The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements of ABM Industries Incorporated ("ABM", and together with its subsidiaries, the "Company") included in this Quarterly Report on Form 10-Q and with the consolidated financial statements and accompanying notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K/A for the year ended October 31, 2008 ("10-K/A"). All information in the discussion and references to years are based on the Company's fiscal year, which ends on October 31.
Overview and Executive Summary
The Company 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 Company was reincorporated in Delaware on March 19, 1985 as the successor to a business founded in California in 1909.
On November 14, 2007, the Company acquired OneSource Services, Inc. ("OneSource"), a janitorial facility services company for $365.0 million, which was paid by a combination of current cash and borrowings from the Company's line of credit. The acquisition was accounted for using the purchase method of accounting. In 2008, the Company realized approximately $29.8 million of synergies in connection with this acquisition, before giving effect to the costs to achieve these synergies. The synergies were achieved primarily through a reduction in duplicative positions and back office functions, the consolidation of facilities, and the reduction of professional fees and other services. The synergies were fully implemented in January 2009. The Company realized $34.5 million of synergies in the nine months ended July 31, 2009 and expects to realize approximately $46.0 million of synergies in the full year ended 2009, before giving effect to the costs to achieve these synergies.
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 and liabilities, to Sylvania Lighting Services Corp. The remaining assets and liabilities associated with the Lighting division have been classified as assets and liabilities of discontinued operations for all periods presented. The results of operations of the Lighting division for all periods presented are classified as "(Loss) income from discontinued operations, net of taxes."
Effective May 1, 2009, the Company acquired certain assets (primarily customer contracts and relationships) of Control Building Services, Inc., Control Engineering Services, Inc., and TTF, Inc. ("Control acquisition"), for $15.1 million in cash, which includes direct acquisition costs of $0.1 million, plus additional consideration of up to $1.6 million, payable in three equal installments of $0.5 million, contingent upon the achievement of certain revenue targets during the three year period commencing on May 1, 2009. The acquisition closed on May 8, 2009 and was accounted for under the purchase method of accounting. The acquisition expands ABM's janitorial and engineering service offerings to clients in the Northeast region. The Company expects to finalize the allocation of the purchase price to assets acquired during the remainder of 2009.
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. The Company's revenues at its Janitorial, Security and Engineering divisions are substantially based on the performance of labor-intensive services at contractually specified prices. Revenues generated by the Parking division relate to parking and transportation services, which are less labor-intensive. In addition to services defined within the scope of customer contracts, the Janitorial division also generates revenues from extra services (or tags) such as additional cleaning requirements, including flood cleanup services and snow removal, which generally provide higher margins. The Company's revenues are primarily impacted by the ability to retain and attract customers, the addition of industrial customers, commercial occupancy rates, air travel levels, tourism and transportation needs at colleges and universities.

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. Cash flows from operating activities, including cash flows from discontinued operating activities, increased by $39.6 million for the nine months ended July 31, 2009, compared to the nine months ended July 31, 2008. Net cash provided by discontinued operating activities increased $17.9 million for the nine months ended July 31, 2009 compared to the nine months ended July 31, 2008. Operating cash flows primarily depend on revenue levels, the timing of collections and payments to suppliers and other vendors, the quality of receivables, and the magnitude of self-insured claims. The Company's trade accounts receivable, net, balance was $470.5 million at July 31, 2009. Trade accounts receivable that were over 90 days past due increased $1.0 million to $48.3 million at July 31, 2009 compared to October 31, 2008.
The Company periodically evaluates its estimated claim costs and liabilities and accrues self-insurance reserves to its best estimate three times during the fiscal year. Management also monitors new claims and claim development to assess appropriate levels of insurance reserves. The self-insurance reserves are intended to reflect recent experience and trends. The trend analysis is complex and highly subjective. The interpretation of trends requires knowledge of many factors that may or may not be reflective of adverse or favorable developments (e.g., changes in regulatory requirements and changes in reserving methodology). Trends may also be impacted by changes in safety programs or claims handling practices. If the trends suggest that the frequency or severity of claims incurred has changed, the Company might be required to record increases or decreases in expenses for self-insurance liabilities. Actuarial evaluations (using claims data as of January 31, 2009 and May 31, 2009), covering the majority of the Company's self-insurance reserves related to prior years and excluding the claims acquired from OneSource, resulted in a $3.5 million increase in the self-insurance reserves recorded in the three and nine months ended July 31, 2009. The comparative prior year actuarial evaluations (using claims data as of January 31, 2008 and May 31, 2008), covering the majority of the Company's self-insurance reserves related to prior years and excluding claims acquired from OneSource (the evaluation of the claims for OneSource were completed during the three months ended October 31, 2008), resulting in a $7.6 million and a $14.8 million decrease in the self-insurance reserves for the three and nine months ended July 31, 2008, respectively. These adjustments have been recorded in the Corporate division for all periods presented. The following is an executive summary for the three and nine months ended July 31, 2009:
• Revenues decreased 5.7% and 3.8% in the three and nine months ended July 31, 2009, respectively, compared to the three and nine months ended July 31, 2008;

