Executive Summary / Key Takeaways

• ABM is executing its ELEVATE strategy, leveraging technology and targeted M&A to reposition its integrated facility solutions business towards higher-growth, more resilient markets like Technical Solutions (microgrids, data centers) and Aviation, while navigating challenges in traditional segments like Business & Industry.
• Recent financial results demonstrate resilience, with Q2 2025 revenue growing 4.6% year-over-year (3.7% organic) and adjusted EPS of $0.86, driven by strong performance in ATS and Aviation and a return to organic growth in B&I and Manufacturing & Distribution.
• Significant investments in technology, including the ongoing ERP system implementation and tools like ABM Connect and WPO, are aimed at driving operational efficiencies, enhancing service delivery, and providing a competitive edge, despite temporary impacts on cash flow.
• Management reaffirmed its full-year 2025 adjusted EPS guidance of $3.65 to $3.80 and adjusted EBITDA margin of 6.3% to 6.5%, anticipating continued market recovery in core segments and normalization of cash flow in the second half of the year.
• Key risks include macroeconomic uncertainty, potential impacts from policy changes, successful execution of the ERP rollout, and competitive pressures, although ABM's diversified portfolio and strategic focus on integrated, tech-enabled solutions provide a degree of mitigation.

Setting the Scene: ABM's Foundation and Strategic Evolution

Founded in 1909, ABM Industries has a long history as a provider of essential facility services. Today, the company operates as a leading integrated facility solutions provider across five segments: Business & Industry (BI), Manufacturing & Distribution (MD), Education, Aviation, and Technical Solutions (ATS). This diversified structure allows ABM to serve a broad range of clients, from commercial offices and airports to manufacturing plants and educational institutions.

In response to evolving market dynamics and to strengthen its leadership position, ABM launched its multiyear ELEVATE strategy in December 2021. This ambitious plan involves significant investments, projected to total $200 million to $215 million, aimed at repositioning the company towards higher-value, more resilient end markets and enhancing its core service delivery through technology and operational improvements. The strategy focuses on elevating the client and team member experience and leveraging data and technology to fundamentally change operations.

The integrated facility solutions market is competitive, with players ranging from large, diversified companies to smaller, regional specialists. Key publicly traded competitors include Aramark (ARMK), Cintas Corporation (CTAS), and Healthcare Services Group (HCSG). While Aramark and Cintas generally exhibit higher revenue growth and profitability margins, reflecting their scale and specific market focuses (food/facilities for Aramark, uniforms/safety for Cintas), ABM strategically positions itself by emphasizing integrated, technology-enabled solutions and deep expertise in specific verticals like Aviation and Technical Solutions. For instance, while Aramark's operating margins hover around 6-8% and Cintas's are significantly higher at 20-22%, ABM's operating margin is typically in the 4-6% range. However, ABM aims to differentiate through service quality, specialized capabilities, and a focus on client relationships, particularly in the higher-performing segments of markets like Class A commercial real estate.

Central to ABM's strategic differentiation is its investment in technology. The company is actively developing and deploying tools designed to enhance efficiency, provide actionable insights, and improve service outcomes. ABM Connect, a real-time data intelligence platform, consolidates various data sources to provide clients and teams with proactive solutions, already proving valuable in streamlining airport operations and optimizing asset performance. The workforce productivity optimization tool (WPO) is another key initiative, designed to benchmark and identify opportunities for labor efficiency improvements across facilities, a critical focus given labor is the vast majority of ABM's operating expense. While specific percentage improvements directly attributable solely to these tools are not quantified, management links WPO to observed labor efficiency gains and ABM Clean (an AI-based tool for Aviation) to potential labor reduction and quicker response times. Furthermore, ABM is exploring broader applications of AI in areas like data mining for revenue opportunities, improving RFP response efficiency, and enhancing HR processes for better candidate retention. These technological advancements are intended to create a competitive moat by improving service quality, reducing costs over time, and providing a more sophisticated offering than traditional facility service providers.

