UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14762
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware |
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36-3858106 |
(State or other jurisdiction of |
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(IRS Employer Identification No.) |
860 Ridge Lake Boulevard, Memphis, Tennessee 38120
(Address of principal executive offices) (Zip Code)
901-597-1400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant is a privately held corporation and its equity shares are not publicly traded. At August 15, 2011, 1,000 shares of the registrants common stock were outstanding, all of which were owned by CDRSVM Holding, Inc.
The ServiceMaster Company is not required to file this Quarterly Report on Form 10-Q with the Securities and Exchange Commission and is doing so on a voluntary basis.
THE SERVICEMASTER COMPANY
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands)
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Three months ended |
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2011 |
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2010 |
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Operating Revenue |
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$ |
967,440 |
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$ |
939,599 |
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|
|
|
|
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Operating Costs and Expenses: |
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Cost of services rendered and products sold |
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520,634 |
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513,276 |
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Selling and administrative expenses |
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259,148 |
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257,822 |
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Amortization expense |
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26,387 |
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39,672 |
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Restructuring charges |
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94 |
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4,080 |
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Total operating costs and expenses |
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806,263 |
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814,850 |
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Operating Income |
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161,177 |
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124,749 |
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|
|
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Non-operating Expense (Income): |
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Interest expense |
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68,378 |
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73,157 |
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Interest and net investment income |
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(1,398 |
) |
(996 |
) | ||
Other expense |
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173 |
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176 |
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Income from Continuing Operations before Income Taxes |
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94,024 |
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52,412 |
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Provision for income taxes |
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33,462 |
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9,024 |
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|
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Income from Continuing Operations |
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60,562 |
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43,388 |
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|
|
|
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|
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Loss from discontinued operations, net of income taxes |
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(3,842 |
) |
(30,944 |
) | ||
Net Income |
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$ |
56,720 |
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$ |
12,444 |
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See accompanying Notes to the Condensed Consolidated Financial Statements
THE SERVICEMASTER COMPANY
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands)
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Six months ended |
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2011 |
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2010 |
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Operating Revenue |
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$ |
1,582,111 |
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$ |
1,520,207 |
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|
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|
|
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Operating Costs and Expenses: |
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Cost of services rendered and products sold |
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891,203 |
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867,755 |
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Selling and administrative expenses |
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450,453 |
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435,942 |
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Amortization expense |
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52,750 |
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79,335 |
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Restructuring charges |
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2,683 |
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7,433 |
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Total operating costs and expenses |
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1,397,089 |
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1,390,465 |
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Operating Income |
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185,022 |
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129,742 |
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|
|
|
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Non-operating Expense (Income): |
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|
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Interest expense |
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136,893 |
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145,827 |
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Interest and net investment income |
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(3,591 |
) |
(3,498 |
) | ||
Other expense |
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348 |
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347 |
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Income (Loss) from Continuing Operations before Income Taxes |
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51,372 |
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(12,934 |
) | ||
Provision (Benefit) for income taxes |
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16,105 |
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(21,867 |
) | ||
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|
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|
|
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Income from Continuing Operations |
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35,267 |
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8,933 |
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|
|
|
|
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Loss from discontinued operations, net of income taxes |
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(24,943 |
) |
(29,149 |
) | ||
Net Income (Loss) |
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$ |
10,324 |
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$ |
(20,216 |
) |
See accompanying Notes to the Condensed Consolidated Financial Statements
THE SERVICEMASTER COMPANY
Condensed Consolidated Statements of Financial Position
(In thousands, except share data)
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As of |
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As of |
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(Unaudited) |
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(Audited) |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
324,134 |
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$ |
252,698 |
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Marketable securities |
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30,259 |
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30,406 |
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Receivables, less allowance of $21,795 and $16,709, respectively |
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431,105 |
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352,094 |
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Inventories |
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58,676 |
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54,732 |
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Prepaid expenses and other assets |
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86,705 |
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40,864 |
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Deferred customer acquisition costs |
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55,180 |
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34,377 |
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Deferred taxes |
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15,044 |
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11,558 |
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Assets of discontinued operations |
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177 |
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51,004 |
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Total Current Assets |
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1,001,280 |
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827,733 |
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Property and Equipment: |
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At cost |
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501,364 |
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440,049 |
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Less: accumulated depreciation |
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(205,084 |
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(173,151 |
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Net property and equipment |
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296,280 |
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266,898 |
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Other Assets: |
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Goodwill |
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3,136,494 |
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3,125,293 |
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Intangible assets, primarily trade names, service marks and trademarks, net |
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2,607,127 |
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2,653,511 |
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Notes receivable |
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21,958 |
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22,550 |
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Long-term marketable securities |
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117,070 |
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110,177 |
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Other assets |
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7,194 |
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7,164 |
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Debt issuance costs |
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45,566 |
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52,366 |
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Assets of discontinued operations |
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32,398 |
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Total Assets |
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$ |
7,232,969 |
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$ |
7,098,090 |
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Liabilities and Shareholders Equity |
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Current Liabilities: |
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Accounts payable |
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$ |
114,869 |
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$ |
72,645 |
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Accrued liabilities: |
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Payroll and related expenses |
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91,214 |
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85,647 |
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Self-insured claims and related expenses |
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87,680 |
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81,278 |
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Accrued interest payable |
