected future service and were calculated using the same assumptions used to measure our benefit obligation atOctober 31, 2022 . •CARES Act Tax Obligations - We deferred approximately$66 million of payroll tax provisions under the CARES Act, which we paid inDecember 2022 . See Note 16, "Income Taxes," in the Financial Statements for further details.
In addition, our material cash requirements for other obligations, for which we cannot reasonably estimate future payments, include the following:
•Multiemployer Benefit Plans - In addition to our company sponsored benefit plans, we participate in certain multiemployer pension and other postretirement plans. The cost of these plans is equal to the annual required contributions determined in accordance with the provisions of negotiated collective bargaining arrangements. During 2021, 2020, and 2019, contributions made to these plans were$555.1 million ,$348.8 million , and$335.8 million , respectively; however, our future contributions to the multiemployer plans are dependent upon a number of factors, including the funded status of the plans, the ability of other participating companies to meet ongoing funding obligations, and the level of our ongoing participation in these plans. Amounts of future contributions that we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated. See Note 12, "Employee Benefit Plans," in the Financial Statements for more information. •Self-Insurance Obligations - We may make payments for exposures for which we are self-insured, including workers' compensation, general liability, automobile liability, property damage, and other insurable risks. AtOctober 31, 2022 , our self-insurance reserves, net of recoverables, were$479.9 million . As these obligations do not have scheduled maturities, we are unable to make a reliable estimate of the amount or timing of cash that may be required to settle these matters. See Note 10, "Insurance," in the Financial Statements for further detail. 35 -------------------------------------------------------------------------------- •Unrecognized Tax Benefits - AtOctober 31, 2022 , our total liability for unrecognized tax benefits was$10.8 million . The resolution or settlement of these tax positions with the taxing authorities is subject to significant uncertainty, and therefore we are unable to make a reliable estimate of the amount or timing of cash that may be required to settle these matters. In addition, certain of these matters may not require cash settlements due to the exercise of credits and net operating loss carryforwards as well as other offsets, including the indirect benefit from other taxing jurisdictions that may be available.
•Contingent Consideration Payable in Connection with Our Acquisition of
RavenVolt - At
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than unrecorded standby letters of credit and surety bonds. We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations and to collateralize self-insurance obligations in the event we are unable to meet our claim payment obligations. As we already have reserves on our books for the claims costs, these do not represent additional liabilities. The surety bonds typically remain in force for one to five years and may include optional renewal periods. As ofOctober 31, 2022 , these letters of credit and surety bonds totaled$158.3 million and$618.6 million , respectively. Neither of these arrangements has a material current effect, or is reasonably likely to have a material future effect, on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. 36 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance withUnited States generally accepted accounting principles requires our management to make certain estimates that affect the reported amounts. We base our estimates on historical experience, known or expected trends, independent valuations, and various other assumptions that we believe to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. As a result of our Acquisition of RavenVolt, we added "Contingent Consideration" to our critical accounting policies and estimates in 2022. We removed "Customer Relationships" and "Contingencies and Litigation". There have been no other significant changes to our critical accounting policies and estimates for the year endedOctober 31, 2022 . We believe the following critical accounting policies govern the more significant judgments and estimates used in the preparation of our Financial Statements. 37 -------------------------------------------------------------------------------- Effect if Actual Results Differ from Description Judgments and Uncertainties
Assumptions
Valuation of Long-Lived Our impairment evaluations During the last three years, we have not made Assets require us to apply judgment in any changes in the accounting methodology We evaluate our fixed assets determining whether a triggering used to evaluate the impairment of long-lived and amortizable intangible event has occurred, including assets or to estimate the useful lives of our assets for impairment the evaluation of whether it is long-lived assets. Additionally, we have not whenever events or changes more likely than not that a made any changes in the accounting in circumstances indicate long-lived asset will be methodology used to evaluate impairment of that the carrying amount of disposed of significantly before goodwill during the last three years. such assets may not be the end of its previously recoverable. These events estimated useful life. Incorrect At October 31, 2022, we had$2.5 billion of and circumstances include, estimation of useful lives may goodwill. Our goodwill is included in the but are not limited to: result in inaccurate following segments: higher than expected depreciation and amortization attrition for customer charges over future periods$1.1 billion - B&I relationships; a current leading, to future impairment. expectation that a Our impairment loss calculations$502.2 million - M&D long-lived asset will be contain uncertainties because disposed of significantly they require management to make$459.3 million - Education before the end of its assumptions and to apply previously estimated useful judgment to estimate future cash$68.7 million - Aviation life, such as when we flows and asset fair values,
classify a business as held including forecasting useful
lives of the assets and
adverse change in the extent selecting the discount rate that A goodwill impairment analysis was performed
or manner in which we use a reflects the risk inherent in for each of our reporting units on August 1,
long-lived asset; or a future cash flows. 2022. Based on these studies, the implied
change in the physical We estimate the fair value of fair value of each of our reporting units was
condition of a long-lived each reporting unit using a substantially in excess of its carrying
asset. Undiscounted cash combination of the income value. Therefore, we concluded there were no
flow analyses are used to approach and the market indicators of impairment. A 10% decrease in
determine if impairment approach. the estimated fair value of any of our
exists; if impairment is The income approach incorporates reporting units would not have resulted in a
determined to exist, the the use of a discounted cash different conclusion. loss is calculated based on flow method in which the estimated fair value.
