Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 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 . Our principal operations are in the United States, and in 2023 our U.S. operations generated approximately 93% of our revenues.
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 we expect to 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.
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Developments and Trends
Macro-Economic Environment in Commercial Real Estate and Other
We actively monitor the economic environment and its potential impact on demand for our services and our financial condition. Largely driven by the lingering effects of the Pandemic, especially the normalization of hybrid work, the commercial real estate industry, particularly multi-tenant and owner-occupied commercial office buildings, is experiencing an increase in vacancy rates. Given that Class A and high-quality commercial office buildings are a key end market for the Company, we expect a decline in demand for janitorial services and work orders in these markets near-term. As a result, we expect our B&I industry to experience muted growth in the near-term. Longer term, we expect the vacancy rates of Class A and high-quality buildings to gradually decrease and our volume of work to stabilize .
We expect a large client within M&D to rebid and rebalance their work needs in 2024 as part of their procurement process. While we still expect to retain a large portion of this business, we expect M&D’s financial results to be impacted in the near-term.
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 the 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. 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 2023 by $14.8 million. In 2022, we decreased our total reserves related to prior year claims by $36.8 million.
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Key Financial Highlights
• Revenues increased by $289.8 million, or 3.7%, to $8,096.4 million during 2023, as compared to 2022. Revenue growth was comprised of organic growth of 2.4% and acquisition growth of 1.3%. Acquisition growth of $104.4 million was driven by the RavenVolt and Momentum acquisitions, completed in the fourth and second quarter of 2022, respectively. Organic growth was primarily driven by the strong leisure and business travel markets served by Aviation, expansion of new business and growth with current customers in M&D, and net new business wins in Education. The increase in revenues was partially offset by a decrease in the overall volume of work orders, lower project revenues within Technical Solutions, and soft commercial office market conditions in B&I.
• Operating profit increased by $60.7 million to $409.5 million during 2023, as compared to 2022. The increase in operating profit was attributable to the revenue increase and:
• a decrease in the fair value of the contingent consideration related to the RavenVolt Acquisition; and
• an Employee retention credit (“ERC”) refund received.
The increase was partially offset by:
• a decrease in favorable self-insurance adjustments related to prior year claims as a result of actuarial evaluations completed on our workers’ compensation, general liability, automobile liability, and property damage insurance plans; and
• a decrease in work orders, which are generally more profitable than contracted service.
• Our effective tax rate on income was 24.1% for 2023, as compared to 25.7% during 2022.
• Net cash provided by operating activities was $243.3 million during 2023. Our net cash provided by operating cash activities were higher than prior year, primarily due to the timing of certain working capital requirements, which included a $143.8 million payment for the Bucio case in 2022, and the related income tax benefit .
• Dividends of $57.5 million were paid to shareholders, and dividends totaling $0.88 per common share were declared during 2023. Additionally, we repurchased 3.3 million of shares for $138.1 million, including excise taxes during 2023.
• At October 31, 2023, total outstanding borrowings under our Amended Credit Facility were $1,313.8 million, and we had up to $483.0 million of borrowing capacity.