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70,916 |
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69,645 |
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Other |
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79,890 |
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83,114 |
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Deferred revenue |
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536,465 |
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449,647 |
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Liabilities of discontinued operations |
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1,652 |
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16,300 |
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Current portion of long-term debt |
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58,255 |
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49,412 |
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Total Current Liabilities |
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1,040,941 |
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907,688 |
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Long-Term Debt |
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3,882,021 |
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3,899,075 |
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Other Long-Term Liabilities: |
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Deferred taxes |
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943,296 |
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934,971 |
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Liabilities of discontinued operations |
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1,895 |
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4,848 |
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Other long-term obligations |
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152,806 |
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163,981 |
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Total Other Long-Term Liabilities |
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1,097,997 |
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1,103,800 |
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|
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Commitments and Contingencies (See Note 4) |
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|
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|
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Shareholders Equity: |
|
|
|
|
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Common stock $0.01 par value, authorized 1,000 shares; issued 1,000 shares |
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|
|
|
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Additional paid-in capital |
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1,460,052 |
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1,455,881 |
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Retained deficit |
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(240,659 |
) |
(250,983 |
) | ||
Accumulated other comprehensive loss |
|
(7,383 |
) |
(17,371 |
) | ||
Total Shareholders Equity |
|
1,212,010 |
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1,187,527 |
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Total Liabilities and Shareholders Equity |
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$ |
7,232,969 |
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$ |
7,098,090 |
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See accompanying Notes to the Condensed Consolidated Financial Statements
THE SERVICEMASTER COMPANY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
|
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Six months ended |
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|
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2011 |
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2010 |
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Cash and Cash Equivalents at Beginning of Period |
|
$ |
252,698 |
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$ |
255,356 |
|
|
|
|
|
|
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Cash Flows from Operating Activities from Continuing Operations: |
|
|
|
|
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Net Income (Loss) |
|
10,324 |
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(20,216 |
) | ||
Adjustments to reconcile net income (loss) to net cash provided from operating activities: |
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|
|
|
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Loss from discontinued operations |
|
24,943 |
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29,149 |
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Depreciation expense |
|
35,574 |
|
29,083 |
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Amortization expense |
|
52,750 |
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79,335 |
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Amortization of debt issuance costs |
|
7,080 |
|
7,333 |
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Deferred income tax provision (benefit) |
|
391 |
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(2,796 |
) | ||
Stock-based compensation expense |
|
4,171 |
|
4,339 |
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Restructuring charges |
|
2,683 |
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7,433 |
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Cash payments related to restructuring charges |
|
(3,145 |
) |
(7,608 |
) | ||
Change in working capital, net of acquisitions: |
|
|
|
|
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Current income taxes |
|
11,592 |
|
(30,064 |
) | ||
Receivables |
|
(76,105 |
) |
(89,066 |
) | ||
Inventories and other current assets |
|
(65,376 |
) |
(77,604 |
) | ||
Accounts payable |
|
40,146 |
|
48,736 |
| ||
Deferred revenue |
|
86,230 |
|
69,407 |
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Accrued liabilities |
|
9,390 |
|
42,552 |
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Other, net |
|
2,462 |
|
5,499 |
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Net Cash Provided from Operating Activities from Continuing Operations |
|
143,110 |
|
95,512 |
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|
|
|
|
|
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Cash Flows from Investing Activities from Continuing Operations: |
|
|
|
|
| ||
Property additions |
|
(57,834 |
) |
(35,311 |
) | ||
Sale of equipment and other assets |
|
951 |
|
718 |
| ||
Acquisition of The ServiceMaster Company |
|
(35 |
) |
(2,164 |
) | ||
Other business acquisitions, net of cash acquired |
|
(11,886 |
) |
(14,753 |
) | ||
Purchase of other intangibles |
|
(1,900 |
) |
|
| ||
Notes receivable, financial investments and securities, net |
|
(4,341 |
) |
(898 |
) | ||
Net Cash Used for Investing Activities from Continuing Operations |
|
(75,045 |
) |
(52,408 |
) | ||
|
|
|
|
|
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Cash Flows from Financing Activities from Continuing Operations: |
|
|
|
|
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Borrowings of debt |
|
|
|
10,000 |
| ||
Payments of debt |
|
(20,437 |
) |
(22,062 |
) | ||
Debt issuance costs paid |
|
(280 |
) |
(30 |
) | ||
Net Cash Used for Financing Activities from Continuing Operations |
|
(20,717 |
) |
(12,092 |
) | ||
|
|
|
|
|
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Cash Flows from Discontinued Operations: |
|
|
|
|
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Cash (used for) provided from operating activities |
|
(1,818 |
) |
9,481 |
| ||
Cash provided from (used for) investing activities: |
|
|
|
|
| ||
Proceeds from sale of business |
|
27,523 |
|
|
| ||
Other investing activities |
|
(1,617 |
) |
(4,704 |
) | ||
Net Cash Provided from Discontinued Operations |
|
24,088 |
|
4,777 |
| ||
|
|
|
|
|
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Cash Increase During the Period |
|
71,436 |
|
35,789 |
| ||
|
|
|
|
|
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Cash and Cash Equivalents at End of Period |
|
$ |
324,134 |
|
$ |
291,145 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements
THE SERVICEMASTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The ServiceMaster Company (ServiceMaster, the Company, we, us or our) is a national company serving both residential and commercial customers. ServiceMasters services include lawn care, termite and pest control, home service contracts, cleaning and disaster restoration, house cleaning, furniture repair and home inspection. ServiceMaster provides these services through a network of company-owned locations and franchise licenses operating primarily under the following leading brands: TruGreen, Terminix, American Home Shield, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec.
The condensed consolidated financial statements include the accounts of ServiceMaster and its subsidiary partnerships, limited liability companies and corporations. All ServiceMaster subsidiaries are wholly owned. ServiceMaster is organized into five principal reportable segments: TruGreen, Terminix, American Home Shield, ServiceMaster Clean and Other Operations and Headquarters. Intercompany transactions and balances have been eliminated.
The condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The Company recommends that the quarterly condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC (the 2010 Form 10-K). The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not indicative of the results that might be achieved for a full year.
In the first quarter of 2011, ServiceMaster concluded that TruGreen LandCare did not fit within the long-term strategic plans of the Company and committed to a plan to sell the business. On April 21, 2011, the Company entered into a purchase agreement to sell the TruGreen LandCare business, and the disposition was effective as of April 30, 2011. The financial results, as well as the assets and liabilities, of the TruGreen LandCare business are reported in discontinued operations for all periods presented.
On July 24, 2007 (the Closing Date), ServiceMaster was acquired pursuant to a merger transaction (the Merger), and, immediately following the completion of the Merger, all of the outstanding common stock of ServiceMaster Global Holdings, Inc. (Holdings), the ultimate parent company of ServiceMaster, was owned by investment funds sponsored by, or affiliated with, Clayton, Dubilier & Rice, Inc. (now operated as Clayton, Dubilier & Rice, LLC, CD&R), Citigroup Private Equity LP (together with its affiliate, Citigroup Alternative Investments LLC, Citigroup), BAS Capital Funding Corporation (BAS) and J.P. Morgan Ventures Corporation (now known as JPMorgan Chase Funding Inc., JPMorgan). On September 30, 2010, Citigroup transferred the management responsibility for certain investment funds that own shares of common stock of Holdings to StepStone Group LLC (StepStone and collectively with CD&R, Citigroup, BAS and JPMorgan, the Equity Sponsors) and its proprietary interests in such investment funds to Lexington Partners Advisors LP.
Equity contributions totaling $1,431.1 million, together with (i) borrowings under a $1,150.0 million senior unsecured interim loan facility (the Interim Loan Facility), (ii) borrowings under a $2,650.0 million senior secured term loan facility and (iii) cash on hand at ServiceMaster, were used, among other things, to finance the aggregate Merger consideration, to make payments in satisfaction of other equity-based interests in ServiceMaster under the Merger agreement, to settle existing interest rate swaps, to redeem or provide for the repayment of certain of the Companys existing indebtedness and to pay related transaction fees and expenses. In addition, letters of credit issued under a $150.0 million pre-funded letter of credit facility (together with the senior secured term loan facility, the Term Facilities) were used to replace and/or secure letters of credit previously issued under a ServiceMaster credit facility that was terminated as of the Closing Date. On the Closing Date, the Company also entered into, but did not then draw under, a senior secured revolving credit facility (the Revolving Credit Facility). The Interim Loan Facility matured on July 24, 2008. On the maturity date, outstanding amounts under the Interim Loan Facility were converted on a one-to-one basis into 10.75% senior notes maturing in 2015 (the Permanent Notes).
Note 2. Significant Accounting Policies
The Companys significant accounting policies are included in the 2010 Form 10-K. The following selected accounting policies should be read in conjunction with the 2010 Form 10-K.
Revenues from lawn care and pest control services, as well as liquid and fumigation termite applications, are recognized as the services are provided. The Company eradicates termites through the use of non-baiting methods (e.g., fumigation or liquid treatments) and baiting systems. Termite services using baiting systems, termite inspection and protection contracts, as well as home service contracts, are frequently sold through annual contracts for a one-time, upfront payment. Direct costs of these contracts (service costs for termite contracts and claim costs for home service contracts) are expensed as incurred. The Company recognizes revenue over the life of these contracts in proportion to the expected direct costs. Those costs bear a direct relationship to the fulfillment of the Companys obligations under the contracts and are representative of the relative value provided to the customer (proportional performance method). The Company regularly reviews its estimates of direct costs for its termite bait and home service contracts and adjusts the estimates when appropriate. Revenue from trade name licensing arrangements is recognized when earned.
