ABM Industries Q2 2026 Earnings Call | Aviation and Tech Facility Maintenance Contracts Lift Views

Good morning everyone and welcome to ABM's second quarter 2026 earnings call. My name is Paul Goldberg and I'm the senior vice president of investor relations at ABM. With me today are Scott Salmirs, our president and chief executive officer, and David, our executive vice president and chief financial officer. Please note that earlier this morning we issued our press release announcing our second quarter 2026 financial results and outlook. A copy of that release and an accompanying slide presentation can be found on our website, abm.com. After Scott and David's prepared remarks, we will host the Q&A session. But before we begin, I would like to remind you that our call and presentation today contain predictions, estimates, and other forward-looking statements. Words like estimate, expect, and similar expressions are intended to identify these statements and they represent our current judgment of what the future holds. While we believe them to be reasonable, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially. These factors are described in a slide that accompanies our presentation as well as our filings with the SEC. During the course of this call, certain non-GAAP financial information will be presented. A reconciliation of historical non-GAAP numbers to GAAP financial measures is available at the end of the presentation and on the company's website under the investor tab. And with that, I would like to now turn the call over to Scott.

Thanks, Scott, and good morning, everyone. Let's start on slide six. Revenue grew 8.4% year-over-year to a second quarter record of $2.3 billion, driven by 6.1% organic growth and a 2.3% contribution from acquisitions, primarily WGM Star. Consolidated organic growth was the strongest we've delivered since Q3 of 2022 with technical solutions and aviation leading the way. By segment, technical solutions grew revenue 27%, aviation was up 20%, and manufacturing and distribution grew 17%. Education grew 2% while BNI was essentially flat. Overall, we remain pleased with the growth trajectory of the business, reflecting the resiliency and diversity of our end markets as well as our investments in sales talent and industry expertise, which helped deliver record first half new sales bookings of $1.2 billion. Turning to slide seven, net income for the quarter was $43.1 million or $0.73 per diluted share compared to $42.2 million or $0.67 per diluted share in the prior year period. Adjusted net income was $52.9 million or $0.90 per diluted share versus $54.1 million or $0.86 per diluted share last year. These year-over-year changes primarily reflect higher interest and amortization expense offset by lower tax expense and corporate costs. Per share measures were boosted by our recent share repurchase activities. Adjusted EBITDA increased $5.8 million over the prior year to $131.7 million. Segment operating margin increased 20 basis points sequentially to 7.3%. On a year-over-year basis, segment margin decreased 60 basis points, primarily reflecting the impact of contracts that came online last year in M&D and BNI, as well as higher amortization expense related to the WGM Star acquisition. We expect healthy sequential margin improvement in the third and fourth quarters driven by improved mix in ATS and our ongoing price escalation and cost actions. Now, let's turn to segment performance beginning with slide 8. BNI revenue was essentially flat with last year at $1 billion. This performance was driven by overall strength in our UK markets, partially offset by the mid-quarter exit of a large UK-based client and the impact of certain other client exits, particularly on the West Coast. Looking forward, we expect growth to moderate in the back half of the year, primarily due to the full run rate impact of the previously mentioned client exits. Operating profit was $76.7 million and margin was 7.6% compared to $83 million and 8.2% respectively last year. This margin change primarily reflects shifts in contract mix along with increased investments in sales resources to support long-term growth. Margin improved 10 basis points sequentially as we continue to make progress on our cost and price escalation actions. Aviation revenue grew 20% to $310.8 million supported by healthy travel demand and the ramp of new contract wins, particularly our new Heathrow contract. Looking to the back half of the year, organic growth will remain strong but moderate from Q2 as we anniversary several large contracts that were brought on in Q3 of last year. Operating profit was $16.3 million with a margin of 5.3% compared to $16.5 million and 6.3% last year. Profit and margin were pressured by incremental weather-related costs, certain contract scope changes, and TSA-driven operational disruptions during the quarter, as well as by ramp-up costs for the new Heathrow contract. Turning to slide nine, M&D generated $463.8 million in revenue, a 17% increase year-over-year, including organic growth of 7% and 9% growth from the WGM Star acquisition. The strong organic growth was driven by recent contract wins, particularly in the technology sector, along with continued client expansions across the segment. Operating profit was $40.6 million with a margin of 8.8% compared to $39.9 million and 10% last year. As anticipated, margin increased 20 basis points sequentially. On a year-over-year basis, the margin change reflects the mix of new contracts secured last year that are helping to drive organic growth. Margin was also impacted by $4 million in incremental