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Results of Operations
Consolidated
Years Ended October 31, 2023 vs. 2022
($ in millions) 2023 2022 2021 Increase / (Decrease)
Revenues $ 8,096.4 $ 7,806.6 $ 6,228.6 $ 289.8 3.7%
Operating expenses 7,037.6 6,757.5 5,258.2 280.1 4.1%
Gross margin 13.1 % 13.4 % 15.6 % (36) bps
Selling, general and administrative expenses 572.8 628.3 719.2 (55.5) (8.8)%
Amortization of intangible assets 76.5 72.1 45.0 4.4 6.1%
Operating profit 409.5 348.8 206.3 60.7 17.4%
Income from unconsolidated affiliates 3.9 2.4 2.1 1.5 60.1%
Interest expense (82.3) (41.1) (28.6) (41.2) (99.9)%
Income before income taxes
331.1 310.0 179.8 21.1 6.8%
Income tax provision (79.7) (79.6) (53.5) (0.1) (0.2)%
Net income 251.3 230.4 126.3 20.9 9.1%
Other comprehensive income
Interest rate swaps (0.5) 36.7 4.5 (37.2) NM*
Foreign currency translation and other 7.3 (19.8) 5.3 27.1 NM*
Income tax provision 0.1 (10.5) (1.5) 10.6 NM*
Comprehensive income $ 258.1 $ 236.9 $ 134.5 $ 21.2 9.0%
*Not meaningful
The Year Ended October 31, 2023, Compared with the Year Ended October 31, 2022
Revenues
Revenues increased by $289.8 million, or 3.7%, to $8,096.4 million during 2023, as compared to 2022. Revenue growth was comprised of organic growth of 2.4% and acquisition growth of 1.3%. Acquisition growth of $104.4 million was driven by the RavenVolt and Momentum acquisitions, completed in the fourth and second quarter of 2022, respectively. Organic growth was primarily driven by the strong leisure and business travel markets served by Aviation, expansion of new business and growth with current customers in M&D, and net new business wins in Education. The increase in revenues was partially offset by a decrease in the overall volume of work orders, lower project revenues within Technical Solutions, and soft commercial office market conditions in B&I.
Operating Expenses
Operating expenses increased by $280.1 million, or 4.1%, to $7,037.6 million during 2023, as compared to 2022. Gross margin decreased by 36 bps to 13.1% in 2023, as compared to 13.4% in 2022. The decrease in gross margin was primarily driven by the decrease in favorable self-insurance adjustments related to prior year claims as a result of actuarial evaluations completed on our workers’ compensation, general liability, automobile liability, and property damage insurance plans. In addition, gross margins were impacted by a decrease in work orders, which are generally more profitable than contracted service.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $55.5 million, or 8.8%, to $572.8 million during 2023, as compared to 2022. The decrease in selling, general and administrative expenses was primarily attributable to:
• a $45.6 million decrease in the fair value of contingent consideration related to the RavenVolt Acquisition;
• a $24.0 million benefit from ERC refunds received; and
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• a $6.6 million decrease in certain technology projects primarily attributable to discrete transformational costs under our ELEVATE strategy for developing the new ERP system, client-facing technology, workforce management tools, and data analytics;
This decrease was partially offset by:
• a $10.8 million increase in bad debt, of which $7.7 million relates to a favorable adjustment in the prior year;
• an absence of a $7.6 million gain on the sale of a group of customer contracts related to healthcare technology management services within Technical Solutions during 2022; and
• a $4.6 million increase in unfavorable self-insurance adjustment related to prior year claims as the result of actuarial evaluations completed on our medical and dental self-insurance plans.
Amortization of Intangible Assets
Amortization of intangible assets increased by $4.4 million, or 6.1%, to $76.5 million during 2023, as compared to 2022. This increase was primarily due to the amortization of intangibles acquired as part of the RavenVolt and Momentum acquisitions.
Interest Expense
Interest expense increased by $41.2 million, or 99.9%, to $82.3 million during 2023, as compared to 2022, primarily driven by higher interest rates on our debt borrowings.
Income Taxes
During 2023 and 2022, we had effective tax rates of 24.1% and 25.7%, respectively, resulting in a provision for tax of $79.7 million and $79.6 million, respectively. . Our effective tax rate for 2023 was impacted by a $12.8 million benefit related to the non-taxable change in the fair value of the contingent consideration related to the RavenVolt Acquisition, a $2.2 million benefit for share-based compensation; and a $1.5 million benefit for return to provision adjustment primarily related to state and local deferred income taxes; partially offset by a $4.8 million expense related to non-deductible executive compensation. Our effective tax rate for 2022 was impacted by the following items: an $8.1 million benefit for uncertain tax positions with expiring statutes; a $1.4 million benefit for share-based compensation; and a $1.3 million return to provision adjustments.
Interest Rate Swaps
We had a loss of $0.5 million on interest rate swaps during the year ended October 31, 2023, as compared to a gain of $36.7 million during the year ended October 31, 2022, 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 gain of $7.3 million during the year ended October 31, 2023, as compared to a foreign currency translation loss of $19.8 million during the year ended October 31, 2022. This change was due to fluctuations in the exchange rate between the U.S. Dollar (“USD”) and the British pound sterling (“GBP”). Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of foreign currencies to the USD and the extent of our foreign assets and liabilities.
