The following Management's Discussion and Analysis ("MD&A") is intended to facilitate an understanding of the results of operations and financial condition of ABM Industries Incorporated and its consolidated subsidiaries (hereinafter collectively referred to as "ABM", "we", "us", "our", or the "Company"). This MD&A should be read in conjunction with the consolidated financial statements and the accompanying notes ("Financial Statements") contained in Item 8, "Financial Statements and Supplementary Data". The following discussion and analysis of our financial condition and results of operations may contain forward-looking statements about our business, operations and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and intentions. Our future results and financial condition may differ materially from those we currently anticipate. See the "Forward-Looking Statements" and "Risk Factors" sections of this Annual Report on Form 10-K. Unless otherwise indicated, all information in the discussion and references to years are based on the Company's fiscal year, which ends on October 31.

Business Overview

ABM is a leading provider of end-to-end integrated facility solutions services to thousands of commercial, governmental, industrial, institutional, retail, and residential client facilities located primarily throughout the United States. The Company's comprehensive capabilities include expansive facility solutions, energy solutions, commercial cleaning, maintenance and repair, HVAC, electrical, landscaping, parking, and security services, provided through stand-alone or integrated solutions.

Strategy and Outlook

In fiscal 2012, we further developed a platform to deliver an end-to-end service model to our clients. As a result, we began to realign our operational structure to an on-site, mobile and on-demand market based structure. During fiscal 2013, this realignment will continue and should improve our long-term growth prospects and provide higher margin opportunities by giving us the ability to better deliver end-to-end services to our clients located in urban, suburban and rural areas.

Our on-site service lines will include Janitorial, Security, Parking and a portion of our Facility Solutions business, which will allow us to focus and better cross sell our end-to-end services to clients. The mobile and on-demand service lines, which include building and energy solutions, will provide end-to-end service to clients with multiple locations or having specific service needs related to the maintenance and on-going operations of their facilities.

The Company's strategy includes the expansion of its vertical market expertise in servicing the end-to-end needs of clients in certain industries. The Company expects to achieve its long-term growth opportunities through strategic acquisitions and through organic growth, while maintaining desirable profit margins and keeping overall costs low. Additionally, the Company continues to assess the impact that the annual federal budget and U.S. Government policy and strategy changes will have on its government clients and its business.

On November 1, 2012, we acquired Air Serv Corporation ("Air Serv"), a provider of integrated facility solutions services for airlines and freight companies, and HHA Services, Inc. ("HHA"), a provider of food and facility solutions services to hospitals, healthcare systems, long-term care facilities and retirement communities. The purchase prices for the Air Serv and HHA acquisitions were $157.5 million and $34.0 million, respectively, and are subject to certain closing adjustments. The Air Serv and HHA acquisitions should allow the Company to significantly expand its vertical market expertise in servicing the end-to-end needs of the airlines, airport authorities and healthcare service market.

In December 2010, the Company acquired The Linc Group, LLC ("Linc") for an aggregate purchase price of $298.7 million in cash (the "Linc Acquisition"). Linc provides end-to-end integrated facility solutions services, military base operation services, and translation and other services in support of U.S. military operations. Linc's clients include state and federal governments, commercial entities and residential customers, throughout the United States and in select international locations. The operations of Linc are included in the Facility Solutions segment as of the acquisition date.

Summary of Key Financial Performance Indicators

During the second half of 2011 and continuing throughout 2012, the U.S. economy was generally weak and the Company faced increasing competitive pricing pressures which led to a reduction in scope of work and certain contract losses from the Company's clients. This competitive environment impacted overall margins in fiscal 2012.

Further, a significant portion of the revenues in the Facility Solutions segment is generated from contracts with the U.S. Government. The Company is continually assessing the potential impact that the size, composition, and timing of congressional approval of the annual federal budget will have on its government clients. In addition, the Company monitors and assesses the potential impact of U.S. Government policy and strategy changes on its business. While the volume of bid activity and request for proposals for future awards remains active, the Company's government business has experienced and may continue to experience delays in new contract awards and in the start dates of currently awarded contracts or early termination of existing contracts.

In addition, during the year ended October 31, 2012, there were unfavorable developments in certain general liability and workers' compensation claims for certain policy years prior to fiscal 2012. Certain general liability claims related to earlier policy years experienced losses significantly higher than were previously estimated. Workers' compensation expense was unfavorable in California and other states where the Company maintains a significant presence. Specifically in California, workers' compensation claims were favorable for older years, but adverse for more current years due primarily to California's post-reform workers' compensation environment. In addition, some of the unfavorable workers' compensation development may be the result of the Company's continuing attempt to achieve earlier settlement of claims.