amortization expense connected with the WGM Star acquisition. Excluding incremental amortization, margin was 9.6%, which we believe better reflects the underlying long-term earnings power and margin profile of the segment. Education revenue rose 2% to $232.2 million, primarily driven by escalations. The segment delivered strong operating performance with operating profit increasing 19% to $16.4 million and margin expanding 100 basis points to 7%. This improvement was driven by enhanced labor efficiency and effective escalation management. Our education team continues to execute at a high level and win meaningful new business such as a large ABM Performance Solutions contract from the Detroit public school system which will come fully online in the fourth quarter. We also expanded our scope with the University of Miami, a long-standing and important client. Looking ahead, we expect margin to improve in the third quarter, which is always a seasonally strong period for education. Technical Solutions second quarter revenue was $267.3 million, up 27% year-over-year, including 22% organic growth and 6% from acquisitions. Organic growth reflected robust activity in our data center markets as well as strong growth in battery energy storage system and HVAC project activity. Additionally, we booked significant new micro grid business in the second quarter with a major big box retailer which supports our expectations for a strong second half in terms of revenue and mix. Operating profit was $16.8 million with a margin of 6.3% compared to $13.4 million at 6.4% last year. The increase in profit was driven by significant volume growth. Margin primarily reflected service mix that was less weighted to design and engineering and more weighted to equipment-intensive infrastructure project services as well as ongoing investments in growth. We expect the service mix to improve in the back half of the year as has been our historical performance cadence within technical solutions. Now turning to slide 10. We ended the quarter with total indebtedness of $1.9 billion including $23 million in standby letters of credit. Our total debt to pro forma adjusted EBITDA ratio was 3.2 times. Available liquidity stood at $614 million including $95 million in cash and cash equivalents. As expected, the WGM Star acquisition pushed leverage above three times in the second quarter and we expect to work it back down under three times by the end of our fiscal year. Second quarter cash from operations was $66.2 million and free cash flow was $22.4 million. For the first six months, cash flow from operations was $128.2 million and free cash flow was $71.2 million versus a use of cash of $73.9 million and negative free cash flow of $107.8 million in the prior year period. This year-over-year improvement of approximately $180 million during the first six months was driven by strong working capital management efforts and continued progress on our ERP stabilization. Now turning to capital allocation. As mentioned, we're focused on reducing our leverage below three times. And as such, our near-term priority is debt repayment, but we'll remain flexible as potential value creation opportunities present themselves. At quarter end, $89 million remained under our existing authorization. Interest expense in the quarter was $28.1 million, up $4.2 million from last year, reflecting larger average debt balances driven by our WGM Star acquisition. Turning to our fiscal 2026 outlook on slide 11, as Scott noted, while we remain encouraged by the relative health of our end markets, we're mindful of broader economic uncertainty. Accordingly, we're maintaining our previously communicated fiscal 2026 adjusted EPS outlook. As a reminder, our full-year organic revenue growth outlook is 3 to 4%, and we now expect to be toward the higher end of that range. Aviation, M&D, and Technical Solutions are expected to grow above that range, while BNI and education are projected to be below that range. The WGM Star acquisition is expected to deliver approximately one additional point of revenue growth, bringing total growth to the high end of our 4 to 5% range. Segment operating margin is expected to be toward the low end of our range of 7.8 to 8% for fiscal 2026 with margin expansion weighted toward the back half of the year primarily driven by improved mix and volume in ATS. Interest expense is now forecast to be approximately $110 million driven by higher than forecasted interest rates. We plan to offset this headwind with additional cost actions. Our normalized tax rate before any discrete items, including the possible extension of the work opportunity tax credit program, is still expected to be 29 to 30%. We feel good about our progress generating cash and are confident in our expectations. And as a reminder, we expect free cash flow of approximately $250 million in 2026 before the impact of transformation and integration costs, the final Raven vault burn-off, and any incremental restructuring. Putting it all together, we continue to expect full-year adjusted EPS to be in the range of $3.85 to $4.15. In addition, we've been actively implementing operational and process improvements to our insurance program over the last six months. We believe these changes will ultimately enable us to better predict the in-year impact of prior year self-insurance adjustments. As such, our full-year fiscal 2026 outlook no longer excludes the expected impacts of such adjustments, which we believe provides greater predictability and transparency in our outlook going forward. And with that, I'll hand it back over to Scott for closing remarks.

Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. To ask as many questions as possible, we ask that you each keep one question and one follow-up. Thank you. Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

David, good morning. So I wanted to ask about your power solutions business here which seems to be running pretty hot right now with more micro grid activity expected in the back half here. But on the second quarter specifically, were there any really large projects in there like the battery storage system or anything else that had a significant contribution to that 22% organic growth number we saw in the quarter?

Hey Tim, it's David. Thanks for the question. We did have a really good quarter on the battery energy storage side. There were a couple of large projects as you mentioned, and those projects carry a little bit different profile. They're heavy on equipment, heavy on infrastructure, and the margins are a little less just because you've got so much equipment going into the jobs. But we see that momentum continuing not only on those jobs in the second half, and really ramping up our more traditional micro grid work for switch gear and generators in the second half as well.

That's really helpful. That was actually my other question was I was going to ask about the margin trajectory and the mix, but I appreciate the color there, Scott. Thank you. And David, maybe I'll follow up with something else in technical solutions. I noticed in your slides you highlighted higher HVAC project activity in the quarter. HVAC technicians we all know right now are in such a high demand nationwide for data center construction projects. I'm curious if you're seeing more work crop up in the building environment on the retrofit side because perhaps some other companies that you'd normally compete with on these jobs are now just solely focused on new data center construction. Are you seeing more opportunities open up?

Okay, thank you.

Thank you. Our next question comes from the line of Jasper Biff with Truist Securities. Please proceed with your question.

Hey, good morning guys. I know you raised the organic growth quite a bit today. It still implies a little bit of deceleration in the back half of the year. Sounds like at the segment level things are mostly running ahead of that range with the exception of BNI due to some client exits. I guess I'm wondering if the flat growth in the second quarter reflects the full impact of those client exits in BNI or maybe the segment would decelerate a bit more in the next few quarters. Thank you.

Hey Jasper, you're calling from a bad line. Maybe you could just repeat that question. Hopefully it'll come across clear. We hardly heard it.

I'm sorry. Hopefully this is better. Yeah, okay. Great. So, my question was on BNI. You mentioned some client exits in the quarter. I was wondering if the flat growth in the second quarter reflected the full impact of the client exits or maybe the segment would decelerate a bit more in the next two quarters as you see the full impact of the exits talked about.

Thanks. And then could you maybe provide a bit more detail on where you're at with the ERP at this point? What kind of margin opportunity you think you have there with ERP in place and running in I think three of your five segments at this point?

Yeah, that's helpful. Thank you for taking the question, guys.

Thank you. Our next question comes from the line of Andy Whitman with Baird. Please proceed with your question.

Great. Good morning and thank you for taking my questions, guys. I wanted to first ask about the standby generator microgrid work that you're doing at the retailers. You've had a large retailer that has been working with you guys to install these for several years now. I think you're on at least your second, maybe your third tranche of stores that that legacy retailer has given you. It sounded like I heard here that there's a new large retailer that signed you up. I'm just trying to understand now that we've got two of these, where they are in terms of installing these types of things on their stores, both for the legacy and how much you have with this new customer, and how you're thinking, Scott, about the long term with this customer. Obviously you need to deliver quality work, but is this the beginning or is this new one likely to have phases as well? Thank you.