• Operating profit, excluding the Corporate segment, increased 6.5% and 18.6% in the three and nine months ended July 31, 2009, respectively, compared to the three and nine months ended July 31, 2008;

• Net income decreased 25.2% to $12.3 million ($0.24 per diluted share) and increased 16.0% to $39.3 million ($0.76 per diluted share) in the three and nine months ended July 31, 2009, respectively, compared to the three and nine months ended July 31, 2008;

• Net cash provided by operating activities, including cash flows from discontinued operating activities, increased $39.6 million in the nine months ended July 31, 2009 compared to the nine months ended July 31, 2008. Net cash provided by discontinued operating activities increased $17.9 million for the nine months ended July 31, 2009 compared to the nine months ended July 31, 2008;

• As a result of actuarial evaluations of the Company's self-insurance reserves related to prior year claims, the self-insurance reserves increased by $3.5 million in the nine months ended July 31, 2009 compared to a $14.8 million reduction in self-insurance reserves related to prior years recorded in the nine months ended July 31, 2008. Accordingly, this resulted in a decrease in income from continuing operations before income taxes of $18.3 million in the nine months ended July 31, 2009 compared to the nine months ended July 31, 2008;

• A net legal settlement of $9.6 million was received in January 2009 from the Company's third party administrator related to poor claims management;

• The Company identified an other-than-temporary impairment related to one of its investments in auction rate securities of $3.6 million, of which $1.6 million was recorded through earnings; and

• The Board of Directors declared a quarterly cash dividend in the amount of $0.13 per share.

Due to the weak economic climate, the Company continues to experience some reductions in the level and scope of services provided to its customer base, contract price compression and a decline in the level of tag work as a result of decreases in customer discretionary spending. Despite the weak economic climate, operating profit increased in the Janitorial and Security divisions during the three months ended July 31, 2009 compared to the three months ended July 31, 2008. Operating profit decreased in the Parking and Engineering divisions during the three months ended July 31, 2009 compared to the three months ended July 31, 2008. However, operating profit increased in all the divisions during the nine months ended July 31, 2009 compared to the nine months ended July 31, 2008. In general, these increases in operating profit were attributable to the Company's ability to maintain acceptable gross profit margins and operating profits, primarily from aggressive cost control and the reduction of less profitable customer contracts.
Achieving the desired levels of revenues and profitability in the future will depend on the Company's ability to retain and attract, at acceptable profit margins, more customers than it loses, to pass on cost increases to customers, and to keep overall costs low to remain competitive, particularly against privately-owned facility services companies that typically have a lower cost advantage.
In the short term, the Company will continue to take proactive measures surrounding its customer contracts, including working with existing customers to reduce their monthly expenses to meet their cost pressures. The Company will continue to monitor and in some cases eliminate contracts with customers that are at high risk of bankruptcy or produce low margins and focus resources on work that may generate less revenue, but produce higher margins. In the long term, the Company expects to grow the business through strategic acquisitions and international expansion to respond to the demand for a global provider.