Offsetting the unfavorable workers' compensation developments in California and other states was the impact of a favorable reform in Illinois, and more specifically relating to reduced medical costs associated with the reform. The Company has also implemented a series of initiatives to improve the management of general liability claims. Further, the recognition within the Company's annual actuarial assessment of the loss experience for policy years in which Linc was a member of a group captive, also resulted in a favorable insurance adjustment.

After analyzing the historical loss development patterns, comparing the loss development against benchmarks, adjusting for known operational claims handling changes, and applying actuarial projection methods to determine the estimate of ultimate losses, the Company increased its expected reserves for prior-year claims, which resulted in an increase in the related insurance expense of $7.3 million during fiscal year ended October 31, 2012 and was recorded as part of Corporate expenses.

These factors, along with higher payroll and payroll related expenses, and the accrual of certain legal settlement costs, have negatively impacted the Company's operating results in 2012.

Financial Overview

Revenues increased by $53.4 million, or 1.3%, in the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to revenues associated with the timing of the Linc Acquisition, which occurred on December 1, 2010, new business within the Security and Janitorial segments, and additional revenues in the Facility Solutions segment from new ABM Building and Energy Solutions ("ABES") contracts. The increase in revenues was partially offset by the continuing impact of reduction in scope of work and contract losses starting in fiscal 2011 and the termination of certain U.S. Government contracts in Iraq earlier in the fiscal year.

Operating profit decreased by $21.0 million, or 17.9% in the year ended October 31, 2012, as compared to the year ended October 31, 2011. The decrease was primarily related to an increase in self-insurance expense related to prior year claims primarily as a result of unfavorable developments in certain general liability and workers' compensation claims during the year ended October 31, 2012 and higher payroll and payroll related expenses, primarily from higher state unemployment insurance rates and the impact of one additional working day in the year ended October 31, 2012. The decrease in operating profit was also related to higher legal settlement costs and the continuing impact of increasing competitive pricing pressures and contract losses starting in fiscal 2011, including the termination of certain U.S. Government contracts in Iraq earlier in the fiscal year.

In addition to revenues and operating profit, the Company's management views operating cash flows as a good indicator of financial performance, as strong operating cash flows provide opportunities for growth both organically and through acquisitions. Operating cash flows primarily depend on: revenue levels; the quality and timing of collections of accounts receivable, including receivables from government contracts which generally have longer collection periods; the timing of payments to suppliers and other vendors; the timing and amount of income tax payments; and the timing and amount of payments on insured claims. The Company's net cash provided by continuing operating activities was $148.9 million, $156.8 million and $140.7 million in the years ended October 31, 2012, 2011 and 2010, respectively.

The Company's largest operating segment is the Janitorial segment, which generated approximately 55.7% of the Company's revenues and approximately 67.3% of the Company's operating profit, excluding expenses allocated to Corporate, in the year ended October 31, 2012.

RESULTS OF OPERATIONS

The Year Ended October 31, 2012 Compared with the Year Ended October 31, 2011

Consolidated




                                                                Years ended October 31,
($ in thousands)                                               2012                 2011                    Increase / (Decrease)
Revenues                                                   $   4,300,265        $   4,246,842        $      53,423                  1.3%
Expenses
Operating                                                      3,854,380            3,781,264               73,116                  1.9%
Gross margin as a % of revenues                                     10.4 %               11.0 %               (0.6 )%
Selling, general and administrative                              327,855              324,762                3,093                  1.0%
As a % of revenues                                                   7.6 %                7.6 %                 -
Amortization of intangible assets                                 21,464               23,248               (1,784 )              (7.7)%

Total expenses                                                 4,203,699            4,129,274               74,425                  1.8%

Operating profit                                                  96,566              117,568              (21,002 )             (17.9)%
Other-than-temporary impairment credit losses on
auction rate security recognized in earnings                        (313 )                 -                   313                   NM*
Income from unconsolidated affiliates, net                         6,395                3,915                2,480                 63.3%
Interest expense                                                  (9,999 )            (15,805 )             (5,806 )             (36.7)%

Income from continuing operations before income taxes             92,649              105,678              (13,029 )             (12.3)%
Provision for income taxes                                       (29,931 )            (36,980 )             (7,049 )             (19.1)%

Income from continuing operations                                 62,718               68,698               (5,980 )              (8.7)%
Loss from discontinued operations, net of taxes                     (136 )               (194 )                (58 )             (29.9)%

Net income                                                 $      62,582        $      68,504        $      (5,922 )              (8.6)%

* Not meaningful

Revenues

Revenues increased by $53.4 million, or 1.3%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to revenues associated with the timing of the Linc Acquisition, which occurred on December 1, 2010, new business within the Security and Janitorial segments, and additional revenues from new ABES contracts. The increase in revenues was partially offset by the continuing impact of reduction in scope of work and contract losses starting in fiscal 2011 and the termination of certain U.S. Government contracts in Iraq earlier in the fiscal year.