Okay, got it. I guess my follow-up question is then for David. I wanted to talk about the prior year self-insurance accounting that's in your adjusted results. I'm sorry, I don't know if I quite followed this. As I understood it going back here, as we came into the year, you were no longer adjusting for this and it was going to be an add-back for years. It was not going to be this year. Did I hear you say that you made a change this quarter to putting it back in? I'm sorry, can you just clarify that? And did the change that you made this quarter have any impact? The nominal number you're saying in terms of EPS for the range for the year is the same, but was there impact from the change you made this quarter? Could you please explain that maybe more slowly this time so we can all understand?

Yes, sure. No problem. Just to take a step back for context, last year in Q2 we had communications with the SEC, and they were strongly advising us to record any prior year self-insurance adjustments above the line as part of our operating earnings. So we did that. Fast forward to the guidance for this year for fiscal 26, what we said was we would continue recording those adjustments as part of operating earnings. However, we weren't factoring that into our guidance. At the time, it was really a visibility issue. We had a $23 million unfavorable adjustment last year, and we were obviously not very pleased with that. As a result, we've made some real investments in this program, specifically to find ways to dampen the volatility and some real operational improvements that we think will result in meaningfully better predictability going forward. We're focused on real insurance-related programs, return to work, timely claims closing, aggressive claim settlement, and driver behavior programs. We think the combination of our focus on that, Andy, will really allow us to be more confident about predicting this type of adjustment in the future. As such, we're now confident that the results of the study we'll do this Q4 for the full year of 26 can be captured and contemplated within the guidance of $385 to $415. At the end of the day, we felt like this is about transparency. We're going to include it in the guide going forward, we're going to own it operationally, and treat it like any other operational program at this company.

Yeah, okay. That makes more sense. I guess maybe another way, I just want to check my understanding for everybody's benefit. It sounds like you've sufficiently narrowed the way you're accounting for this in the programs and all these actions so that even if there are changes in how this comes through, you think they're narrow enough that it's more predictable now than it used to be. So now you can bake it in there fully baked, which is a good outcome. Is that another simple way of looking at it, David?

You nailed it, Andy. It's all about predictability, and we firmly believe that the actions we've taken and the focus on the program gives us that narrowing ability.

Okay, good. All right, I'm going to leave it there, guys. Have a good day.

Thank you. Our next question comes from the line of Fisa Always. Please proceed with your question.

Yes, hi, thank you so much. I wanted to ask about WGN Star. Now that you've owned it for a few months, just wanted to get an update. I know you sound pretty good about the opportunity there, but just give us some additional color in terms of, are you seeing any changes around the competitive environment there, and how do you think about, are you growing with new business or are you seeing your existing customers grow a lot faster? I'd love to hear more about that.

Great, that's very helpful. And then I just wanted to follow up on BNI margins because you talked about an improving trajectory from mix, and you're also investing in sales resources. So just give us a bit more perspective on where we think steady-state BNI margins should be, how much opportunity there is from mix alone, and once you ramp down the sales investment.

All right, thank you.

Thank you. Our next question comes from the line of Josh Ken with UV. Please proceed with your question.

Hi, good morning Scott and David. Thanks for taking my questions. Obviously really strong organic growth in the first half, 5 to 6%. Your guide obviously you're pushing it up to the high end of 3 to 4, but I guess does that decelerate in the second half? It seems like there may be opportunity even with BNI to still get perhaps above the 4% growth rate for the year. Am I on the right track in thinking that way?

Hey Josh, thanks for the question. Clearly the deceleration in the back half is largely driven by the TFL exits as we talked about and some of the pressure on the West Coast that Scott talked about. From a full fiscal year perspective, we're looking at more flat to maybe slightly positive growth for BNI on a full-year basis. We see that deceleration, and it obviously takes a little bit of time to lap those kinds of exits, especially with TFL for the year.

Okay, thank you. And then on the price escalations, in terms of the magnitude of those price escalations, do you feel like your pricing is sufficient to offset whatever you're seeing in terms of wage inflation?

One of the things we're excited about, and actually a benefit of some of the new systems we have installed, is we've got really good visibility into our cost basis, especially for a lot of the bigger groups that have high volume of contracts, BNI being the main one. As part of our core day-to-day operations, we've got a tremendous focus on escalations. We feel really good about the path to capturing any cost burdens we've experienced, and that's part of the momentum that's going to continue in the back half of the year for BNI to really help ramp that sequential margin performance up.

