The following discussion should be read in conjunction with the Notes to the Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data." All information in the discussion and references to the years are based on the Company's fiscal year that ends on October 31. All references to 2009, 2008, 2007 and 2006, unless otherwise indicated, are to fiscal years 2009, 2008, 2007 and 2006, respectively. The Company's fiscal year is the period from November 1 through October 31.

Overview

ABM Industries Incorporated ("ABM"), through its subsidiaries (collectively, the "Company" or "we"), provides janitorial, parking, security and engineering services for thousands of commercial, industrial, institutional and retail facilities in hundreds of cities primarily throughout the United States. The largest segment of the Company's business is Janitorial which generated approximately 68.8% of the Company's revenues (hereinafter called "Revenues") and approximately 71.9% of its operating profit before corporate expenses for 2008.

On November 14, 2007, ABM acquired OneSource Services, Inc. ("OneSource"), a company formed under the laws of Belize, with US operations headquartered in Atlanta, Georgia for an aggregate purchase price of $390.5 million, including payment of its $21.5 million line of credit and direct acquisition costs of $4.0 million. The purchase price was paid from a combination of current cash and borrowings from the Company's line of credit. With annual revenues of approximately $825.0 million during its fiscal year ended March 31, 2007 and approximately 30,000 employees, OneSource was a provider of outsourced facilities services including janitorial, landscaping, general repair and maintenance and other specialized services, for more than 10,000 commercial, industrial, institutional and retail accounts, primarily in the United States.

OneSource's operations are included in the Janitorial segment since the date of its acquisition. The Company expects to achieve operating margins for the OneSource business consistent with the remaining Janitorial segment and attain annual cost synergies of between $45.0 million to $50.0 million, which are expected to be fully implemented during 2009. In 2008, the Company realized approximately $29.8 million of synergies before giving effect to costs to achieve these synergies, as discussed below, and expects to attain additional cost synergies between $15.0 million and $20.0 million in 2009. The synergies were achieved primarily through a reduction in duplicative positions and back office functions, the consolidation of facilities, and elimination of professional fees and other services. Furthermore, the Company expects to achieve significant cash tax savings associated with the utilization of OneSource's net operating loss carry forwards and from deducting goodwill amortization.

Throughout fiscal year 2008, the Company had five reportable segments:
Janitorial, Parking, Security, Engineering and Lighting. On October 31, 2008, the Company completed the sale of substantially all of the assets of the Company's Lighting division, excluding accounts receivable and certain other assets, to Sylvania Lighting Services Corp ("Sylvania"). The assets sold included customer contracts, inventory and other assets, as well as rights to the name "Amtech Lighting." The consideration received in connection with such sale was approximately $34.0 million in cash, which included certain adjustments, payment to the Company of $0.6 million pursuant to a transition services agreement and the assumption of certain liabilities under certain contracts and leases relating to the period after the closing. Further post-closing adjustments may be made. The proceeds already received from the sale of the Lighting division, and amounts anticipated to be realized over time from retained assets, primarily accounts and

other receivables, are expected to total approximately $70.0 to $75.0 million. In connection with the sale, the Company recorded a loss of approximately $3.5 million including income tax expense of $1.0 million. The assets and liabilities associated with the Lighting division have been classified on the Company's Consolidated Balance Sheets as assets and liabilities of discontinued operations, as of October 31, 2008, and have been reclassified as of October 31, 2007 for comparative purposes. The results of operations of Lighting for the years ended October 31, 2008, 2007 and 2006 are included in the Company's Consolidated Statements of Income as "Income (loss) from discontinued operations, net of taxes." In accordance with Emerging Issues Task Force ("EITF") Issue No. 87-24 "Allocation of Interest to Discontinued Operations," general corporate overhead expenses of $1.3 million, $1.7 million and $0.5 million for the years ended October 31, 2008, 2007 and 2006, respectively, which were previously included in the operating results of the Lighting division have been reallocated to the Corporate segment. All corresponding prior year periods presented in the Company's Consolidated Financial Statements and the accompanying notes have been reclassified to reflect the discontinued operations presentation.

The Company's Revenues are substantially based on the performance of labor-intensive services at contractually specified prices. The level of Revenues directly depends on commercial real estate occupancy levels. Decreases in occupancy levels reduce demand and also create pricing pressures on building maintenance and other services provided by the Company.