Operating Expenses

Operating expenses increased by $73.1 million, or 1.9%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. As a percentage of revenues, gross margin decreased by 0.6%, to 10.4% in the year ended October 31, 2012 from 11.0% in the year ended October 31, 2011. The decrease in gross margin was primarily related to an increase in payroll and payroll related expenses, including higher state unemployment insurance rates, and the impact of one additional working day in the year ended October 31, 2012. Also contributing to the decrease were higher self-insurance expenses related to prior year claims primarily as a result of unfavorable developments in certain general liability and workers' compensation claims during the year ended October 31, 2012; the absence of a refund of paid health insurance premiums during the year ended October 31, 2011; and the continuing impact of increasing competitive pricing pressures and contract losses starting in fiscal 2011, including the termination of certain U.S. Government contracts in Iraq earlier in the fiscal year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $3.1 million, or 1.0%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. As a percentage of revenues, selling, general and administrative expenses remained flat at 7.6% in the years ended October 31, 2012 and October 31, 2011.

The increase in selling, general and administrative expenses was primarily related to:

• $4.7 million higher expense associated with the settlement of certain legal cases;

• $3.5 million of legal fees and other costs associated with an internal investigation into a foreign entity previously affiliated with a joint venture;

• the absence of a $2.7 million settlement received in fiscal 2011, related to a dispute that arose in connection with the fiscal 2010 acquisition of Five Star Parking, Network Parking Company Ltd., and System Parking, Inc. (collectively, this asset acquisition is referred to as "L&R");

• $2.0 million higher costs associated with the Company's re-branding initiative; and

• a $1.8 million settlement paid in exchange for a release from certain restrictive covenants in connection with a contract related to a prior divestiture;

partially offset by:

• a $5.6 million reduction in acquisition transaction costs, primarily related to the Linc Acquisition in fiscal 2011;

• $5.5 million lower employee compensation expense and the absence of severance expense relating to an executive officer in fiscal 2011; and

• a $1.4 million reduction primarily related to the consolidation of our data centers and the impact of additional companywide cost control measures in fiscal 2012.

Amortization of Intangible Assets

Amortization of intangible assets decreased by $1.8 million, or 7.7%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The decrease was primarily related to certain intangible assets being amortized using the sum-of-the-years'-digits method, which results in declining amortization expense over the assets' useful lives.

Income from Unconsolidated Affiliates, Net

Income from unconsolidated affiliates, net, increased by $2.5 million or 63.3%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to the Company's share of a gain associated with property sales completed by one of its investments in a low income housing partnership.

Interest Expense

Interest expense decreased by $5.8 million, or 36.7%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The decrease was primarily related to a decrease in average borrowings and average interest rates under the Company's line of credit. The average outstanding balances under the Company's line of credit were $291.1 million and $369.1 million in the years ended October 31, 2012 and 2011, respectively.

Provision for Income Taxes

The effective tax rate on income from continuing operations for the years ended October 31, 2012 and 2011 was 32.3% and 35.0%, respectively. The effective tax rate for the year ended October 31, 2012 decreased due to a tax benefit of $6.9 million related to a re-measurement of certain unrecognized tax benefits and $1.9 million of additional employment based tax credits. Additionally, offsetting the decrease in tax rate during fiscal 2012 was the impact of the expiration of employment based tax credits as of December 31, 2011 and an increase in certain state tax rates in jurisdictions where the Company operates. The tax provision for the year ended October 31, 2011 included a tax benefit of $4.7 million related to a re-measurement of certain unrecognized tax benefits.

Segment Information

The Company has determined Janitorial, Facility Solutions, Parking and Security to be its reporting segments in accordance with Accounting Standards Codification Topic 280, Segment Reporting.

During the year ended October 31, 2012, the Company changed the name of its Engineering segment to Facility Solutions to better reflect the variety of end-to-end integrated facility solutions services, building operation and maintenance, and bundled energy solutions services provided to its clients.

Most Corporate expenses are not directly allocated. Such expenses include certain chief executive officer and other finance and human resource departmental costs, certain information technology costs, share-based compensation costs, certain legal and settlement costs, and current actuarial developments of self-insurance reserves related to claims incurred in prior years.