The Company has franchise agreements in its TruGreen, Terminix, ServiceMaster Clean, AmeriSpec, Furniture Medic and Merry Maids businesses. Franchise revenue (which in the aggregate represents approximately four percent of consolidated revenue from continuing operations) consists principally of continuing monthly fees based upon the franchisees customer level revenue. Monthly fee revenue is recognized when the related customer level revenue is reported by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial fees resulting from the sale of a franchise. These fees are fixed and are recognized as revenue when collectability is reasonably assured and all material services or conditions relating to the sale have been substantially performed. Total profits from the franchised operations were $17.7 million and $34.1 million for the three and six months ended June 30, 2011, respectively, and $18.0 million and $34.6 million for the three and six months ended June 30, 2010, respectively. Consolidated operating income from continuing operations was $161.2 million and $185.0 million for the three and six months ended June 30, 2011, respectively, and $124.7 million and $129.7 million for the three and six months ended June 30, 2010, respectively. The Company evaluates the performance of its franchise businesses based primarily on operating profit before corporate general and administrative expenses, interest expense and amortization of intangible assets. The portion of total franchise fee income related to initial fees received from the sale of franchises was immaterial to the Companys condensed consolidated financial statements for all periods.
The Company had $536.5 million and $449.6 million of deferred revenue as of June 30, 2011 and December 31, 2010, respectively. Deferred revenue consists primarily of payments received for annual contracts relating to home service contracts, termite baiting, termite inspection, pest control and lawn care services.
Customer acquisition costs, which are incremental and direct costs of obtaining a customer, are deferred and amortized over the life of the related contract in proportion to revenue recognized. These costs include sales commissions and direct selling costs which can be shown to have resulted in a successful sale.
TruGreen has significant seasonality in its business. In the winter and spring, this business sells a series of lawn applications to customers which are rendered primarily in March through October (the production season). This business incurs incremental selling expenses at the beginning of the year that directly relate to successful sales for which the revenues are recognized in later quarters. On an interim basis, TruGreen defers these incremental selling expenses, pre-season advertising costs and annual repairs and maintenance procedures that are performed primarily in the first quarter. These costs are deferred and recognized in proportion to the revenue generated over the production season and are not deferred beyond the calendar year-end. Other business segments of the Company also defer, on an interim basis, advertising costs incurred early in the year. These pre-season costs are deferred and recognized approximately in proportion to revenue over the balance of the year and are not deferred beyond the calendar year-end.
The cost of direct-response advertising at Terminix and TruGreen, consisting primarily of direct-mail promotions, is capitalized and amortized over its expected period of future benefits.
The preparation of the condensed consolidated financial statements requires management to make certain estimates and assumptions required under GAAP which may differ from actual results. Disclosures in the 2010 Form 10-K presented the significant areas requiring the use of management estimates and discussed how management formed its judgments. The areas discussed included revenue recognition; the allowance for uncollectible receivables; accruals for self-insured retention limits related to medical, workers compensation, auto and general liability insurance claims; accruals for home service contracts and termite damage claims; the possible outcome of outstanding litigation; accruals for income tax liabilities as well as deferred tax accounts; the deferral and amortization of
customer acquisition costs; useful lives for depreciation and amortization expense; the valuation of marketable securities; and the valuation of tangible and intangible assets.
Note 3. Restructuring Charges
The Company incurred restructuring charges of $0.1 million ($0.1 million, net of tax) and $4.1 million ($2.5 million, net of tax) for the three months ended June 30, 2011 and 2010, respectively. The Company incurred restructuring charges of $2.7 million ($1.6 million, net of tax) and $7.4 million ($4.6 million, net of tax) for the six months ended June 30, 2011 and 2010, respectively. Restructuring charges were comprised of the following:
|
|
Three months ended |
|
Six months ended |
| ||||||||
(In thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
TruGreen reorganization and restructuring(1) |
|
$ |
|
|
$ |
2,939 |
|
$ |
|
|
$ |
5,962 |
|
Terminix branch optimization(2) |
|
(73 |
) |
|
|
2,467 |
|
|
| ||||
Other(3) |
|
167 |
|
1,141 |
|
216 |
|
1,471 |
| ||||
Total restructuring charges |
|
$ |
94 |
|
$ |
4,080 |
|
$ |
2,683 |
|
$ |
7,433 |
|
(1) Represents restructuring charges related to a reorganization of field leadership and a restructuring of branch operations. For the three months ended June 30, 2010, these charges include consulting fees of $1.9 million and severance and lease termination costs of $1.0 million. For the six months ended June 30, 2010 these charges include consulting fees of $3.8 million and severance, lease termination and other costs of $2.2 million.
(2) Represents restructuring (credits) charges related to a branch optimization project. For the three months ended June 30, 2011, these credits include adjustments to lease termination reserves. For the six months ended June 30, 2011, these charges include lease termination costs of $2.4 million and severance costs of $0.1 million.
(3) For the three and six months ended June 30, 2011, these charges include costs associated with previous restructuring initiatives. For the three and six months ended June 30, 2010, these charges include severance, retention, legal fees and other costs associated with the Merger of $1.0 million and $1.1 million, respectively, and costs associated with previous restructuring initiatives of $0.1 million and $0.4 million, respectively.
The pretax charges discussed above are reported in Restructuring charges in the condensed consolidated statements of operations.
A reconciliation of the beginning and ending balances of accrued restructuring charges, which are included in Accrued liabilities Other on the condensed consolidated statements of financial position, is presented as follows:
(In thousands) |
|
Accrued |
| |
Balance as of December 31, 2010 |
|
$ |
3,542 |
|
Costs incurred |
|
2,683 |
| |
Costs paid or otherwise settled |
|
(3,417 |
) | |
Balance as of June 30, 2011 |
|
$ |
2,808 |
|
Note 4. Commitments and Contingencies
A portion of the Companys vehicle fleet and some equipment are leased through month-to-month operating leases, cancelable at the Companys option. There are residual value guarantees by the Company (ranging from 70 percent to 84 percent of the estimated terminal value at the inception of the lease depending on the agreement) relative to these vehicles and equipment, which historically have not resulted in significant net payments to the lessors. The fair value of the assets under all of the fleet and equipment leases is expected to substantially mitigate the Companys guarantee obligations under the agreements. As of June 30, 2011, the Companys residual value guarantees related to the leased assets totaled $39.7 million for which the Company has recorded a liability for the estimated fair value of these guarantees of $0.9 million in the condensed consolidated statements of financial position.
The Company carries insurance policies on insurable risks at levels that it believes to be appropriate, including workers compensation, auto and general liability risks. The Company purchases insurance policies from third party insurance carriers, which typically incorporate significant deductibles or self-insured retentions. The Company is responsible for all claims that fall below the retention limits. As of June 30, 2011 and December 31, 2010, the Company had accrued self-insured claims of $120.4 million and $121.7 million, respectively, which are included in Accrued liabilities Self-insured claims and related expenses and Other long-term obligations on the condensed consolidated statements of financial position. During the six months ended June 30, 2011 and 2010, the Company recorded provisions for uninsured claims totaling $15.2 million and $18.5 million, respectively, and the Company paid claims totaling $16.5 million and $20.7 million, respectively. In determining the Companys accrual for self-insured claims, the Company uses historical claims experience to establish both the current year accrual and the underlying provision for future losses. This actuarially determined provision and related accrual includes known claims, as well as incurred but not reported claims. The Company adjusts its estimate of accrued self-insured claims when required to reflect changes based on factors such as changes in health care costs, accident frequency and claim severity.
Accruals for home service contract claims in the American Home Shield business are made based on the Companys claims experience and actuarial projections. Termite damage claim accruals are recorded based on both the historical rates of claims incurred within a contract year and the cost per claim. Current activity could differ causing a change in estimates. The Company has certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. The Company accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified.