Yeah, that's good to hear. Thank you for the color, and good luck in the second half.

Thank you. Our next question comes from the line of David Silver with Freedom Capital Markets. Please proceed with your question.

Yeah, hi, good morning. I'd like to ask for a little bit of color behind the $1.2 billion of new contract wins. It's a big number, and I think you're on track for another record in terms of new business wins overall. But beyond that, seeing it highlighted in a quarterly earnings release struck me as a little unusual. And I even wrap it around with the idea that you highlighted some decisions to walk away from business that wasn't generating sufficient profit. I'd like to know, if we could focus on the non-ATS portion of that, how much of the new business wins you're getting, or what would you attribute the faster pace at which you're winning new business to? I'd break it down as offense versus defense. Are you out there specifically targeting new business you want to be in strategically, or is it more defense where due to regional or company-specific characteristics, they're looking for concessions or terms that you're just not acceptable with? Some thoughts on the incremental pace of new business wins and what's behind that. Thank you.

Okay, great. Thank you for that. And then, this is a question you may have touched on anecdotally or partially already, but Scott, your company has been in business for a very long time, and you've been very careful to segment your business by end market. You've segmented aviation in different ways, for example, and other segments. I'm wondering, as a company, does it make sense to think about things more geographically now? Technology business in one part of the country might require a different strategy than another part. I'm thinking California versus Texas, or West Coast versus non-West Coast, based on your comments. You use the term episodic, but my sense is over the past few years, some of these trends haven't really changed much. As a company with a very clear national view, what role does a more discreet, more explicit geographic strategy make sense?

Thank you. Our next question comes from the line of Mark Riddick with Sidian Company. Please proceed with your question.

Hey, good morning. Thanks for taking all the questions. We've covered quite a bit already this morning. I wanted to touch a little bit on the expectation of reducing leverage by the end of the year back to three times or so. Maybe talk a little bit about what you're seeing in the acquisition pipeline currently, comfort levels, valuation levels if they've changed especially over the last few months, and how your appetite looks there.

Thanks, Mark. Definitely an appropriate question. As we said in Q1, we did anticipate our leverage to tick up over three times with the acquisition of WGN Star. Clearly, our near-term priority remains delevering, and we anticipate based on our cash flow strength in the back half to be able to get back down below three times by the end of the year. That doesn't mean we're walking away from other value creation opportunities and capital return. We're just sequencing it appropriately. From a leverage perspective, based on the strength of our sequential cash flows, we feel really solid. Scott, I'll let you comment on the M&A pipeline.

That's helpful. And then just a quick follow-up. There wasn't much mentioned as far as any effects you've seen from the war or political disruptions. I was wondering if there were any areas where you've seen any influence from that, or how the pacing through the quarter and into Q3 might be impacted there, or if you've seen anything that's come from that. Thanks.

Thank you. Our final question this morning comes from the line of Kate Sullivan with Maxim Group. Please proceed with your question.

Thank you. Thanks for the earlier comments on organic growth. That's one thing we're looking for, accelerating earnings growth from last fiscal year when it was at 3.8%. I think you cleared that up with BNI. And just one quick one, David, on the pre-cash flow guidance of $250 million. Can you go into what that excludes specifically and disclose some of the figures?

Yes, certainly. The items it excludes total roughly $65 million on an annual basis. Some remaining transformation costs, about $20 million. The anticipated earnout payment for the Ravenolt acquisition, the final one, which is roughly $30 million. And then some acquisition costs associated with the WGM Star acquisition, about $8 to $9 million, and just any other restructuring charges to fill out the gap. As I mentioned earlier, we still feel really good about where we are on cash flows. We're at about 40% of our pacing on a normalized basis, about $100 million out of the $250 million guide. You've been following the stock for a while, you know that the majority of the cash flow for ABM is tilted towards the second half of the year. So it puts us in a good position on cash flow for the year.

Okay, thank you all.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Salmirs for any final comments.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.