Liquidity and Capital Resources

                                       July 31,       October 31,
           (in thousands)                2009            2008           Change
           Cash and cash equivalents   $  23,573     $      26,741     $ (3,168 )
           Working capital             $ 265,725     $     273,980     $ (8,255 )



                                                         Nine Months Ended July 31,
(in thousands)                                             2009               2008            Change
Net cash provided by operating activities              $      76,465       $    36,833      $   39,632
Net cash used in investing activities                  $     (32,293 )     $  (446,816 )    $  414,523
Net cash (used in) provided by financing activities    $     (47,340 )     $   286,860      $ (334,200 )

As of July 31, 2009, the Company's cash and cash equivalents balance was $23.6 million. The decrease in cash is principally due to the timing of net borrowings under the Company's line of credit, collections of accounts receivable and payments made on vendor invoices.
The Company believes that the 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. Available credit under the line of credit was $135.4 million as of July 31, 2009.
Working Capital. Working capital decreased by $8.3 million to $265.7 million at July 31, 2009 from $274.0 million at October 31, 2008. Excluding the effects of discontinued operations, working capital increased by $11.7 million to $261.3 million at July 31, 2009 from $249.6 million at October 31, 2008. The increase was primarily due to:
• a $12.3 million decrease in accounts payable and accrued liabilities primarily due to the timing of payments made on vendor invoices;

• an $8.1 million increase in prepaid income taxes primarily due to the timing of payments and the utilization of OneSource acquired tax assets; and

• a $2.0 million increase in prepaid expenses and other primarily due to the timing of payments;

partially offset by:
• a $3.2 million decrease in cash and cash equivalents;

• a $2.7 million decrease in trade accounts receivable, net, primarily due to the decrease in revenues;

• a $2.5 million increase in income taxes payable; and

• a $2.1 million decrease in deferred income taxes, net, primarily due to the utilization of the acquired OneSource deferred tax assets during the nine months ended July 31, 2009.

Trade accounts receivable that were over 90 days past due were $48.3 million and $47.3 million at July 31, 2009 and October 31, 2008, respectively.
Cash Flows from Operating Activities. Net cash provided by operating activities was $76.5 million for the nine months ended July 31, 2009, compared to $36.8 million for the nine months ended July 31, 2008. The increase in cash flows from operating activities of $39.6 million is due to:
• a $17.9 million increase in net cash provided by discontinued operating activities, primarily due to the collections of accounts receivable during the nine months ended July 31, 2009. Net cash provided by discontinued operating activities was $23.8 million for the nine months ended July 31, 2009 compared to $5.9 million for the nine months ended July 31, 2008;

• a $11.0 million increase in deferred income taxes primarily due to the utilization of the acquired OneSource deferred tax assets during the nine months ended July 31, 2009; and

• an increase in net income of $5.4 million in the nine months ended July 31, 2009 as compared to the nine months ended July 31, 2008;

partially offset by:
• a $1.4 million decrease in continuing operating assets and liabilities principally related to changes in trade accounts receivable, net, and the timing of payments for accounts payable and other accrued liabilities.

Cash Flows from Investing Activities. Net cash used in investing activities for the nine months ended July 31, 2009 was $32.3 million, compared to $446.8 million for the nine months ended July 31, 2008. The decrease was primarily due to $15.1 million paid for the Control acquisition in the nine months ended July 31, 2009 as compared to $390.5 million and $24.4 million paid for OneSource and the remaining 50% of the equity of Southern Management, respectively, in the nine months ended July 31, 2008.
No significant cash flows were provided by discontinued investing activities for the nine months ended July 31, 2009 and 2008.
Cash Flows from Financing Activities. Net cash used in financing activities was $47.3 million for the nine months ended July 31, 2009, compared to net cash provided by of $286.9 million for the nine months ended July 31, 2008. In the nine months ended July 31, 2008, the Company's net borrowings of $285.0 million from the Company's line of credit were primarily due to the acquisition of OneSource and the purchase of the remaining 50% of the equity of Southern Management Company. During the nine months ended July 31, 2009 the Company paid down $34.0 million on the line of credit.
No cash flows were provided by discontinued financing activities for the nine months ended July 31, 2009 and 2008.
Line of Credit. In connection with the acquisition of OneSource, ABM entered into a $450.0 million five year syndicated line of credit that is scheduled to expire on November 14, 2012 (the "Facility"). The Facility is available for working capital, the issuance of standby letters of credit, the financing of capital expenditures, and other general corporate purposes.
As of July 31, 2009, the total outstanding amounts under the Facility in the form of cash borrowings and standby letters of credit were $196.0 million and $118.6 million, respectively. Available credit under the Facility was $135.4 million as of July 31, 2009.