The Year Ended October 31, 2022, Compared with the Year Ended October 31, 2021
For a comparison of our Results of Operations for the year ended October 31, 2022, to the year ended October 31, 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended October 31, 2022, filed with the SEC on December 21, 2022.
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Segment Information
Our current reportable segments consist of B&I, M&D, Education, Aviation, and Technical Solutions.
Financial Information for Each Reportable Segment
Years Ended October 31, 2023 vs. 2022
($ in millions) 2023 2022 2021 Increase / (Decrease)
Revenues
Business & Industry $ 4,089.4 $ 4,095.9 $ 2,853.8 $ (6.5) (0.2)%
Manufacturing & Distribution 1,526.7 1,445.2 1,363.1 81.5 5.6%
Education 880.4 834.7 830.8 45.7 5.5%
Aviation 925.7 804.0 651.1 121.7 15.1%
Technical Solutions 674.2 626.8 529.8 47.4 7.6%
$ 8,096.4 $ 7,806.6 $ 6,228.6 $ 289.8 3.7%
Operating profit (loss)
Business & Industry $ 315.6 $ 334.9 $ 285.9 $ (19.3) (5.7)%
Operating profit margin 7.7 % 8.2 % 10.0 % (46) bps
Manufacturing & Distribution 161.7 161.8 155.5 (0.1) —%
Operating profit margin 10.6 % 11.2 % 11.4 % (60) bps
Education 49.7 47.1 61.5 2.6 5.5%
Operating profit margin 5.6 % 5.6 % 7.4 % — bps
Aviation 60.0 29.3 32.1 30.7 NM*
Operating profit margin 6.5 % 3.6 % 4.9 % 283 bps
Technical Solutions 53.2 63.8 49.4 (10.6) (16.5)%
Operating profit margin 7.9 % 10.2 % 9.3 % (228) bps
Government Services — (0.3) (0.2) 0.3 NM*
Operating profit margin NM* NM* NM* NM*
Corporate (226.6) (284.5) (374.6) (57.9) 20.3%
Adjustment for income from unconsolidated
affiliates, included in Aviation (3.9) (2.4) (2.1) (1.5) (60.1)%
Adjustment for tax deductions for energy
efficient government buildings, included in
Technical Solutions (0.3) (0.9) (1.2) 0.6 66.8%
$ 409.5 $ 348.8 $ 206.3 $ 60.7 17.4%
*Not meaningful
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The Year Ended October 31, 2023, Compared with the Year Ended October 31, 2022
Business & Industry
Years Ended October 31,
($ in millions) 2023 2022 Increase
Revenues $ 4,089.4 $ 4,095.9 $ (6.5) (0.2)%
Operating profit 315.6 334.9 (19.3) (5.7)%
Operating profit margin 7.7 % 8.2 % (46) bps
B&I revenues decreased by $6.5 million, or 0.2%, to $4,089.4 million during 2023, as compared to 2022. This decrease in revenue was comprised of acquisition growth of 0.8%, offset by organic decrease of 0.9%. Acquisition growth of $32.1 million was driven by the Momentum Acquisition, completed in the second quarter of 2022. Organic decrease was primarily driven by decrease in work orders, soft commercial office market conditions, and the expected attrition of certain engineering clients. Management reimbursement revenues for this segment totaled $270.1 million and $227.8 million during 2023 and 2022, respectively.
Operating profit decreased by $19.3 million, or 5.7%, to $315.6 million during 2023, as compared to 2022. Operating profit margin decreased by 46 bps to 7.7% in 2023 from 8.2% in 2022. The decrease in operating profit margin was primarily driven by a decrease in work orders, which are generally more profitable than contracted service, the change in contract mix, and an increase in direct labor and related costs due to a limited labor supply in certain non-union markets. The decrease was partially offset by lower amortization of intangible assets.