The Company has guarantees on certain bonds issued by divested companies associated with TruGreen LandCare, primarily performance type bonds. The maximum payments the Company could be required to make if the buyer of the divested companies is unable to fulfill their obligations is approximately $23.3 million as of June 30, 2011. The TruGreen LandCare purchase agreement requires that the buyer replace the bonds at the earlier of the bonds expiration date or April 30, 2012. Substantially all of the bonds are scheduled to expire prior to 2015, but may be extended depending on the completion of the related projects. The Company believes that if it were to incur a loss on any individual bond guarantee, the likelihood of which the Company believes is remote, such loss would not have a material effect on the Companys reputation, business, financial position, results of operations or cash flows.
In the ordinary course of conducting business activities, the Company and its subsidiaries become involved in judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. These proceedings include, on an individual, collective and class action basis, regulatory, insured and uninsured employment, general and commercial liability, wage and hour and environmental proceedings. Additionally, the Company has entered into settlement agreements in certain cases, including with respect to putative collective and class actions, which are subject to court approval. If one or more of the Companys settlements are not finally approved, the Company could have additional or different exposure, which could be material. At this time, the Company does not expect any of these proceedings to have a material effect on its reputation, business, financial position, results of operations or cash flows; however, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial position, results of operations and cash flows.
Note 5. Goodwill and Intangible Assets
In accordance with applicable accounting standards, goodwill and intangible assets that are not amortized are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. The Companys annual assessment date is October 1. There were no goodwill or trade name impairment charges recorded in continuing operations in the three and six months ended June 30, 2011 and 2010.
See Note 12 for a discussion of the impairment recorded in loss from discontinued operations, net of income taxes, for the three and six months ended June 30, 2011, as a result of the Companys decision to sell its TruGreen LandCare business unit. This impairment included $4.6 million related to the TruGreen LandCare trade name. The loss from discontinued operations, net of income taxes, for the three and six months ended June 30, 2010 includes a non-cash impairment charge of $46.9 million to reduce the carrying value of TruGreen LandCares goodwill and trade name as a result of the Companys interim impairment testing of goodwill and indefinite-lived intangible assets.
During the six months ended June 30, 2011, the increase in goodwill and other intangible assets related primarily to tuck-in acquisitions completed throughout the period by TruGreen and Terminix.
The table below summarizes the goodwill balances by segment for continuing operations:
(In thousands) |
|
TruGreen |
|
Terminix |
|
American |
|
ServiceMaster |
|
Other |
|
Total |
| ||||||
Balance as of December 31, 2010 |
|
$ |
1,191,071 |
|
$ |
1,397,414 |
|
$ |
347,783 |
|
$ |
135,894 |
|
$ |
53,131 |
|
$ |
3,125,293 |
|
Acquisitions |
|
2,606 |
|
8,733 |
|
|
|
|
|
|
|
11,339 |
| ||||||
Other(1) |
|
132 |
|
(277 |
) |
(108 |
) |
118 |
|
(3 |
) |
(138 |
) | ||||||
Balance as of June 30, 2011 |
|
$ |
1,193,809 |
|
$ |
1,405,870 |
|
$ |
347,675 |
|
$ |
136,012 |
|
$ |
53,128 |
|
$ |
3,136,494 |
|
(1) Reflects the impact of the amortization of tax deductible goodwill and foreign exchange rate changes.
There were no accumulated impairment losses as of June 30, 2011.
The table below summarizes the other intangible asset balances for continuing operations:
|
|
As of June 30, 2011 |
|
As of December 31, 2010 |
| ||||||||||||||
(In thousands) |
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
| ||||||
Trade names(1) |
|
$ |
2,370,200 |
|
$ |
|
|
$ |
2,370,200 |
|
$ |
2,370,200 |
|
$ |
|
|
$ |
2,370,200 |
|
Customer relationships |
|
672,392 |
|
(508,973 |
) |
163,419 |
|
668,649 |
|
(464,056 |
) |
204,593 |
| ||||||
Franchise agreements |
|
88,000 |
|
(38,839 |
) |
49,161 |
|
88,000 |
|
(35,272 |
) |
52,728 |
| ||||||
Other |
|
57,700 |
|
(33,353 |
) |
24,347 |
|
55,024 |
|
(29,034 |
) |
25,990 |
| ||||||
Total |
|
$ |
3,188,292 |
|
$ |
(581,165 |
) |
$ |
2,607,127 |
|
$ |
3,181,873 |
|
$ |
(528,362 |
) |
$ |
2,653,511 |
|
(1) Not subject to amortization.
Note 6. Stock-Based Compensation
For the three months ended June 30, 2011 and 2010, the Company recognized stock-based compensation expense of $1.8 million ($1.1 million, net of tax) and $2.2 million ($1.3 million, net of tax), respectively. For the six months ended June 30, 2011 and 2010, the Company recognized stock-based compensation expense of $4.2 million ($2.6 million, net of tax) and $4.3 million ($2.6 million, net of tax), respectively. As of June 30, 2011, there was $12.8 million of total unrecognized compensation cost related to non-vested stock options and restricted share units granted by Holdings under the Amended and Restated ServiceMaster Global Holdings, Inc. Stock Incentive Plan (the MSIP). These remaining costs are expected to be recognized over a weighted-average period of 2.3 years.
In February 2011, the Board of Directors and stockholders of Holdings adopted an amendment to the MSIP. The amendment increased the number of shares of Holdings common stock available for issuance under the MSIP by 750,000 shares, from 13,845,000 to 14,595,000 shares.
Note 7. Supplemental Cash Flow Information
Supplemental information relating to the condensed consolidated statements of cash flows for the six months ended June 30, 2011 and 2010 is presented in the following table:
|
|
Six months ended |
| ||||
(In thousands) |
|
2011 |
|
2010 |
| ||
Cash paid for or (received from): |
|
|
|
|
| ||
Interest expense |
|
$ |
126,620 |
|
$ |
136,518 |
|
Interest and dividend income |
|
(2,462 |
) |
(2,790 |
) | ||
Income taxes, net of refunds |
|
8,366 |
|
10,127 |
| ||
Note 8. Comprehensive Income
Total comprehensive income was $55.5 million and $5.5 million for the three months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, total comprehensive income (loss) was $20.3 million and ($26.4) million, respectively. Total comprehensive income (loss) primarily includes net income (loss), unrealized gain (loss) on marketable securities, unrealized gain (loss) on derivative instruments and the effect of foreign currency translation.
Note 9. Receivable Sales
The Company has an accounts receivable securitization arrangement under which TruGreen and Terminix may sell certain eligible trade accounts receivable to ServiceMaster Funding Company LLC (Funding), the Companys wholly owned, bankruptcy-remote subsidiary, which is consolidated for financial reporting purposes. Funding, in turn, may transfer, on a revolving basis, an undivided percentage ownership interest of up to $50.0 million in the pool of accounts receivable to one or both of the unrelated purchasers who are parties to the accounts receivable securitization arrangement (Purchasers). The amount of the eligible receivables varies during the year based on seasonality of the businesses and could, at times, limit the amount available to the Company from the sale of these interests. As of June 30, 2011, the amount of eligible receivables was approximately $50.0 million.
During the six months ended June 30, 2011, there were no transfers of interests in the pool of trade accounts receivables to Purchasers under this arrangement. As of June 30, 2011 and December 31, 2010, the Company had $10.0 million outstanding under the arrangement and, as of June 30, 2011, had $40.0 million of remaining capacity available under the trade accounts receivable securitization arrangement.