The Facility includes covenants limiting liens, dispositions, fundamental changes, investments, indebtedness and certain transactions and payments. In addition, the Facility also requires that ABM maintain the following three financial covenants which are described in Note 5, "Line of Credit Facility", to the Consolidated Financial Statements set forth in the Company's Annual Report on Form 10-K/A: (1) a fixed charge coverage ratio; (2) a leverage ratio; and
(3) a combined net worth test. The Company was in compliance with all covenants as of July 31, 2009 and expects to be in compliance for the foreseeable future. On February 19, 2009, the Company entered into a two-year interest rate swap agreement with a notional amount of $100.0 million, involving the exchange of floating- for fixed-rate interest payments. The Company will receive 1 month LIBOR floating-rate interest payments that offset the LIBOR component of the interest due on $100.0 million of the Company's floating-rate debt and make fixed-rate interest payments of 1.47% over the life of the interest rate swap. The Company assesses the effectiveness of the Company's hedging strategy using the method described in Derivatives Implementation Group Statement 133 Implementation Issue No. G9, "Cash Flow Hedges: Assuming No Ineffectiveness When Critical Terms of the Hedging Instrument and the Hedged Transaction Match in a Cash Flow Hedge. Additionally, the Company assesses the creditworthiness of each swap counterparty to determine the possibility of whether the counterparty to the derivative instrument will default by failing to make any contractually required payments as scheduled in the derivative instrument. The Company also assesses whether its LIBOR-based interest payments are probable of being paid under the loan at the inception and, on an ongoing basis (no less than once each quarter), during the life of each hedging relationship. As of July 31, 2009, the fair value of the interest rate swap was ($0.7) million. The effective portion of the cash flow hedges are recorded as accumulated other comprehensive loss in the Company's condensed consolidated balance sheet and reclassified into interest expense, net in the Company's condensed consolidated statements of income in the same period during which the hedged transaction affects earnings. Any ineffective portions of the cash flow hedges are recorded immediately to interest expense, net. No ineffectiveness existed at July 31, 2009, therefore the amount included in accumulated other comprehensive loss was ($0.7) million ($0.4 million, net of taxes).

Results of Operations
Three Months Ended July 31, 2009 vs. Three Months Ended July 31, 2008

                                        Three Months        Three Months         Increase         Increase
                                           Ended               Ended            (Decrease)       (Decrease)
($ in thousands)                       July 31, 2009       July 31, 2008            $                 %

Revenues                               $      870,635      $      923,667      $    (53,032 )           (5.7 )%

Expenses
Operating                                     782,449             818,887           (36,438 )           (4.4 )%
Selling, general and administrative            64,736              72,317            (7,581 )          (10.5 )%
Amortization of intangible assets               2,952               2,518               434             17.2 %

Total expense                                 850,137             893,722           (43,585 )           (4.9 )%

Operating profit                               20,498              29,945            (9,447 )          (31.5 )%
Other-than-temporary impairment
losses on auction rate security:
Gross impairment losses                         3,575                   -             3,575               NM *
Impairments recognized in other
comprehensive income                           (2,009 )                 -            (2,009 )             NM *
Interest expense                                1,472               3,338            (1,866 )          (55.9 )%

Income from continuing operations
before income taxes                            17,460              26,607            (9,147 )          (34.4 )%
Provision for income taxes                      5,060              10,263            (5,203 )          (50.7 )%

Income from continuing operations              12,400              16,344            (3,944 )          (24.1 )%
(Loss) income from discontinued
operations, net of taxes                         (124 )                68              (192 )             NM *

Net income                             $       12,276      $       16,412      $     (4,136 )          (25.2 )%