Segment Performance and Market Dynamics

ABM's recent financial performance reflects the impact of its strategic focus and the varying dynamics across its end markets. In the second quarter of fiscal year 2025, the company reported total revenues of $2,111.7 million, a 4.6% increase compared to the prior year period. This growth was comprised of 3.7% organic growth and 0.8% from acquisitions, notably the Quality Uptime Services acquisition completed in June 2024.

The Business & Industry (BI) segment, ABM's largest, returned to organic growth in Q2 2025, with revenues increasing 2.6% to $1,015.5 million. This was primarily driven by client expansions, both domestically and internationally, and reflects improving conditions in the U.S. prime commercial office market. Operating profit for BI rose 7.0% to $83.0 million, with the margin improving 34 basis points to 8.2%, benefiting from geographic mix and lower amortization, partially offset by higher bad debt. Management is encouraged by improving market indicators for high-quality office space and expects this trend to support continued growth.

The Manufacturing & Distribution (MD) segment also returned to organic growth in Q2 2025, increasing revenues by 2.4% to $398.1 million. This was ahead of management's anticipated timeline and was driven by expansion with existing clients and new business wins, partially mitigating the impact of a previously discussed customer loss. However, operating profit decreased 8.5% to $39.9 million, with the margin declining 120 basis points to 10.0%, attributed to contract mix and investments in technical sales talent. Management remains confident in the long-term fundamentals of this segment, driven by U.S. manufacturing investment and growth in semiconductor and data center markets.

Aviation continued its strong performance, with revenues growing 9.2% to $260.1 million in Q2 2025, driven by positive travel trends and new business wins, including a significant contract at Miami International Airport. Operating profit surged 26.2% to $16.5 million, expanding the margin by 85 basis points to 6.3%, reflecting favorable contract mix and operational efficiencies. Management expects Aviation to continue outpacing sector growth, supported by technology offerings like ABM Connect and ongoing airport infrastructure investments.

Education revenues saw a modest 1.0% increase to $227.8 million in Q2 2025, primarily from new business wins. Operating profit increased 19.4% to $13.8 million, with the margin improving 93 basis points to 6.0%, largely due to operational efficiencies. Education remains a stable segment, providing consistent earnings and cash flow, with a focus on larger institutions and the APS offering for future growth.

The Technical Solutions (ATS) segment delivered robust revenue growth of 19.3% in Q2 2025, reaching $210.2 million (9.8% organic, 9.5% acquisition). This was primarily driven by higher project revenues from microgrids and infrastructure solutions, complemented by the Quality Uptime acquisition. However, operating profit decreased 20.7% to $13.4 million, and the margin compressed 323 basis points to 6.4%, attributed to adverse service mix and higher amortization. Management noted temporary project delays impacted Q2 but expects these to resume, contributing to a strong year for ATS, driven by demand in microgrids, data centers, and mission-critical services, supported by a $700 million total segment backlog as of April 30, 2025.

Financial Health and Operational Efficiency

ABM's consolidated financial performance for the six months ended April 30, 2025, shows revenue growth of 3.4% to $4,226.6 million, with operating profit increasing 2.9% to $159.9 million. Gross margin expanded by 37 basis points to 12.6%, reflecting operational efficiencies and favorable mix, partially offset by increased selling, general, and administrative expenses, which rose 9.4% to $344.1 million due to investments in systems, compensation, and acquisition costs. Interest expense increased 11.5% to $46.8 million, driven by higher debt levels.

Liquidity and cash flow generation were significantly impacted in the first half of fiscal 2025 by the ongoing ERP system implementation for the BI and MD segments. Net cash used in operating activities for the six months ended April 30, 2025, was $73.9 million, a notable decrease from the $116.9 million provided in the prior year period. This was primarily due to a temporary increase in working capital resulting from delayed invoicing as the company prioritized careful quality control reviews during the system transition. However, management reported a significant quarter-over-quarter improvement in free cash flow in Q2 2025 ($15 million provided vs. negative $123 million used in Q1 2025) and anticipates continued improvement and normalization in the second half of the year.