Segment revenues and operating profits for the years ended October 31, 2012 and 2011 were as follows:

                                            Years ended October 31,
($ in thousands)                           2012                2011                  Increase / (Decrease)
Revenues
Janitorial                             $   2,394,344       $   2,380,195       $      14,149                 0.6%
Facility Solutions                           924,415             899,381              25,034                 2.8%
Parking                                      615,132             615,679                (547 )             (0.1)%
Security                                     365,926             350,377              15,549                 4.4%
Corporate                                        448               1,210                (762 )            (63.0)%

                                       $   4,300,265       $   4,246,842       $      53,423                 1.3%

Operating profit
Janitorial                             $     135,967       $     140,621       $      (4,654 )             (3.3)%
Operating profit as a % of revenues              5.7 %               5.9 %              (0.2 )%
Facility Solutions                            31,965              33,384              (1,419 )             (4.3)%
Operating profit as a % of revenues              3.5 %               3.7 %              (0.2 )%
Parking                                       26,189              24,257               1,932                 8.0%
Operating profit as a % of revenues              4.3 %               3.9 %               0.4 %
Security                                       7,835               7,968                (133 )             (1.7)%
Operating profit as a % of revenues              2.1 %               2.3 %              (0.2 )%
Corporate and other                         (105,390 )           (88,662 )            16,728                18.9%

                                       $      96,566       $     117,568       $     (21,002 )            (17.9)%

Janitorial




                                            Years ended October 31,
($ in thousands)                           2012                2011                  Increase / (Decrease)
Revenues                               $   2,394,344       $   2,380,195       $      14,149                  0.6 %
Operating Profit                             135,967             140,621              (4,654 )             (3.3)%
Operating profit as a % of revenues              5.7 %               5.9 %              (0.2 )%

Janitorial revenues increased by $14.1 million, or 0.6%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to additional revenues from new business, partially offset by the continuing impact of lost business and reduction in scope of work starting in fiscal 2011.

Operating profit decreased by $4.7 million, or 3.3%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. Operating profit margins decreased by 0.2%, to 5.7% in the year ended October 31, 2012 from 5.9% in the year ended October 31, 2011. The decrease in operating profit was primarily related to higher payroll and payroll related expenses, including the impact of higher state unemployment insurance rates and one additional working day in the year ended October 31, 2012. Also contributing to the decrease in operating profit were higher legal expenses and the continuing impact of lost business and increasing competitive pricing pressures starting in fiscal 2011. The decrease in operating profit was partially offset by a reduction in the sales allowance reserve, lower selling, general and administrative expenses due to additional cost control measures, and lower amortization of intangible assets expense in the year ended October 31, 2012.

Facility Solutions




                                            Years ended October 31,
($ in thousands)                           2012                2011                  Increase / (Decrease)
Revenues                               $     924,415       $     899,381       $      25,034                 2.8%
Operating Profit                              31,965              33,384              (1,419 )             (4.3)%
Operating profit as a % of revenues              3.5 %               3.7 %              (0.2 )%

Facility Solutions revenues increased by $25.0 million, or 2.8%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The increase was primarily related to revenues associated with the timing of the Linc Acquisition, which was acquired on December 1, 2010, and an increase in ABES and commercial facility solutions services revenues as a result of new contracts. The increase was partially offset by decreases in government revenues, including the termination of certain U.S. Government contracts in Iraq earlier in the fiscal year.

Operating profit decreased by $1.4 million, or 4.3%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. Operating profit margins decreased by 0.2%, to 3.5% in the year ended October 31, 2012 from 3.7% in the year ended October 31, 2011. The decrease in operating profit margins was primarily related to the unfavorable margin impact as a result of lower government revenues. Additionally, the decrease in operating profit margins was impacted by lower margins on new business contracts related to commercial facility solutions services as a result of increasing competitive pricing pressures and the impact of higher state unemployment insurance rates. The decrease in operating profit was partially offset by higher margins on increased ABES revenues and lower selling, general and administrative expenses due to additional cost control measures in the year ended October 31, 2012.

Parking




                                            Years ended October 31,
($ in thousands)                           2012                2011                  Increase / (Decrease)
Revenues                               $     615,132       $     615,679       $        (547 )            (0.1)%
Operating Profit                              26,189              24,257               1,932                8.0%
Operating profit as a % of revenues              4.3 %               3.9 %               0.4 %

Parking revenues decreased by $0.5 million, or 0.1%, during the year ended October 31, 2012, as compared to the year ended October 31, 2011. The decrease was primarily related to lost contracts, including the termination of certain unprofitable contracts, partially offset by increased revenues from existing and new clients.

Operating profit increased by $1.9 million, or 8.0%, during the year ended October 31, 2012, as compared to October 31, 2011. Operating profit margins increased by 0.4%, to 4.3% in the year ended October 31, 2012 from 3.9% in the year ended October 31, 2011. The increase in operating profit was primarily related to improved margins on certain existing contracts, the termination of certain unprofitable contracts and the impact of a favorable legal settlement in the current year.

Security




                                            Years ended October 31,
($ in thousands)                           2012                2011                  Increase / (Decrease)
Revenues                               $     365,926       $     350,377       $      15,549                  4.4 %
Operating Profit                               7,835               7,968                (133 )               (1.7 )%
Operating profit as a % of revenues              2.1 %               2.3 %              (0.2 )%
. . .