* Not meaningful

Net Income. Net income in the three months ended July 31, 2009 decreased by $4.1 million, or 25.2%, to $12.3 million ($0.24 per diluted share) from $16.4 million ($0.32 per diluted share) in the three months ended July 31, 2008. Net income included a loss of $0.1 million and income of $0.1 million from discontinued operations in the three months ended July 31, 2009 and 2008, respectively.
Income from Continuing Operations. Income from continuing operations in the three months ended July 31, 2009 decreased by $3.9 million, or 24.1%, to $12.4 million ($0.24 per diluted share) from $16.3 million ($0.32 per diluted share) in the three months ended July 31, 2008.
The decrease in income from continuing operations was primarily a result of:
• a $3.5 million increase in self-insurance reserves related to prior year claims recorded in the three months ended July 31, 2009 compared to a $7.6 million reduction in self-insurance reserves related to prior years recorded in the three months ended July 31, 2008. Accordingly, this resulted in a decrease in income from continuing operations before income taxes of $11.1 million in the three months ended July 31, 2009 compared to the three months ended July 31, 2008;

• a $1.7 million increase in information technology costs, including higher depreciation costs related to the upgrade of the payroll, human resources and accounting systems; and

• a $1.6 million credit loss associated with the other-than-temporary impairment of the Company's investment in auction rate securities;

partially offset by:
• a $5.2 million decrease in income taxes primarily due to lower taxable income combined with $1.7 million of non-recurring tax benefits;

• a $2.9 million increase in operating profit, excluding the Corporate segment, primarily resulting from aggressive cost control;

• a $1.9 million decrease in interest expense as a result of a lower average outstanding balance and average interest rate under the Facility;

• a $0.6 million decrease in expenses associated with the move of the Company's headquarters to New York in fiscal year 2008;

• a $0.5 million decrease in professional fees, net of increases in payroll and payroll related costs associated with in-sourcing these functions; and

• a $0.4 million decrease in expenses associated with the integration of OneSource's operations.

Revenues. Revenues in the three months ended July 31, 2009 decreased $53.0 million, or 5.7%, to $870.6 million from $923.7 million in the three months ended July 31, 2008. The Company and its customers continue to feel the negative impact of the weak economic environment resulting in reductions in the level and scope of services provided to its customers, contract price compression, the reduction of less profitable customer contracts and a decline in the level of tag work as a result of decreases in customer discretionary spending. However, approximately $5.5 million, or 10.4%, of the decrease in revenues is due to the reduction of expenses incurred on the behalf of managed parking facilities, which are reimbursed to the Company. These reimbursed expenses are recognized as parking revenues and expenses, which have no impact on operating profit.
Operating Expenses. As a percentage of revenues, gross margin was 10.1% and 11.3% in the three months ended July 31, 2009 and 2008, respectively. The decrease in gross margin percentage was primarily the result of a $3.5 million increase in self-insurance reserves related to prior year claims recorded in the three months ended July 31, 2009 compared to a $7.6 million reduction in self-insurance reserves related to prior years recorded in the three months ended July 31, 2008. Accordingly, this resulted in an increase in operating expenses of $11.1 million in the three months ended July 31, 2009 compared to the three months ended July 31, 2008.
Selling General and Administrative Expenses. Selling, general and administrative expenses decreased $7.6 million, or 10.5%, in the three months ended July 31, 2009 compared to the three months ended July 31, 2008.
The decrease in selling, general and administrative expenses is primarily a result of:
• a $7.8 million decrease in selling, general and administrative costs at the Janitorial division, primarily attributable to aggressive cost control;

• a $0.6 million decrease in expenses associated with the move of the Company's headquarters to New York in fiscal year 2008;

• a $0.5 million decrease in professional fees, net of increases in payroll and payroll related costs associated with in-sourcing these functions; and

• a $0.4 million decrease in expenses associated with the integration of OneSource's operations;

partially offset by:

• a $1.7 million increase in information technology costs, including higher depreciation costs related to the upgrade of the payroll, human resources and accounting systems.

Interest Expense. Interest expense in the three months ended July 31, 2009 decreased $1.9 million, or 55.9%, to $1.5 million from $3.3 million in the three months ended July 31, 2008. The decrease was primarily related to a lower average outstanding balance and average interest rate under the Facility in the three months ended July 31, 2009 compared to the three months ended July 31, . . .