The accounts receivable securitization arrangement is a 364-day facility that is renewable annually at the option of Funding, with a final termination date of July 17, 2012. Only one of the Purchasers is required to purchase interests under the arrangement. As part of the annual renewal of the facility, which occurred on July 26, 2011, this Purchaser agreed to continue its participation in the arrangement through July 17, 2012.
The Company has recorded its obligation to repay the Purchaser for its interest in the pool of receivables as long-term debt in the condensed consolidated statement of financial position. The interest rates applicable to the Companys obligation are based on a fluctuating rate of interest based on the Purchasers pooled commercial paper rate (0.21% as of June 30, 2011). In addition, the Company pays usage fees on its obligations and commitment fees on undrawn amounts committed by the Purchasers. All obligations under the accounts receivable securitization arrangement must be repaid by July 17, 2012.
Note 10. Cash and Marketable Securities
Cash, money market funds and certificates of deposits, with maturities of three months or less when purchased, are included in Cash and cash equivalents on the condensed consolidated statements of financial position. As of June 30, 2011 and December 31, 2010, the Companys investments consist primarily of domestic publicly traded debt and certificates of deposit totaling $106.7 million and $100.9 million, respectively, and common equity securities of $40.6 million and $39.7 million, respectively.
The aggregate market value of the Companys short- and long-term investments in debt and equity securities was $147.3 million and $140.6 million, and the aggregate cost basis was $137.7 million and $133.0 million as of June 30, 2011 and December 31, 2010, respectively.
As of June 30, 2011 and December 31, 2010, $274.4 million and $242.2 million, respectively, of the cash and short- and long-term marketable securities balance are associated with regulatory requirements at American Home Shield and for other purposes. American Home Shields investment portfolio has been invested in a combination of high quality, short duration fixed income securities and equities.
Gains and losses on sales of investments, as determined on a specific identification basis, are included in investment income in the period they are realized. The Company periodically reviews its portfolio of investments to determine whether there has been an other than temporary decline in the value of the investments from factors such as deterioration in the financial condition of the issuer or the market(s) in which the issuer competes. The table below summarizes gross realized gains and gross realized losses, each resulting from sales of available-for-sale securities. There were no impairment charges due to other than temporary declines in the value of certain investments for the three and six months ended June 30, 2011 and 2010.
|
|
Three months ended |
|
Six months ended |
| ||||||||
(In thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Gross realized gains, pre-tax |
|
$ |
104 |
|
$ |
602 |
|
$ |
611 |
|
$ |
1,101 |
|
Gross realized gains, net of tax |
|
64 |
|
370 |
|
374 |
|
676 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross realized losses, pre-tax |
|
(21 |
) |
(125 |
) |
(36 |
) |
(126 |
) | ||||
Gross realized losses, net of tax |
|
(13 |
) |
(77 |
) |
(22 |
) |
(77 |
) | ||||
The table below summarizes unrealized gains and losses in the investment portfolio:
(In thousands) |
|
As of |
|
As of |
| ||
Unrealized gains |
|
$ |
11,184 |
|
$ |
9,621 |
|
Unrealized losses |
|
(1,577 |
) |
(1,995 |
) | ||
Portion of unrealized losses which had been in a loss position for more than one year |
|
|
|
(109 |
) | ||
Aggregate fair value of the investments with unrealized losses |
|
10,866 |
|
18,535 |
| ||
Note 11. Long-Term Debt
Long-term debt as of June 30, 2011 and December 31, 2010 is summarized in the following table:
(In thousands) |
|
As of |
|
As of |
| ||
Senior secured term loan facility maturing in 2014 |
|
$ |
2,544,000 |
|
$ |
2,557,250 |
|
10.75% senior notes maturing in 2015 |
|
1,061,000 |
|
1,061,000 |
| ||
Revolving credit facility maturing in 2014 |
|
|
|
|
| ||
7.10% notes maturing in 2018(1) |
|
66,512 |
|
65,549 |
| ||
7.45% notes maturing in 2027(1) |
|
151,890 |
|
150,555 |
| ||
7.25% notes maturing in 2038(1) |
|
61,037 |
|
60,633 |
| ||
Other |
|
55,837 |
|
53,500 |
| ||
Less current portion |
|
(58,255 |
) |
(49,412 |
) | ||
Total long-term debt |
|
$ |
3,882,021 |
|
$ |
3,899,075 |
|
(1) The increase in the balance from December 31, 2010 to June 30, 2011 reflects the amortization of fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown above.
On February 2, 2011, ServiceMaster entered into an amendment to its Revolving Credit Facility, which provides for senior secured revolving loans and stand-by and other letters of credit. Prior to the amendment, the facility was scheduled to mature on July 24, 2013 and provided for maximum borrowing capacity of $500.0 million with outstanding letters of credit limited to $75.0 million. The Company desired to extend the maturity date of the facility by one year and, as an inducement for such extension, offered to allow any lenders in the syndicate group that were willing to extend the maturity date by one year a 20 percent reduction of such lenders loan commitment. As a result of the amendment, the Company will have available borrowing capacity under its amended Revolving Credit Facility of $442.5 million through July 24, 2013 and will have available borrowing capacity of $229.6 million from July 25, 2013 through July 24, 2014. The Company will continue to have access to letters of credit up to $75.0 million through July 24, 2014.
Note 12. Discontinued Operations
In the first quarter of 2011, ServiceMaster concluded that TruGreen LandCare did not fit within the long-term strategic plans of the Company and committed to a plan to sell the business. On April 21, 2011, the Company entered into a purchase agreement to sell the TruGreen LandCare business, and the disposition was effective as of April 30, 2011. As a result of the decision to sell this business, a $34.2 million impairment charge ($21.0 million, net of tax) was recorded in loss from discontinued operations, net of income taxes, in the first quarter of 2011 to reduce the carrying value of TruGreen LandCares assets to their estimated fair value less cost to sell in accordance with applicable accounting standards. Additionally, upon completion of the sale, a $1.3 million loss on sale ($0.7 million, net of tax) was recorded in the second quarter of 2011. The loss on the disposition of the TruGreen LandCare business is subject to certain post-closing adjustments, and such adjustments could be significant to the purchase price.
The carrying amounts of the major classes of assets and liabilities for TruGreen LandCare are presented below.
(In thousands) |
|
As of |
|
As of |
| ||
Assets: |
|
|
|
|
| ||
Receivables, net |
|
$ |
|
|
$ |
27,732 |
|
Inventories and other current assets |
|
177 |
|
23,245 |
| ||
Total Current Assets |
|
177 |
|
50,977 |
| ||
Net property and equipment |
|
|
|
22,498 |
| ||
Goodwill and intangible assets, net |
|
|
|
9,899 |
| ||
Total Assets |
|
$ |
177 |
|
$ |
83,374 |
|
Liabilities: |
|
|
|
|
| ||
Current liabilities |
|
$ |
1,322 |
|
$ |
15,495 |
|
Long-term liabilities |
|
66 |
|
1,951 |
| ||
Total Liabilities |
|
$ |
1,388 |
|
$ |
17,446 |
|
Loss from discontinued operations, net of income taxes, for all periods presented includes the operating results of TruGreen LandCare and the other previously sold businesses noted in the 2010 Form 10-K.