Manufacturing & Distribution
Years Ended October 31,
($ in millions) 2023 2022 Increase
Revenues $ 1,526.7 $ 1,445.2 $ 81.5 5.6%
Operating profit 161.7 161.8 (0.1) —%
Operating profit margin 10.6 % 11.2 % (60) bps
M&D revenues increased by $81.5 million, or 5.6%, to $1,526.7 million during 2023, as compared to 2022. The increase was primarily attributable to the net new business wins and the expansion of business with existing customers, partially offset by a decrease in work orders.
Operating profit decreased by $0.1 million, to $161.7 million during 2023, as compared to 2022. Operating profit margin decreased by 60 bps to 10.6% in 2023 from 11.2% in 2022. The decrease in operating profit margin was primarily attributable to the change in contract mix and decrease in work orders, which are generally more profitable than contracted service.
Education
Years Ended October 31,
($ in millions) 2023 2022 Increase
Revenues $ 880.4 $ 834.7 $ 45.7 5.5%
Operating profit 49.7 47.1 2.6 5.5%
Operating profit margin 5.6 % 5.6 % — bps
Education revenues increased by $45.7 million, or 5.5%, to $880.4 million during 2023, as compared to 2022. The increase was primarily attributable to net new business wins, partially offset by a decrease in work orders.
Operating profit increased by $2.6 million, or 5.5% to $49.7 million during 2023, as compared to 2022. Operating profit margin of 5.6% in 2023 was consistent with 2022. The operating profit margin was positively impacted by labor efficiencies and lower amortization of intangible assets, offset by an increase in start-up supplies to support new business growth and the decrease in work orders, which are generally more profitable than contracted service.
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Aviation
Years Ended October 31,
($ in millions) 2023 2022 Increase
Revenues $ 925.7 $ 804.0 $ 121.7 15.1%
Operating profit 60.0 29.3 30.7 NM*
Operating profit margin 6.5 % 3.6 % 283 bps
Aviation revenues increased by $121.7 million, or 15.1% to $925.7 million, during 2023, as compared to 2022. The increase was primarily attributable to a recovery in leisure and business travel (both domestic and international) and new parking-related services. In addition, we recognized $11.4 million in revenue from an Aviation parking project, whereby all the direct labor and related costs were recognized in prior periods. The related revenue was not recognized in the prior periods since the criteria for revenue recognition was not met until February 2023. Management reimbursement revenues for this segment totaled $31.8 million and $52.6 million during 2023 and 2022, respectively.
Operating profit increased by $30.7 million, to $60.0 million during 2023, as compared to 2022. Operating profit margin increased to 6.5% during 2023, from 3.6% during 2022. The increase in operating profit margin was primarily attributable to the $11.4 million in revenue from an Aviation parking project. Operating profit margin was negatively impacted by an increase in direct labor and related costs due to increased headcounts as travel continues to recover.
Technical Solutions
Years Ended October 31,
($ in millions) 2023 2022 Increase / (Decrease)
Revenues $ 674.2 $ 626.8 $ 47.4 7.6%
Operating profit 53.2 63.8 (10.6) (16.5)%
Operating profit margin 7.9 % 10.2 % (228) bps
Technical Solutions revenues increased by $47.4 million, or 7.6%, to $674.2 million during 2023, as compared to 2022. Revenue growth included acquisition growth of 11.5%, which was partially offset by an organic decrease of 3.9%. Acquisition growth of $72.3 million was driven by the RavenVolt Acquisition, which was completed in the fourth quarter of 2022. The organic revenue decrease was primarily driven by the decline in electric vehicle charging station installation sales and lower project revenues due to the timing of completions of certain bundled energy solutions projects.
Operating profit decreased by $10.6 million, or 16.5%, to $53.2 million during 2023, as compared to 2022. Operating profit margin decreased by 228 bps to 7.9% in 2023 from 10.2% in 2022. The decrease in operating profit margin was primarily attributable to a $7.6 million gain recognized on the sale of a group of customer contracts related to healthcare technology management services recognized in the prior year, and amortization of intangible assets related to the RavenVolt Acquisition, partially offset by the contract mix.