Janitorial and other maintenance service contracts are either fixed-price or "cost-plus" (i.e., the customer agrees to reimburse the agreed upon amount of wages and benefits, payroll taxes, insurance charges and other expenses plus a profit percentage), or are time and materials based. In addition to services defined within the scope of the contract, the Company also generates Revenues from extra services (or "tags"), such as additional cleaning requirements or emergency repair services, with extra services frequently providing higher margins. The quarterly profitability of fixed-price contracts is impacted by the variability of the number of work days in the quarter.

The majority of the Company's contracts are for one year periods, but are subject to termination by either party after 30 to 90 days' written notice. Upon renewal of the contract, the Company may renegotiate the price although competitive pressures and customers' price sensitivity could inhibit the Company's ability to pass on cost increases. Such cost increases include, but are not limited to, labor costs, workers' compensation and other insurance costs, any applicable payroll taxes and fuel costs. However, for some renewals the Company is able to restructure the scope and terms of the contract to maintain or increase profit margin.

Revenues have historically been the major source of cash for the Company, while payroll expenses, which are substantially related to Revenues, have been the largest use of cash. Hence operating cash flows primarily depend on the Revenues level and timing of collections, as well as the quality of the customer accounts receivable. The timing and level of the payments to suppliers and other vendors, as well as the magnitude of self-insured claims, also affect operating cash flows. The Company's management views operating cash flows as a good indicator of financial strength. Strong operating cash flows provide opportunities for growth both internally and through acquisitions.

The Company's growth in Revenues in 2008 from 2007 is principally attributable to the OneSource acquisition as described above. During the period ended July 31, 2008, the Company started to notice a general decline in discretionary spending in some customer sectors and regions. Despite this weakness, the Company did experience organic growth in Revenues during 2008. Organic growth in Revenues represents not only Revenues from new customers but also expanded services or increases in the scope of work for existing customers. Achieving the desired levels of Revenues and profitability will depend on the Company's ability to (1) gain and retain, at acceptable profit margins, more customers than it loses, (2) pass on cost increases to customers, and (3) keep overall costs down to remain competitive, particularly against privately owned facility services companies that typically have the lower cost advantage. Recent acquisitions contributing to the growth in revenues in 2008 are described in Note 12 of the Notes to the Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data." If economic conditions further deteriorate, demand for our services may be reduced and collections could be reduced if the financial health of our customers weaken, thereby negatively impacting cash flows.

In the long term, the Company expects to focus its financial and management resources on those businesses which it can grow to be a leading national

service provider. It also plans to increase Revenues by expanding its services into international markets.

In the short-term, management is focused on pursuing new business, increasing operating efficiencies, and the further integration of its most recent acquisitions, particularly OneSource. The Company continues to implement a new payroll and human resources information system and to upgrade its accounting systems and expects full implementation by the end of 2009. In addition, the Company has substantially completed the relocation of its Janitorial headquarters to Houston and its corporate headquarters to New York City and is in the process of concentrating its other business units in Southern California. In 2009, the Company expects to incur additional expenses of approximately $16.0 million associated with the upgrade of the existing accounting systems, implementation of the new payroll system and human resources information system and other costs to integrate OneSource.

Liquidity and Capital Resources

                                                      October 31,
    (In thousands)                                2008          2007          Change


    Cash and cash equivalents                  $     710     $ 136,192     $ (135,482 )
    Working capital of continuing operations   $ 249,554     $ 312,635     $  (63,081 )

                                           Years ended October 31,                         Years ended October 31,
(In thousands)                               2008             2007          Change           2007             2006         Change


Net cash provided by operating
activities                               $      68,307      $  54,295     $   14,012     $     54,295       $ 130,367     $ (76,072 )
Net cash used in investing activities    $    (421,522 )    $ (54,794 )   $ (366,728 )   $    (54,794 )     $ (21,814 )   $ (32,980 )
Net cash provided by (used in)
financing activities                     $     217,733      $   2,690     $  215,043     $      2,690       $ (31,345 )   $  34,035