As of April 30, 2025, total outstanding borrowings under the Amended Credit Facility were $1.6 billion, with $599.1 million of available borrowing capacity. The company's total debt to pro forma adjusted EBITDA ratio stood at 2.9x as of Q1 2025. The credit facility was recently amended and extended to February 2030, reflecting lender confidence and providing financial flexibility.

ABM maintains a balanced approach to capital allocation, including dividends (increased by 18% in Q4 2024, moving closer to a 30% adjusted net income payout target), share repurchases ($133.2 million authorization remaining), and strategic acquisitions like Quality Uptime Services.

Outlook and Growth Catalysts

ABM's outlook for fiscal year 2025 reflects confidence in its strategic direction and anticipated market improvements. Management reaffirmed its full-year adjusted EPS guidance in Q2 2025, expecting it to be in the range of $3.65 to $3.80. Adjusted EBITDA margin is projected to be between 6.3% and 6.5%. This guidance is underpinned by the expectation of continued organic growth across segments, particularly the return to growth in BI and MD in the latter half of the year, and sustained strong performance in Aviation and ATS.

Key growth catalysts identified by management include the continued recovery in prime commercial office markets, driven by increasing leasing activity and return-to-office trends. In Manufacturing & Distribution, secular growth in the semiconductor and data center markets, coupled with onshoring trends, presents significant opportunities. The Aviation segment is expected to benefit from ongoing airport infrastructure investments and healthy travel volumes. Technical Solutions is poised for growth fueled by the expanding microgrid market, increasing demand for data center and mission-critical services driven by AI proliferation, and the integration of recent acquisitions. Management also highlights the potential for cross-selling integrated solutions (APS) across its diverse client base and the realization of benefits from its technology investments and ERP implementation, which are expected to drive efficiency and margin expansion over time.

The company anticipates full-year normalized free cash flow to be in the range of $250 million to $290 million, excluding ELEVATE/integration costs and a portion of the RavenVolt earnout payment. This forecast assumes the normalization of working capital impacts from the ERP rollout in the second half of the year.

Risks and Challenges

Despite the positive outlook, ABM faces several risks and challenges. Macroeconomic uncertainty, including potential recessionary pressures, high interest rates, and changes in energy prices, could impact client demand and profitability. The commercial real estate market, particularly non-prime office space, remains volatile, and a slower-than-expected recovery could pressure the BI segment.

Operational risks include potential labor shortages, turnover, and wage increases, although ABM's experience managing union contracts and investments in talent acquisition technology help mitigate this. The ongoing ERP system implementation, while strategic, carries execution risk and could continue to impact operational efficiency and financial reporting if not managed effectively, as evidenced by the temporary cash flow impact in the first half of the year.

Competition remains intense across all segments, requiring continuous focus on service quality, efficiency, and differentiation. While ABM's technology investments aim to provide an edge, competitors are also innovating. Specific market risks include the lumpiness of project-based revenue in ATS, sensitivity of bundled energy solutions to interest rates, and potential impacts from changes in government policies related to immigration, fiscal matters, or energy tax credits. The company is also exposed to risks related to its self-insurance programs, litigation, and the successful integration of acquisitions.

Conclusion

ABM Industries is a resilient business that has demonstrated its ability to perform in a challenging macroeconomic environment, particularly within the volatile commercial real estate sector. The company's strategic pivot through the ELEVATE program, focusing on enhancing service delivery, leveraging technology, and targeting higher-growth verticals like Technical Solutions and Aviation, is beginning to yield results, evidenced by the return to organic growth in its largest segments and strong performance in its strategic focus areas.

While the ongoing ERP implementation presents near-term operational and cash flow challenges, it is a critical investment expected to drive long-term efficiencies and competitive advantages. Coupled with investments in client-facing technology and workforce optimization tools, ABM is building a foundation for future margin expansion. The reaffirmed full-year guidance reflects management's confidence in the payoff from these initiatives and the anticipated recovery in key markets. Despite facing competitive pressures and macroeconomic uncertainties, ABM's diversified portfolio, operational focus, and strategic investments position it to capitalize on emerging market tailwinds and deliver value to shareholders, making it a compelling consideration for investors seeking exposure to the evolving facility solutions landscape.