Corporate
Years Ended October 31,
($ in millions) 2023 2022 Decrease
Corporate expenses $ (226.6) $ (284.5) $ (57.9) 20.3%
Corporate expenses decreased by $57.9 million, or 20.3%, to $226.6 million during 2023, as compared to 2022. The decrease in corporate expenses was primarily related to:
• a $45.6 million decrease in the fair value of contingent consideration related to the RavenVolt Acquisition;
• a $24.0 million benefit from ERC refunds received;
• a $6.6 million decrease in certain technology projects primarily attributable to discrete transformational costs under our ELEVATE strategy for developing the new ERP system, client-facing technology, workforce management tools, and data analytics;
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• a $6.4 million decrease in compensation and related expenses primarily due to lower compensation under certain incentive plans; and
• a $2.4 million decrease in acquisition and integration costs primarily attributable to our prior years’ acquisitions.
This decrease was partially offset by:
• a $22.0 million decrease in favorable self-insurance adjustments related to prior year claims as the result of actuarial evaluations completed on our workers’ compensation, general liability, automobile liability, and property damage insurance plans; and
• a $4.6 million increase in unfavorable self-insurance adjustment related to prior year claims as the result of actuarial evaluations completed on our medical and dental self-insurance plans.
The Year Ended October 31, 2022, Compared with the Year Ended October 31, 2021
For a comparison of our Segment Information for the year ended October 31, 2022, to the year ended October 31, 2021, 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 ended October 31, 2022, filed with the SEC on December 21, 2022.
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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 at least a 12-month period from the issuance of these financial statements. 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
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 (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 on September 1, 2018.
On June 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 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. 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 October 31, 2023, we were in compliance with these covenants and expect to be in compliance in the foreseeable future.
On March 1, 2022, we entered into a new uncommitted receivable repurchase facility (the “Receivables Facility”) of up to $150 million, which expired on March 30, 2023. This facility was considered a secured borrowing and provided the buyer with customary rights of termination upon the occurrence of certain events of default. We have guaranteed all of the sellers’ obligations under the facility.
During 2023, we made $32.5 million of principal payments under the term loan. At October 31, 2023, the total outstanding borrowings and standby letters of credit were $1,313.8 million and $58.2 million, respectively. At October 31, 2023, we had up to $483.0 million of borrowing capacity.
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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. We believe that our cash on hand in the United States, along with our Amended Credit Facility and future domestic cash flows, are sufficient to satisfy our domestic liquidity requirements.
Share Repurchases
Effective December 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. Effective December 9, 2022, and December 13, 2023, our Board of Directors expanded the Share Repurchase Program by $150.0 millionand $150.0 million, respectively. We repurchased shares under the share repurchase program during the year ended October 31, 2023, as summarized below. At October 31, 2023, authorization for $60.3 million of repurchases remained under the Share Repurchase Program.
Years Ended October 31,
(in millions, except per share amounts) 2023 2022
Total number of shares purchased 3.3 2.3
Average price paid per share (1)
$ 41.06 $ 42.15
Total cash paid for share repurchases (1)
$ 137.1 $ 97.5
(1) Average price paid per share and total cash paid for share repurchases do not include any excise tax for stock repurchases as part of the Inflation Reduction Act of 2022.
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.
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
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settlements.
Years Ended October 31,
(in millions) 2023 2022 2021
Net cash provided by operating activities 243.3 20.4 314.3
Net cash used in investing activities (62.1) (241.5) (740.0)
Net cash (used in) provided by financing activities (186.3) 235.5 92.4
Operating Activities
Net cash provided by operating activities of continuing operations increased by $222.9 million during 2023, as compared to 2022. The increase was primarily driven by a $143.8 million payments made for the Bucio settlement in 2022, and the related income tax benefit .
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.
Investing Activities
Net cash used in investing activities changed by $179.5 million during 2023, as compared to 2022. The change was primarily related to the Momentum and RavenVolt acquisitions, completed in 2022.
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.