Cash provided by operations and bank borrowings have been the sources for meeting working capital requirements, financing capital expenditures and acquisitions and paying cash dividends. As of October 31, 2008 and October 31, 2007, the Company's cash and cash equivalents totaled $0.7 million and $136.2 million, respectively. The cash balance at October 31, 2008 declined from October 31, 2007 primarily due to cash used for the acquisition of OneSource. The total purchase price of OneSource, including the $21.5 million payoff of OneSource's pre-existing debt and $4.0 million of direct acquisition costs, was $390.5 million, which was paid by a combination of current cash and borrowings from the Company's line of credit. In addition, the Company paid $27.3 million in cash, including $0.4 million in direct acquisition costs, for the remaining equity of Southern Management Company ("Southern Management"). (See Note 12 of the Notes to the Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data.") As of October 31, 2008, borrowings under the Company's line of credit were $230.0 million.

The Company believes that the current cash and cash equivalents, cash generated from operations and amounts available under its $450.0 million line of credit will be sufficient to meet the Company's cash requirements for the long term, except to the extent cash is required for significant acquisitions, if any. There can be no assurance that the recent turmoil in the credit markets will not impair our ability to access these markets on terms commercially acceptable to us, or at all.

At October 31, 2008, the Company held investments in auction rate securities valued at $19.0 million, which are classified as available for sale securities and are reflected at fair value. Auction rate securities are debt instruments with long-term nominal maturities (typically 20 to 50 years), for which the interest rate is reset through Dutch auctions approximately every 30 days. However, due to events in the U.S. credit markets, auctions for these securities failed commencing in August and September 2007 and continued to fail through October 31, 2008. The Company continues to receive the scheduled interest payments from the issuers of the auction rate securities. The Company has estimated the fair values of these securities utilizing discounted cash flow valuation models as of October 31, 2008. These analyses consider, among other factors, underlying collateral, final maturity and assumptions as to when, if ever, the security might be re-financed by the issuer or have a successful auction. Because there is no assurance that auctions for these securities will be successful in the near future, the Company has classified the auction rate securities as long-term investments on the Consolidated Balance Sheet.

For the year ended October 31, 2008, unrealized losses of $6.0 million ($3.6 million net of tax) were charged to accumulated other comprehensive loss as a result of declines in the fair value of the Company's auction rate securities. Any future fluctuation in the fair value related to these securities that the Company deems to be temporary, including any recoveries of previous unrealized losses, would be recorded to accumulated other comprehensive income
(loss), net of taxes. If at any time in the future a decline in value is other than temporary, the Company will record a charge to earnings in the period of determination.

Working Capital of Continuing Operations. Working capital of continuing operations decreased by $63.1 million to $249.6 million at October 31, 2008 from $312.6 million at October 31, 2007, primarily due to the $135.5 million decrease in cash and cash equivalents mainly used to acquire OneSource. Additional working capital contributed by OneSource partially offset this decrease. Trade accounts receivable increased by $124.1 million to $473.3 million at October 31, 2008, of which $103.6 million was attributable to OneSource. These amounts were net of allowances for doubtful accounts totaling $12.5 million and $6.4 million at

October 31, 2008 and 2007, respectively. At October 31, 2008, accounts receivable over 90 days past due has increased by $23.4 million to $47.3 million from $23.9 million at October 31, 2007, primarily due to the acquisition of OneSource.

Cash Flows from Operating Activities. Net cash provided by operating activities was $68.3 million, $54.3 million and $130.4 million in 2008, 2007 and 2006, respectively. The $14.0 million increase in 2008 compared to 2007 is primarily due to a $34.9 million income tax payment made in 2007 relating to the $80.0 million gain on the settlement of the World Trade Center ("WTC") insurance claims recorded in the fourth quarter of 2006. Additionally, an increase in accounts receivable in 2008 of $34.3 million from 2007 was primarily due to increased Revenues and effects of the increases in past due accounts receivables as noted above.

Net cash provided by operating activities decreased by $76.1 million in 2007 compared to 2006 primarily due to the inclusion in 2006 of the $80.0 million received in the fourth quarter from the settlement of the WTC insurance claims, a $34.9 million income tax payment in 2007 relating to the WTC insurance claims settlement and $6.6 million of deferred costs to International Business Machines Corporation ("IBM") associated with IBM transition and maintenance services in 2007. An increase in collection of accounts receivable in 2007 and the receipt of $7.5 million in connection with the termination of an airport parking garage lease in 2007 also impacted the change.

