ABM Industries Incorporated (ABM) Earnings

Management highlights

- Overall Company Performance * Q2 2026 total revenue grew 8.4% YoY to a record $2.3 billion, with 6.1% organic growth (the strongest organic growth since Q3 2022) and 2.3% growth from acquisitions. * First half 2026 new sales bookings reached a record $1.2 billion. * Net income was $43.1 million ($0.73 per diluted share) compared to $42.2 million ($0.67 per diluted share) in Q2 2025. Adjusted net income was $52.9 million ($0.90 per diluted share) versus $54.1 million ($0.86 per diluted share) last year. * Adjusted EBITDA increased $5.8 million YoY to $131.7 million. Consolidated segment operating margin increased 20 basis points sequentially to 7.3%. * First half 2026 free cash flow improved $180 million YoY to $71.2 million, driven by strong working capital management and ERP stabilization progress. * Total debt to pro forma adjusted EBITDA was 3.2x at quarter end, after the WGN Star acquisition pushed leverage above 3x. Near-term capital allocation priority is deleveraging to below 3x by end of fiscal 2026. - End Market & Strategic Highlights * B&I: Prime office recovery is gaining traction, with U.S. office leasing approaching 2019 levels and positive net absorption. Softness remains concentrated in West Coast commercial real estate, where the company strategically exited unprofitable clients that did not meet margin thresholds. Recent large contract wins with major U.S. banks reflect confidence in the company's services. * M&D: The U.S. semiconductor build-out, supported by over $645 billion in announced private investment since 2020, is a key long-term growth driver. The WGN Star acquisition expanded the company's presence inside semiconductor fabrication facilities, creating a seamless end-to-end offering that enabled double-digit organic growth in the sector in Q2. Reshoring of manufacturing and e-commerce growth also support demand. * Aviation: TSA throughput is near 3 million passengers daily, with sustained robust leisure demand and a strong pipeline of airport modernization projects. Recent large wins at Orlando International, Miami International, and LaGuardia Terminal B highlight the segment's momentum. * Education: Chronic underfunding of K-12 facility repair and modernization creates durable long-term demand. The segment has strong retention and recently won a $25 million contract with Detroit Public Schools. * ATS: The segment is positioned to capture secular growth from battery storage expansion, AI-driven data center construction, and growing demand for microgrids for energy resiliency. A recently booked large microgrid contract with a major big-box retailer supports strong back half growth expectations. - Operational Progress * Three of five business segments are now live on the new ERP platform, with planning underway for the remaining two segments. Clean standardized data from the completed ERP implementation will enable AI-driven efficiency gains in workforce management, scheduling, and contract administration starting in 2027-2028.

Guidance

- Management maintained its previously communicated full-year fiscal 2026 adjusted EPS guidance range of $3.85 to $4.15. - Organic revenue growth guidance of 3% to 4% is maintained, with the company now expecting full-year results to come in toward the higher end of this range. The WGN Star acquisition adds approximately 1 percentage point of total revenue growth, bringing total full-year growth to the high end of the 4% to 5% range. - Aviation, M&D, and Technical Solutions are expected to grow above the core organic range, while B&I and Education are projected to grow below the range. - Full-year segment operating margin is expected to come in toward the low end of the prior 7.8% to 8% range, with all margin expansion weighted to the back half of the year driven by improved mix and higher volume in ATS. - Full-year interest expense is now forecast to be approximately $110 million, up from prior forecasts due to higher than expected interest rates. The company plans to offset this headwind with additional cost reduction actions. - The normalized tax rate (excluding discrete items) remains projected at 29% to 30%. - Full-year 2026 free cash flow is expected to be approximately $250 million before transformation/integration costs, the final Ravenvolt acquisition earn-out, and incremental restructuring. The total of these excluded items is approximately $65 million for the full year. - Management now includes expected prior-year self-insurance adjustments in the full-year guidance, following operational improvements to reduce volatility and improve predictability, increasing transparency for investors.