The operating results of discontinued operations are as follows:
|
|
Three months ended |
|
Six months ended |
| ||||||||
(In thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Operating Results: |
|
|
|
|
|
|
|
|
| ||||
Operating revenue |
|
$ |
19,464 |
|
$ |
63,463 |
|
$ |
75,765 |
|
$ |
122,263 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating loss |
|
(5,115 |
) |
(3,687 |
) |
(5,190 |
) |
(662 |
) | ||||
Benefit for income taxes |
|
(1,986 |
) |
(1,484 |
) |
(2,009 |
) |
(254 |
) | ||||
Operating loss, net of income taxes |
|
(3,129 |
) |
(2,203 |
) |
(3,181 |
) |
(408 |
) | ||||
Loss on sale and impairments, net of income taxes(1) |
|
(713 |
) |
(28,741 |
) |
(21,762 |
) |
(28,741 |
) | ||||
Loss from discontinued operations, net of income taxes |
|
$ |
(3,842 |
) |
$ |
(30,944 |
) |
$ |
(24,943 |
) |
$ |
(29,149 |
) |
(1) Includes goodwill and trade name impairments of $46.9 million ($28.7 million, net of tax) in the three and six months ended June 30, 2010.
The table below summarizes the activity for the six months ended June 30, 2011 for the remaining liabilities from operations that were discontinued in years prior to 2011. The remaining obligations primarily relate to long-term self-insurance claims. The Company believes that the remaining reserves continue to be adequate and reasonable.
(In thousands) |
|
As of |
|
Cash Payments |
|
Income |
|
As of |
| ||||
Remaining liabilities of discontinued operations: |
|
|
|
|
|
|
|
|
| ||||
ARS/AMS |
|
$ |
219 |
|
$ |
109 |
|
$ |
(128 |
) |
$ |
200 |
|
LandCare Construction |
|
656 |
|
(612 |
) |
(44 |
) |
|
| ||||
LandCare utility line clearing business |
|
771 |
|
(771 |
) |
|
|
|
| ||||
Certified Systems, Inc. and other |
|
1,905 |
|
(76 |
) |
|
|
1,829 |
| ||||
InStar |
|
149 |
|
(19 |
) |
|
|
130 |
| ||||
Total liabilities of discontinued operations |
|
$ |
3,700 |
|
$ |
(1,369 |
) |
$ |
(172 |
) |
$ |
2,159 |
|
Note 13. Income Taxes
As required by Accounting Standard Codification (ASC) 740 Income Taxes, we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from continuing operations before income taxes, except for significant unusual or infrequently occurring items. Our estimated tax rate is adjusted each quarter in accordance with ASC 740.
The effective tax rate on income from continuing operations was 35.6 percent for the three months ended June 30, 2011 compared to 17.2 percent for three months ended June 30, 2010. The effective tax rate for the three months ended June 30, 2010 was impacted by a cumulative adjustment arising from a revision in the anticipated annual effective tax rate during the second quarter of 2010.
The effective tax rate on income from continuing operations was 31.3 percent for the six months ended June 30, 2011 compared to 169.1 percent for the six months ended June 30, 2010. The effective tax rate for the six months ended June 30, 2010 was affected by the reclassification of the TruGreen LandCare business to discontinued operations and the resulting impact on the allocation of the full year effective tax rate on income from continuing operations to interim periods.
As of June 30, 2011 and December 31, 2010, the Company had $8.6 million and $13.7 million, respectively, of tax benefits primarily reflected in state tax returns that have not been recognized for financial reporting purposes (unrecognized tax benefits). The Company currently estimates that, as a result of pending tax settlements and expiration of statutes of limitations, the amount of unrecognized tax benefits could be reduced by approximately $1.9 million during the next 12 months.
Note 14. Business Segment Reporting
The business of the Company is conducted through five reportable segments: TruGreen, Terminix, American Home Shield, ServiceMaster Clean and Other Operations and Headquarters.
In accordance with accounting standards for segments, the Companys reportable segments are strategic business units that offer different services. The TruGreen segment provides residential and commercial lawn care services. The Terminix segment provides termite and pest control services to residential and commercial customers. The American Home Shield segment provides home service contracts to consumers that cover heating, ventilation, air conditioning, plumbing and other home systems and appliances. The ServiceMaster Clean segment provides residential and commercial disaster restoration and cleaning services primarily under the ServiceMaster and ServiceMaster Clean brand names, on-site furniture repair and restoration services primarily under the Furniture Medic brand name and home inspection services primarily under the AmeriSpec brand name. The Other Operations and Headquarters segment includes the franchised and Company-owned operations of Merry Maids, which provides house cleaning services. The Other Operations and Headquarters segment also includes The ServiceMaster Acceptance Company Limited Partnership (SMAC), our financing subsidiary exclusively dedicated to providing financing to our franchisees and retail customers of our operating units, and the Companys headquarters operations, which provide various technology, marketing, finance, legal and other support services to the business units.
Segment information for continuing operations is presented below:
|
|
Three months ended |
|
Six months ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
(In thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Operating Revenue: |
|
|
|
|
|
|
|
|
| ||||
TruGreen |
|
$ |
383,022 |
|
$ |
378,642 |
|
$ |
519,283 |
|
$ |
502,724 |
|
Terminix |
|
334,258 |
|
323,393 |
|
618,414 |
|
594,310 |
| ||||
American Home Shield |
|
195,326 |
|
183,792 |
|
336,258 |
|
316,997 |
| ||||
ServiceMaster Clean |
|
32,870 |
|
32,034 |
|
65,702 |
|
64,296 |
| ||||
Other Operations and Headquarters |
|
21,964 |
|
21,738 |
|
42,454 |
|
41,880 |
| ||||
Total Operating Revenue |
|
$ |
967,440 |
|
$ |
939,599 |
|
$ |
1,582,111 |
|
$ |
1,520,207 |
|
Operating Income (Loss):(1),(2) |
|
|
|
|
|
|
|
|
| ||||
TruGreen |
|
$ |
68,588 |
|
$ |
52,606 |
|
$ |
48,828 |
|
$ |
13,518 |
|
Terminix |
|
72,108 |
|
68,755 |
|
123,489 |
|
121,735 |
| ||||
American Home Shield |
|
31,356 |
|
21,360 |
|
44,513 |
|
28,468 |
| ||||
ServiceMaster Clean |
|
12,529 |
|
12,572 |
|
25,262 |
|
25,244 |
| ||||
Other Operations and Headquarters |
|
(23,404 |
) |
(30,544 |
) |
(57,070 |
) |
(59,223 |
) | ||||
Total Operating Income |
|
$ |
161,177 |
|
$ |
124,749 |
|
$ |
185,022 |
|
$ |
129,742 |
|
(1) Presented below is a reconciliation of segment operating income to income (loss) from continuing operations before income taxes:
|
|
Three months ended |
|
Six months ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
(In thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Total Segment Operating Income |
|
$ |
161,177 |
|
$ |
124,749 |
|
$ |
185,022 |
|
$ |
129,742 |
|
Non-operating Expense (Income): |
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
68,378 |
|
73,157 |
|
136,893 |
|
145,827 |
| ||||
Interest and net investment income |
|
(1,398 |
) |
(996 |
) |
(3,591 |
) |
(3,498 |
) | ||||
Other expense |
|
173 |
|
176 |
|
348 |
|
347 |
| ||||
Income (Loss) from Continuing Operations before Income Taxes |
|
$ |
94,024 |
|
$ |
52,412 |
|
$ |
51,372 |
|
$ |
(12,934 |
) |
(2) Includes (i) restructuring charges related to a reorganization of field leadership and a restructuring of branch operations at TruGreen, (ii) a branch optimization project at Terminix and (iii) costs associated with the Merger. Presented below is a summary of restructuring charges (credits) by segment:
|
|
Three months ended |
|
Six months ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
(In thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Restructuring charges: |
|
|
|
|
|
|
|
|
| ||||
TruGreen |
|
$ |
8 |
|
$ |
2,939 |
|
$ |
5 |
|
$ |
5,962 |
|
Terminix |
|
(73 |
) |
32 |
|
2,467 |
|
78 |
| ||||
American Home Shield |
|
|
|
|
|
|
|
(127 |
) | ||||
ServiceMaster Clean |
|
|
|
|
|
20 |
|
|
| ||||
Other Operations and Headquarters |
|
159 |
|
1,109 |
|
191 |
|
1,520 |
| ||||
Total restructuring charges |
|
$ |
94 |
|
$ |
4,080 |
|
$ |
2,683 |
|
$ |
7,433 |
|
Note 15. Related Party Transactions
In connection with the Merger and the related transactions, the Company entered into a consulting agreement with CD&R under which CD&R provides the Company with on-going consulting and management advisory services. The annual management fee payable under the consulting agreement with CD&R is $6.25 million. Under this agreement, the Company recorded management fees of $1.6 million and $3.1 million for the three and six months ended June 30, 2011 and 2010, respectively. The consulting agreement also provides that CD&R may receive additional fees in connection with certain subsequent financing and acquisition or disposition transactions. The consulting agreement will terminate on July 24, 2017, unless terminated earlier at CD&Rs election.