estimated future cash flows and During the third quarter of 2021, we
Goodwill is not amortized terminal value are calculated recognized a non-cash impairment charge
but rather tested at least for each reporting unit and then totaling $9.1 million in our Corporate
annually for impairment or discounted to present value segment for previously capitalized
more often if events or using an appropriate discount internal-use software related to our ERP
changes in circumstances rate. system implementation. The Company determined
indicate it is more likely The valuation of our reporting that certain components that were previously
than not that the carrying units requires significant developed would no longer be integrated into
amount of the asset may not judgment in evaluation of recent the new ERP system. The impairment charge
be recoverable. Goodwill is indicators of market activity reduced the carrying value to zero for those
tested for impairment at the and estimated future cash flows, components.
reporting unit level, which discount rates, and other
represents an operating factors. Our impairment analyses During the second quarter of 2020, given the
segment or a component of an contain inherent uncertainties general deterioration in economic and market
operating segment. Goodwill due to uncontrollable events conditions arising from the Pandemic, we
is tested for impairment by that could positively or identified a triggering event indicating
either performing a negatively impact anticipated possible impairment of goodwill and
qualitative evaluation or a future economic and operating intangible assets. For the three goodwill
quantitative test. The conditions. reporting units tested quantitatively, we
qualitative evaluation is an In making these estimates, the estimated the fair value using a weighting of
assessment of factors to weighted-average cost of capital fair values derived from an income approach
determine whether it is more is utilized to calculate the and a market approach. Based on the
likely than not that the present value of future cash evaluation performed, we determined that
fair value of a reporting flows and terminal value. Many goodwill was impaired for each of the three
unit is less than its variables go into estimating goodwill reporting units evaluated and
carrying amount, including future cash flows, including recognized a non-cash impairment charge
goodwill. We may elect not estimates of our future revenue totaling $163.8 million ($99.3 million
to perform the qualitative growth and operating results. related to Education, $55.5 million related
assessment for some or all When estimating our projected to Aviation, and $9.0 million related to our
of our reporting units and revenue growth and future UK Technical Solutions business). We also
instead perform a operating results, we consider recognized intangible asset impairment
quantitative impairment industry trends, economic data, charges of $5.6 million related to Aviation
test. and our competitive advantage.
and
The market approach estimates Solutions business. We performed our annual
fair value of a reporting unit
goodwill impairment analysis on
by using market comparables for 2020, using a qualitative approach since
reasonably similar public there were no indicators of impairment
companies. subsequent to our quantitative analysis
performed in the second quarter of 2020 as
discussed above. As a result of the
qualitative analysis, we concluded that there
were no further impairments.
38
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39
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Effect if Actual Results Differ from
Description Judgments and Uncertainties Assumptions
Insurance Reserves We use a combination of insured Our self-insurance liabilities We have not made any changes in the and self-insurance programs to contain uncertainties due to accounting methodology used to establish cover workers' compensation, assumptions required and our self-insurance liabilities during the general liability, automobile judgment used. past three years. liability, property damage, and other insurable risks. Costs to settle our obligations,
After analyzing recent loss development
including legal and healthcare patterns, comparing the loss development
Insurance claim liabilities costs, could fluctuate and cause patterns against benchmarks, and applying
represent our estimate of retained estimates of our self-insurance actuarial projection methods to estimate
risks without regard to insurance liabilities to change. the ultimate losses, we decreased our
coverage. We retain a substantial total reserves related to prior years
portion of the risk related to Incident rates, including known claims as well as our estimate of
certain workers' compensation and frequency and severity, could the loss amounts associated with IBNR
medical claims. Liabilities fluctuate and cause the Claims during 2022 by $36.8 million . In
associated with these losses estimates in our self-insurance 2021, we decreased our total reserves
include estimates of both claims liabilities to change. related to prior years claims by $36.0
filed and IBNR Claims. million.
These estimates are subject to:
With the assistance of third-party changes in the regulatory
It is possible that actual results could
actuaries, we periodically review environment; fluctuations in differ from recorded self-insurance
our estimate of ultimate losses projected exposures, including liabilities. A 10% change in our
for IBNR Claims and adjust our payroll, revenues, and the projected ultimate losses would have
required self-insurance reserves number of vehicle units; and the affected net income by approximately
as appropriate. As part of this frequency, lag, and severity of $34.5 million for 2022.
evaluation, we review the status claims.
of existing and new claim reserves The full extent of certain
as established by our third-party claims, especially workers'
claims administrators. compensation and general
liability claims, may not be
The third-party claims fully determined for several
administrators establish the case years.
reserves based upon known factors
related to the type and severity In addition, if the reserves
of the claims, demographic data, related to self-insurance or
legislative matters, and case law, high deductible programs from
as appropriate. acquired businesses are not
adequate to cover damages
We compare actual trends to resulting from future accidents
expected trends and monitor claims or other incidents, we may be development.
exposed to substantial losses
arising from future claim
The specific case reserves developments.
estimated by the third-party
administrators are provided to an
actuary who assists us in
projecting an actuarial estimate
of the overall ultimate losses for
our self-insured or high
deductible programs. The
projection includes the case
reserves plus an actuarial
estimate of reserves required for
additional developments, including
IBNR Claims.