Cash Flows from Investing Activities. Net cash used in investing activities was $421.5 million, $54.8 million and $21.8 million in 2008, 2007 and 2006, respectively. The $366.7 million increase in 2008 compared to 2007 was primarily due to the $390.5 million and $27.2 million paid for OneSource and the remaining 50% of the equity of Southern Management, respectively, and $5.1 million of contingent amounts (excluding $0.6 million related to contingent amounts settled in stock issuances). The 2008 increase was partially offset by $33.4 million of proceeds received from Sylvania for the sale of Lighting. Cash paid for acquisitions in 2007 consisted of a $7.1 million payment for the acquisition of the assets of HealthCare Parking Systems of America and $3.2 million of contingent payments (excluding $0.5 million related to contingent payments settled in stock issuances) for businesses acquired in periods prior to 2007. In addition, property, plant and equipment additions increased $13.9 million in 2008 compared to 2007, which mainly reflects capitalized costs associated with the upgrade of the Company's accounting systems and implementation of a new payroll and human resources information system.

The $33.0 million increase in cash flows from investing activities in 2007 compared to 2006 is primarily due to original principle investments of $25.0 million in auction rate securities as described above and an $8.0 million increase in additions to property, plant and equipment, which mainly reflects capitalized costs associated with the upgrade of the Company's accounting systems and the implementation of a new payroll and human resources information system (discussed above).

Cash Flows from Financing Activities. Net cash provided by financing activities was $217.7 million and $2.7 million in 2008 and 2007, respectively and net cash used in financing activities was $31.3 million in 2006. As of October 31, 2008, the Company's net borrowings of $230.0 million from the Company's line of credit was primarily due to the acquisition of OneSource and purchase of the remaining 50% of the equity of Southern Management. The Company did not repurchase any ABM common stock in 2008 and 2007, compared to 2006 when it repurchased $26.0 million of ABM common stock. The net cash provided by financing activities in 2007 is also attributable to a $12.3 million increase in funds from common stock issuances as a result of the increase in stock option exercises in 2007, partially offset by a $2.0 million decrease in Employee Stock Purchase Plan ("ESPP") purchases compared to 2006.

Line of Credit. In connection with the acquisition of OneSource, the Company terminated its $300.0 million line of credit on November 14, 2007 and replaced it with a new $450.0 million five year syndicated line of credit that is scheduled to expire on November 14, 2012 ("the new Facility"). Borrowings under the new Facility were primarily used to acquire OneSource. The new Facility is also available for working capital, the issuance of standby letters of credit, the financing of capital expenditures, and other general corporate purposes.

Under the new Facility, no compensating balances are required and the interest rate is determined at the time of borrowing based on the London Interbank Offered Rate ("LIBOR") plus a spread of 0.625% to 1.375% or, at ABM's election, at the higher of the federal funds rate plus 0.5% and the Bank of America prime rate ("Alternate Base Rate") plus a spread of 0.000% to 0.375%. A portion of the new Facility is also available for swing line (same-day) borrowings at the Interbank Offered Rate ("IBOR") plus a spread of

0.625% to 1.375% or, at ABM's election, at the Alternate Base Rate plus a spread of 0.000% to 0.375%. The new Facility calls for a non-use fee payable quarterly, in arrears, of 0.125% to 0.250% of the average, daily, unused portion of the new Facility. For purposes of this calculation, irrevocable standby letters of credit issued primarily in conjunction with ABM's self-insurance program and cash borrowings are included as usage of the new Facility. The spreads for LIBOR, Alternate Base Rate and IBOR borrowings and the commitment fee percentage are based on ABM's leverage ratio. The new Facility permits ABM to request an increase in the amount of the line of credit by up to $100.0 million (subject to receipt of commitments for the increased amount from existing and new lenders). The standby letters of credit outstanding under the prior facility have been replaced and are now outstanding under the new Facility. As of October 31, 2008, the total outstanding amounts under the new Facility in the form of cash borrowings and standby letters of credit were $230.0 million and $112.4 million, respectively. Available credit under the line of credit was up to $107.6 million as of October 31, 2008.