In addition, in August 2009, the Company entered into consulting agreements with Citigroup, BAS and JPMorgan, each of which is an Equity Sponsor or an affiliate of an Equity Sponsor. Under the consulting agreements, Citigroup, BAS and JPMorgan each provide the Company with on-going consulting and management advisory services through June 30, 2016 or the earlier termination of the existing consulting agreement between the Company and CD&R. On September 30, 2010, Citigroup transferred the management responsibility for certain investment funds that own shares of common stock of Holdings to StepStone and its proprietary interests in such investment funds to Lexington Partners Advisors LP. Citigroup also assigned its obligations and rights under its consulting agreement to StepStone, and beginning in the fourth quarter of 2010, the consulting fee otherwise payable to Citigroup became payable to StepStone. The Company pays annual management fees of $0.5 million, $0.5 million and $0.25 million to StepStone, BAS and JPMorgan, respectively. The Company recorded consulting fees related to these agreements of $0.3 million and $0.6 million for the three and six months ended June 30, 2011 and 2010, respectively.
In 2008 and 2009, Holdings completed open market purchases totaling $65.0 million in face value of the Permanent Notes for a cost of $21.4 million. The debt acquired by Holdings has not been retired, and the Company has continued to pay interest in accordance with the terms of the debt. The Company recorded interest expense of $3.5 million for the six months ended June 30, 2011 and 2010 related to the Permanent Notes held by Holdings. The Company made cash payments to Holdings of $3.5 million during the six months ended June 30, 2011 and 2010. Interest accrued by the Company and payable to Holdings as of June 30, 2011 and December 31, 2010 amounted to $3.2 million.
Note 16. Newly Issued Accounting Statements and Positions
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements, which amends the multiple-element arrangement guidance under ASC 605, Revenue Recognition. This standard amends the criteria for separating consideration received for products or services in multiple-deliverable arrangements. This standard establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation, and requires that total arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this standard significantly expands required disclosures related to a vendors multiple-deliverable revenue arrangements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (calendar year 2011). The Company adopted the required provisions of this standard during the first quarter of 2011. The adoption of this standard did not have a material impact on the Companys condensed consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders equity and require that all non-owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (calendar year 2012) and must be applied retrospectively to all periods upon adoption. The Company anticipates that the adoption of this standard will change the presentation of its condensed consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop converged guidance on how to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP; however, it expands existing disclosure requirements for fair value measurements and makes other amendments, many of which eliminate unnecessary wording differences between U.S. GAAP and IFRS. This ASU is effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the effects that this guidance will have on its condensed consolidated financial statements.
Note 17. Fair Value of Financial Instruments
The period end carrying amounts of receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The period end carrying amounts of long-term notes receivables approximate fair value as the effective interest rates for these instruments are comparable to market rates at period end. The period end carrying amounts of current and long-term marketable securities also approximate fair value, with unrealized gains and losses reported net-of-tax as a component of accumulated other comprehensive loss on the condensed consolidated statements of financial position, or, for certain unrealized losses, reported in interest and net investment income in the condensed consolidated statements of operations if the decline in value is other than temporary. The carrying amount of total debt was $3,940.3 million and $3,948.5 million and the estimated fair value was $3,993.5 million and $3,957.7 million as of June 30, 2011 and December 31, 2010, respectively. The fair values of the Companys financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to the Company as of June 30, 2011 and December 31, 2010.
The Company has estimated the fair value of its financial instruments measured at fair value on a recurring basis using the market and income approaches. For investments in marketable securities, deferred compensation trust assets and derivative contracts, which are carried at their fair values, the Companys fair value estimates incorporate quoted market prices, other observable inputs (for example, forward interest rates) and unobservable inputs (for example, forward commodity prices) at the balance sheet date.
Interest rate swap contracts are valued using forward interest rate curves obtained from third party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contracts.
Fuel swap contracts are valued using forward fuel price curves obtained from third party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract fuel price to the expected forward fuel price as of each settlement date and applying the difference between the contract and expected prices to the notional gallons in the fuel swap contracts.
The carrying amount and estimated fair value of the Companys financial instruments that are recorded at fair value for the periods presented are as follows:
|
|
|
|
As of |
|
As of |
| ||||||||||||||
|
|
|
|
|
|
Estimated Fair Value Measurements |
|
|
|
|
| ||||||||||
(In thousands) |
|
Balance Sheet Locations |
|
Carrying |
|
Quoted |
|
Significant |
|
Significant |
|
Carrying |
|
Estimated |
| ||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deferred compensation trust assets |
|
Long-term marketable securities |
|
$ |
11,359 |
|
$ |
11,359 |
|
$ |
|
|
$ |
|
|
$ |
10,859 |
|
$ |
10,859 |
|
Investments in marketable securities |
|
Marketable securities and Long-term marketable securities |
|
135,970 |
|
50,778 |
|
85,192 |
|
|
|
129,724 |
|
129,724 |
| ||||||
Fuel swap contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current |
|
Prepaid expenses and other assets |
|
6,839 |
|
|
|
|
|
6,839 |
|
5,813 |
|
5,813 |
| ||||||
Noncurrent |
|
Other assets |
|
922 |
|
|
|
|
|
922 |
|
836 |
|
836 |
| ||||||
Total financial assets |
|
|
|
$ |
155,090 |
|
$ |
62,137 |
|
$ |
85,192 |
|
$ |
7,761 |
|
$ |
147,232 |
|
$ |
147,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fuel swap contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current |
|
Other |
|
33 |
|
|
|
|
|
33 |
|
|
|
|
| ||||||
Noncurrent |
|
Other long-term obligations |
|
63 |
|
|
|
|
|
63 |
|
|
|
|
| ||||||
Interest rate swap contracts |
|
Other long-term obligations |
|
38,531 |
|
|
|
38,531 |
|
|
|
50,085 |
|
50,085 |
| ||||||
Total financial liabilities |
|
|
|
$ |
38,627 |
|
$ |
|
|
$ |
38,531 |
|
$ |
96 |
|
$ |
50,085 |
|
$ |
50,085 |
|
A reconciliation of the beginning and ending fair values of financial instruments valued using significant unobservable inputs (Level 3) is presented as follows:
(In thousands) |
|
Fuel Swap |
| |
Balance as of December 31, 2010 |
|
$ |
6,649 |
|
Total gains (losses) (realized and unrealized) |
|
|
| |
Included in earnings(1) |
|
5,493 |
| |
Included in accumulated other comprehensive loss |
|
1,016 |
| |
Settlements, net |
|
(5,493 |
) | |
Balance as of June 30, 2011 |
|
$ |
7,665 |
|
(In thousands) |
|
Fuel Swap |
| |
Balance as of December 31, 2009 |
|
$ |
6,916 |
|
Total gains (losses) (realized and unrealized) |
|
|
| |
Included in earnings(1) |
|
2,784 |
| |
Included in accumulated other comprehensive loss |
|
(4,944 |
) | |
Settlements, net |
|
(2,784 |
) | |
Balance as of June 30, 2010 |
|
$ |
1,972 |
|
(1) Gains (losses) included in earnings are reported in cost of services rendered and products sold.