We utilize the results of
actuarial studies to estimate our
insurance rates and insurance
reserves for future periods and to
adjust reserves, if appropriate,
for prior years.
40
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Effect if Actual Results Differ from
Description Judgments and Uncertainties Assumptions
Contingent Consideration The acquisition of RavenVolt To estimate the fair value of We review and re-assess the estimated included contingent earn-out the contingent consideration on fair value of contingent consideration on arrangement, which is based on the date of acquisition, we used a quarterly basis, and the updated fair the achievement of future the Real Options method. The key value could be materially different from income thresholds or other assumptions used in our the initial estimates or prior quarterly metrics. The contingent valuation were: i) forecast of amounts. Changes in the estimated fair earn-out arrangements are based revenues and EBITDA margins, ii) value of our contingent consideration and upon our valuations of the the volatility associated with adjustments to the estimated fair value acquired companies and reduce the EBITDA, iii) risk-adjusted related to changes in all other the risk of overpaying for discount rate applied to unobservable inputs will be recognized acquisitions if the projected forecasted EBITDA, and (iv) the within "Operating Expenses" in the financial results are not credit-adjusted discount rate Consolidated Statements of Comprehensive achieved. related to the payment of the
Income (Loss).
contingent consideration. A
The fair values of these simulation of one million At October 31, 2022, we recorded $59.0
earn-out arrangements are scenarios was performed with the million of contingent consideration
included as part of the assistance of a third-party liability related to the RavenVolt
purchase price of the acquired valuation specialist, resulting acquisition. The cumulative maximum of
companies on their respective in a fair value for the the earn-out payments is $280.0 million ,
acquisition dates. For each cumulative contingent if RavenVolt achieves certain EBITDA (as
transaction, we estimate the consideration for calendar years defined in the RavenVolt merger
fair value of contingent 2023 through 2025 totaling $59 agreement) targets. Pursuant to the
earn-out payments as part of million. RavenVolt merger agreement, former owners
the initial purchase price and of RavenVolt would be entitled to a
record the estimated fair value These estimates are influenced payment of up to $75.0 million in
of contingent consideration as by many factors, including calendar year 2024 for achieving certain
a liability on the Consolidated historical financial EBITDA targets in calendar year 2023;
Balance Sheets. The fair values information, guideline public $75.0 million in calendar year 2025 for
of the earn-out arrangements company data, and management's achieving certain EBITDA targets in
are estimated by discounting expectations for future customer calendar year 2024; and $130.0 million in
the expected future contingent growth as a combined company. calendar year 2026 for achieving certain
payments to present value using Changes in these inputs could EBITDA targets in calendar year 2025. If
a variation of the Income have a significant impact on the the EBITDA achieved for calendar years
Approach, known as the Real initial fair value of the 2023 - 2025 cumulatively meets the
Option method. contingent consideration
defined EBITDA targets, the entire
liability. million would be paid in calendar year
2026, minus any earn-out payments made in
2024 and 2025. The actual achievement of
contingent considerations payments in
2024, 2025, and 2026 could be materially
different than the initial fair value of
$59 million . 41
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Recent Accounting Pronouncements
Effective Date/
Accounting Standard Updates Topic Summary Method of Adoption
2021-01 Reference Rate Reform This Accounting Standard Update ("ASU"), This update was effective
(Topic 848): Scope issued in January 2021, clarifies that upon issuance and can be
derivatives affected by the discounting applied to hedging
transition are explicitly eligible for relationships
certain optional expedients and exceptions retrospectively or
under Topic 848. prospectively through
December 31, 2022.
Effective November 1, 2023, we applied
availablepractical expedients under ASC 848
to account for modifications, changes in
critical terms, and updates to the
designated hedged risks as qualifying
changes have been made to applicable debt
and derivative contracts as if they were not
substantial.
2020-04 Reference Rate Reform This ASU, issued in March 2020, provides This update was effective
(Topic 848): optional expedients to assist with the upon issuance and can be
Facilitation of the discontinuance of LIBOR. The expedients applied prospectively to
Effects of Reference allow companies to ease the potential contract modifications
Rate Reform on accounting burden when modifying contracts made and hedging
Financial Reporting and hedging relationships that use LIBOR as relationships entered
a reference rate, if certain criteria are into or evaluated through
met. December 31, 2022 .
Effective November 1, 2023 , we applied
availablepractical expedients under ASC 848
to account for modifications, changes in
critical terms, and updates to the
designated hedged risks as qualifying
changes have been made to applicable debt
and derivative contracts as if they were not
substantial.
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