Financing Activities
Net cash used in financing activities was $186.3 million in 2023, as compared to net cash provided by financing activities of $235.5 million in 2022. The change was primarily related to a decrease in net borrowings from our Amended Credit Facility, as in 2022 we had higher borrowings to fund Momentum and RavenVolt acquisitions, and higher share repurchases in 2023.
Net cash provided by financing activities was $235.5 million in 2022, as compared to $92.4 million in 2021, primarily due to higher net borrowings to fund acquisitions and working capital requirements.
Dividends
On December 13, 2023, we announced a quarterly cash dividend of $0.225 per share on our common stock, payable on February 5, 2024, to shareholders of record on January 4, 2024. We declared a quarterly cash dividend on our common stock every quarter during 2023, 2022, and 2021. We paid total annual dividends of $57.5 million, $51.9 million, and $51.0 million during 2023, 2022, and 2021, respectively.
Material Cash Requirements from Contractual and Other Obligations
As of October 31, 2023, our material cash requirements for our known contractual and other obligations were as follows:
• Debt Obligations and Interest Payments – Outstanding payments on our Amended Credit Facility were $1,313.8 million, with $32.5 million payable within 12 months. We have future interest payments based on our hedged borrowings under our Amended Credit Facility of $16.8 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, “Debt,” 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 l ease agreements for office space, parking facilities, warehouses, vehicles, and equipment used in the normal course of business. Operating
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and finance lease obligations were $168.0 million, with $42.2 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 $88.2 million, with $25.0 million payable within 12 months.
• Information Technology Service Agreement s – Information technology service agreements represent outsourced services and licensing costs pursuant to our information technology agreements. We had contractual payments for these agreements of $122.4 million, with $41.0 million payable within 12 months.
• Benefit Obligations – Expected future payments relating to our defined benefit, postretirement, and deferred compensation plans were $38.2 million, with $3.3 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 at October 31, 2023.
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 2023, 2022, and 2021, contributions made to these plans were $574.6 million, $555.1 million, and $348.8 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. At October 31, 2023, our self-insurance reserves, net of recoverables, were $487.9 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.
• Unrecognized Tax Benefits – At October 31, 2023, our total liability for unrecognized tax benefits was $11.6 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 utilization 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 October 31, 2023, contingent consideration of up to $280.0 million in cash may be paid in calendar years 2024, 2025, and 2026, if the RavenVolt business achieves certain financial targets, as defined in the merger agreement, in calendar years 2023, 2024, and 2025 . We do not expect the RavenVolt business to achieve the aforementioned financial targets for calendar year 2023, and as such, we do not expect contingent consideration to be payable in the next 12 months.
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 of October 31, 2023, these letters of credit totaled $58.2 million, and surety bonds and surety-backed letters of credit totaled $776.2 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.
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”) 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. We removed “Contingent Consideration” from our critical accounting policies and estimates in 2023. There have been no other significant changes to our critical accounting policies and estimates for the year ended October 31, 2023. We believe the following critical accounting policies govern the more significant judgments and estimates used in the preparation of our Financial Statements.
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Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions
Valuation of Long-Lived Assets
We evaluate our fixed assets and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. These events and circumstances include, but are not limited to: higher than expected attrition for customer relationships; a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, such as when we classify a business as held for sale; a significant adverse change in the extent or manner in which we use a long-lived asset; or a change in the physical condition of a long-lived asset. Undiscounted cash flow analyses are used to determine if impairment exists; if impairment is determined to exist, the loss is calculated based on estimated fair value. Goodwill is not amortized but rather tested at least annually for impairment or more often if events or changes in circumstances indicate it is more likely than not that the carrying amount of the asset may not be recoverable. Goodwill is tested for impairment at the reporting unit level, which represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all of our reporting units and instead perform a quantitative impairment test.
Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the evaluation of whether it is more likely than not that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life. Incorrect estimation of useful lives may result in inaccurate depreciation and amortization charges over future periods leading, to future impairment.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
We estimate the fair value of each reporting unit using a combination of the income approach and the market approach.
The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal value are calculated for each reporting unit and then discounted to present value using an appropriate discount rate.