Segment performance

1. Business & Industry (B&I): Revenue was flat year-over-year at $1 billion, contributing ~43.5% of total Q2 revenue. Operating profit was $76.7 million, with a margin of 7.6% (down from 8.2% YoY, up 10 basis points sequentially). Revenue softness came from the exit of a large UK client and strategic exits of unprofitable clients primarily on the West Coast, offset by broader strength in UK markets and prime office recovery in other regions. 2. Aviation: Revenue grew 20% YoY to $310.8 million, contributing ~13.5% of total Q2 revenue. Operating profit was $16.3 million, with a margin of 5.3% (down from 6.3% YoY), pressured by incremental weather-related costs, contract scope changes, TSA-driven operational disruptions, and ramp-up costs for the new Heathrow contract. Growth was supported by robust travel demand and ramp of new contract wins. 3. Manufacturing & Distribution (M&D): Revenue grew 17% YoY to $463.8 million, contributing ~20.2% of total Q2 revenue. 7% of growth was organic, 10% from the WGN Star acquisition. Operating profit was $40.6 million, with a margin of 8.8% (down from 10% YoY, up 20 basis points sequentially). Excluding $4 million in incremental acquisition amortization, underlying margin was 9.6%. Strong organic growth was driven by semiconductor sector wins and client expansions. 4. Education: Revenue grew 2% YoY to $232.2 million, contributing ~10.1% of total Q2 revenue, primarily driven by price escalations. Operating profit grew 19% YoY to $16.4 million, with margin expanding 100 basis points to 7%, driven by enhanced labor efficiency and effective escalation management. 5. Technical Solutions (ATS): Revenue grew 27% YoY to $267.3 million, contributing ~11.6% of total Q2 revenue. 22% of growth was organic, 6% from acquisitions. Operating profit grew to $16.8 million, with a margin of 6.3% (flat YoY from 6.4%), driven by significant volume growth. Margin was slightly pressured by a Q2 mix shift toward equipment-heavy infrastructure projects rather than higher-margin design and engineering work. Organic growth came from robust data center activity, battery energy storage, and strong HVAC project demand.

Risks & headwinds

- B&I faces sustained softness in West Coast commercial real estate markets, where vacancy rates are 2-3x higher than in major East Coast markets, driven by slower return-to-office in the tech-heavy region. This has led to aggressive pricing from competitors that does not meet ABM's profitability thresholds, requiring strategic exit from unprofitable clients. - B&I revenue and growth will be negatively impacted in the back half of 2026 by the full run-rate impact of the exited large UK client, which will reduce B&I growth by approximately 300 basis points. - Near-term aviation results face pressure from rising fuel costs that impact airline client profitability, as well as softness in international air travel volume tied to ongoing geopolitical disruptions. - Higher than expected market interest rates have increased projected full-year interest expense above prior forecasts. - Margin is pressured near-term by ramp-up costs for new contracts, acquisition amortization, and temporary mix shifts toward lower-margin project work in ATS.

Analyst Q&A

• Q: Technical Solutions posted 22% organic growth in Q2, and there is strong momentum in microgrid work. Were large battery storage projects the driver of Q2 growth, and what is the margin trajectory for the segment going forward? /

  A: Q2 did see several large battery energy storage projects, which are equipment-heavy and carry lower margins than higher-margin design and engineering work. This mix shift explains ATS' slightly lower Q2 margin. Management expects mix to improve meaningfully in the back half, with more design and engineering work scheduled, which will drive margin expansion in the segment.

• Q: B&I was flat in Q2 following the client exits you announced. Does Q2 reflect the full impact of these exits, or will B&I decelerate further in the back half? /

  A: The majority of the impact comes from the large exited UK client (TFL), which will create a 300 basis point headwind to B&I growth in the back half, so B&I organic growth will moderate further. Strategic exits of unprofitable West Coast clients, where vacancy and competitive pricing pressure is extreme, will reduce B&I revenue but improve segment margins, as only unprofitable business was exited. Management expects margin to accelerate in the back half as a result of these intentional changes.

• Q: Now that WGN Star has been integrated for a few months, how is the acquisition performing in the semiconductor end market? /

  A: Integration has gone very well, and the acquisition already meaningfully contributed to Q2 semiconductor growth. Before the acquisition, ABM only served support areas outside of semiconductor fabrication facilities; WGN Star had expertise servicing the controlled environments inside fabs. The combined offering now makes ABM a single-source provider for semiconductor clients. ABM currently serves 75% of U.S. and European fab capacity clients, and double-digit growth in the semiconductor segment is expected to continue for the foreseeable future.

• Q: What is the status of the ERP implementation, and what margin opportunities will the completed platform enable? /

  A: Three of five segments are now live on the new platform, with planning underway for the remaining two segments. The primary long-term benefit is a standardized, clean company-wide data set that will enable significant AI-driven efficiency gains for scheduling, workforce management, contract escalation, and cash collection. Meaningful opportunities from these improvements are expected to emerge in 2027 and 2028 as the platform and related AI tools mature.