The new Facility includes covenants limiting liens, dispositions, fundamental changes, investments, indebtedness, and certain transactions and payments. In addition, the new Facility also requires that ABM maintain three financial covenants: (1) a fixed charge coverage ratio greater than or equal to 1.50 to 1.0 at each fiscal quarter-end; (2) a leverage ratio of less than or equal to 3.25 to 1.0 at each fiscal quarter-end; and (3) a consolidated net worth of greater than or equal to the sum of (i) $475.0 million, (ii) an amount equal to 50% of the consolidated net income earned in each full fiscal quarter ending after November 14, 2007 (with no deduction for a net loss in any such fiscal quarter), and (iii) an amount equal to 100% of the aggregate increases in stockholders' equity of ABM and its subsidiaries after November 14, 2007 by reason of the issuance and sale of capital stock or other equity interests of ABM or any subsidiary, including upon any conversion of debt securities of ABM into such capital stock or other equity interests, but excluding by reason of the issuance and sale of capital stock pursuant to ABM's employee stock purchase plans, employee stock option plans and similar programs. The Company was in compliance with all covenants as of October 31, 2008.

If an event of default occurs under the new Facility, including certain cross-defaults, insolvency, change in control, and violation of specific covenants, among others, the lenders can terminate or suspend ABM's access to the new Facility, declare all amounts outstanding under the new Facility, including all accrued interest and unpaid fees, to be immediately due and payable, and/or require that ABM cash collateralize the outstanding letter of credit obligations.

Commitments

As of October 31, 2008, the Company's future contractual payments, commercial
commitments and other long-term liabilities were as follows:



(in thousands)                                                                    Payments Due By Period

Contractual Obligations                               Total          1 year         2 - 3 years       4 - 5 years       After 5 years


Operating Leases                                   $ 119,184       $  37,720       $    41,824       $    22,304        $     17,336
IBM Master Professional Services Agreement            73,900          15,532            28,883            27,004               2,481
IBM Systems Upgrade, Implementation and Support       19,522          10,519             5,020             3,732                 251


                                                   $ 212,606       $  63,771       $    75,727       $    53,040        $     20,068

(in thousands) Payments Due By Period

Other Long-Term Liabilities Total 1 year 2 - 3 years 4 - 5 years After 5 years

Unfunded Employee Benefit Plans $ 39,811 $ 3,671 $ 5,582 $ 4,981 $ 25,577

(in thousands)                                                         Amounts of Commitment Expiration Per Period

Commercial Commitments                                Total          1 year         2 - 3 years       4 - 5 years       After 5 years


Borrowings Under Line of Credit                    $ 230,000       $       -       $         -       $   230,000        $          -
Standby Letters of Credit                            112,438         112,438                 -                 -                   -
Surety Bonds                                         123,512         111,367            11,141             1,004                   -


                                                   $ 465,950       $ 223,805       $    11,141       $   231,004        $          -


Total Commitments                                  $ 718,367       $ 291,247       $    92,450       $   289,025        $     45,645

The amounts set forth under operating leases represent the Company's contractual obligations to make future payments under non-cancelable operating lease agreements for various facilities, vehicles and other equipment.

On September 29, 2006, the Company entered into a Master Professional Services Agreement (the "Services Agreement") with IBM that became effective October 1, 2006. Under the Services Agreement, IBM is responsible for substantially all of the Company's information technology infrastructure and support services. The base fee for these services was $116.6 million payable over the initial term of 7 years and 3 months.

In 2007 the Company entered into additional agreements with IBM, pursuant to which IBM provides assistance, support and post-implementation services relating to the upgrade of the Company's accounting systems and the implementation of a new payroll system and human resources information system. In connection with the OneSource acquisition in 2008, the Company entered into additional agreements with IBM to provide information technology systems integration and data center support services through 2009.

During the fourth quarter of 2008, the Company assessed the services provided by IBM to determine whether the services provided and the level of support was in compliance with IBM's obligations under the Services Agreement and consistent with the Company's strategic objectives. The Company determined that some or all of the services provided under the Services Agreement will likely be transitioned from IBM. In connection with this assessment, the Company wrote-off . . .