The valuation of our reporting units requires significant judgment in evaluation of recent indicators of market activity and estimated future cash flows, discount rates, and other factors. Our impairment analyses contain inherent uncertainties due to uncontrollable events that could positively or negatively impact anticipated future economic and operating conditions.
In making these estimates, the weighted-average cost of capital is utilized to calculate the present value of future cash flows and terminal value. Many variables go into estimating future cash flows, including estimates of our future revenue growth and operating results. When estimating our projected revenue growth and future operating results, we consider industry trends, economic data, and our competitive advantage.
The market approach estimates fair value of a reporting unit by using market comparables for reasonably similar public companies.
During the last three years, we have not made any changes in the accounting methodology used to evaluate the impairment of long-lived assets or to estimate the useful lives of our long-lived assets. Additionally, we have not made any changes in the accounting methodology used to evaluate impairment of goodwill during the last three years.
At October 31, 2023, we had $2.5 billion of goodwill. Our goodwill is included in the following segments:
$1.1 billion — B&I
$502.2 million — M&D
$459.3 million — Education
$69.0 million — Aviation
$368.0 million — Technical Solutions
A goodwill impairment analysis was performed for each of our reporting units on August 1, 2023. Based on these studies, the implied fair value of each of our reporting units was substantially in excess of its carrying value, with the exception of the Education reporting unit, where the excess of the fair value over its carrying value was less than 20%. A 10% decrease in the estimated fair value of any of our reporting units would not have resulted in a different conclusion. We concluded there were no indicators of impairment.
During the third quarter of 2021, we recognized a non-cash impairment charge totaling $9.1 million in our Corporate segment for previously capitalized internal-use software related to our ERP system implementation. The Company determined that certain components that were previously developed would no longer be integrated into the new ERP system. The impairment charge reduced the carrying value to zero for those components.
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Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions
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 claims filed and IBNR Claims.
With the assistance of third-party actuaries, we periodically review our estimate of ultimate losses for IBNR Claims 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 our 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 data, legislative matters, and case law, as appropriate.
We compare actual trends to expected trends and monitor claims development.
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. 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.
Our self-insurance liabilities contain uncertainties due to assumptions required and judgment used.
Costs to settle our obligations, including legal and healthcare costs, could fluctuate and cause estimates of our self-insurance liabilities to change.
Incident rates, including frequency and severity, could fluctuate and cause the estimates in our self-insurance liabilities to change.
These estimates are subject to: changes in the regulatory environment; fluctuations in projected exposures, including payroll, revenues, and the number of vehicle units; and the frequency, lag, and severity of claims.
The full extent of certain claims, especially workers’ compensation and general liability claims, may not be fully determined for several years.
In addition, if the reserves related to self-insurance or high deductible programs from acquired businesses are not adequate to cover damages resulting from future accidents or other incidents, we may be exposed to substantial losses arising from future claim developments. We have not made any changes in the accounting methodology used to establish our self-insurance liabilities during the past three years.
After analyzing recent loss development patterns, comparing the loss development patterns against benchmarks, and applying actuarial projection methods to estimate the ultimate losses, we decreased our total reserves related to prior years known claims as well as our estimate of the loss amounts associated with IBNR Claims during 2023 by $14.8 million. In 2022, we decreased our total reserves related to prior years claims by $36.8 million.
It is possible that actual results could differ from recorded self-insurance liabilities. A 10% change in our projected ultimate losses would have affected net income by approximately $35.1 million for 2023.
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Accounting Pronouncements
Accounting Standard Updates Topic Summary Effective Date/
Method of Adoption
2022-04
Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations This Accounting Standard Update (“ASU”), issued in September 2022, is designed to enhance transparency around supplier finance programs by requiring new disclosures that would allow a user of the financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude.
While we are currently evaluating the impact of implementing this guidance on our financial statements, we do not expect adoption to have a material impact. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted.
2023-07
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
This ASU, issued in November 2023, improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker, and an amount for other segment items by reportable segment, with a description of its composition. We are currently evaluating the impact of implementing this guidance on our financial statements; however, we do not expect adoption to have a material impact.
This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.
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