The Company uses derivative financial instruments to manage risks associated with changes in fuel prices and interest rates. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. In designating its derivative financial instruments as hedging instruments under accounting standards for derivative instruments, the Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives to forecasted transactions. The Company assesses at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the projected changes in cash flows of the associated forecasted transactions. All of the Companys designated hedging instruments are classified as cash flow hedges.
The Company has historically hedged a significant portion of its annual fuel consumption of approximately 23 million gallons. The Company has also hedged the interest payments on a portion of its variable rate debt through the use of interest rate swap agreements. All of the Companys fuel swap contracts and interest rate swap contracts are classified as cash flow hedges, and, as such, the hedging instruments are recorded on the condensed consolidated statements of financial position as either an asset or liability at fair value, with the effective portion of changes in the fair value attributable to the hedged risks recorded in accumulated other comprehensive loss. Any change in the fair value of the hedging instrument resulting from ineffectiveness, as defined by accounting standards, is recognized in current period earnings. Cash flows related to fuel and interest rate derivatives are classified as operating activities in the condensed consolidated statements of cash flows.
The effect of derivative instruments on the condensed consolidated statements of operations and accumulated other comprehensive loss on the condensed consolidated statements of financial positions for the six months ended June 30, 2011 and 2010, respectively, is presented as follows:
(In thousands)
Derivatives designated as |
|
Effective Portion of |
|
Effective Portion of Gain (Loss) |
|
Location of Gain (Loss) |
| ||
Relationships |
|
Six months ended June 30, 2011 |
|
included in Income |
| ||||
|
|
|
|
|
|
|
| ||
Fuel swap contracts |
|
$ |
1,016 |
|
$ |
5,493 |
|
Cost of services rendered and products sold |
|
Interest rate swap contracts |
|
$ |
11,554 |
|
$ |
(19,483 |
) |
Interest expense |
|
Derivatives designated as |
|
Effective Portion of |
|
Effective Portion of Gain (Loss) |
|
Location of Gain (Loss) |
| ||
Relationships |
|
Six months ended June 30, 2010 |
|
included in Income |
| ||||
|
|
|
|
|
|
|
| ||
Fuel swap contracts |
|
$ |
(4,944 |
) |
$ |
2,784 |
|
Cost of services rendered and products sold |
|
Interest rate swap contracts |
|
$ |
(4,270 |
) |
$ |
(27,216 |
) |
Interest expense |
|
Ineffective portions of derivative instruments designated in accordance with accounting standards as cash flow hedge relationships were insignificant during the six months ended June 30, 2011. As of June 30, 2011, the Company had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $52.2 million, maturing through 2012. Under the terms of its fuel swap contracts, the Company is required to post collateral in the event that the fair value of the contracts exceeds a certain agreed upon liability level and in other circumstances required by the counterparty. As of June 30, 2011, the Company had posted $1.5 million in letters of credit as collateral under its fuel hedging program, none of which were posted under the Companys Revolving Credit Facility. As of June 30, 2011, the Company had interest rate swap contracts to pay fixed rates for interest on long-term debt with an aggregate notional amount of $1.430 billion, maturing through 2013.
The effective portion of the gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments is recorded in accumulated other comprehensive loss. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement or the fuel settlement affects earnings. The amount expected to be reclassified into earnings during the next 12 months includes unrealized gains and losses related to open fuel hedges and interest rate swaps. Specifically, as the underlying forecasted transactions occur during the next 12 months, the hedging gains and losses in accumulated other comprehensive loss expected to be recognized in earnings is a loss of $15.8 million, net of tax, as of June 30, 2011. The amounts that are ultimately reclassified into earnings will be based on actual interest rates and fuel prices at the time the positions are settled and may differ materially from the amount noted above.
Note 18. Condensed Consolidating Financial Statements of The ServiceMaster Company and Subsidiaries
The following condensed consolidating financial statements of the Company and its subsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X. These condensed consolidating financial statements have been prepared from the Companys financial information on the same basis of accounting as the condensed consolidated financial statements. Goodwill and other intangible assets have been allocated to all of the subsidiaries of the Company based on managements estimates.
The payment obligations of the Company under the Permanent Notes are jointly and severally guaranteed on a senior unsecured basis by certain of the Companys domestic subsidiaries excluding certain subsidiaries subject to regulatory requirements in various states (Guarantors). Each of the Guarantors is wholly owned, directly or indirectly, by the Company, and all guarantees are full and unconditional. All other subsidiaries of the Company, either directly or indirectly owned, do not guarantee the Permanent Notes (Non-Guarantors).
THE SERVICEMASTER COMPANY AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2011 (Unaudited)
(In thousands)
|
|
The |
|
|
|
|
|
|
|
|
| |||||
|
|
ServiceMaster |
|
|
|
Non- |
|
|
|
|
| |||||
|
|
Company |
|
Guarantors |
|
Guarantors |
|
Eliminations |
|
Consolidated |
| |||||
Operating Revenue |
|
$ |
|
|
$ |
750,739 |
|
$ |
231,405 |
|
$ |
(14,704 |
) |
$ |
967,440 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of services rendered and products sold |
|
|
|
433,364 |
|
101,799 |
|
(14,529 |
) |
520,634 |
| |||||
Selling and administrative expenses |
|
2,451 |
|
160,435 |
|
96,369 |
|
(107 |
) |
259,148 |
| |||||
Amortization expense |
|
54 |
|
17,370 |
|
8,963 |
|
|
|
26,387 |
| |||||
Restructuring charges (credits) |
|
3 |
|
(65 |
) |
156 |
|
|
|
94 |
| |||||
Total operating costs and expenses |
|
2,508 |
|
611,104 |
|
207,287 |
|
(14,636 |
) |
806,263 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating (Loss) Income |
|
(2,508 |
) |
139,635 |
|
24,118 |
|
(68 |
) |
161,177 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-operating Expense (Income): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest expense (income) |
|
46,663 |
|
23,127 |
|
(1,412 |
) |
|
|
68,378 |
| |||||
Interest and net investment loss (income) |
|
496 |
|
3,182 |
|
(5,076 |
) |
|
|
(1,398 |
) | |||||
Other expense |
|
|
|
|
|
173 |
|
|
|
173 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) Income from Continuing Operations before Income Taxes |
|
(49,667 |
) |
113,326 |
|
30,433 |
|
(68 |
) |
94,024 |
| |||||
(Benefit) provision for income taxes |
|
(19,464 |
) |
31,279 |
|
21,647 |
|
|
|
33,462 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) Income from Continuing Operations |
|
(30,203 |
) |
82,047 |
|
8,786 |
|
(68 |
) |
60,562 |
| |||||
Income (loss) from discontinued operations, net of income taxes |
|
|
|
2,602 |
|
(6,512 |
) |
68 |
|
(3,842 |
) | |||||
Equity in earnings (losses) of subsidiaries (net of tax) |
|
86,923 |
|
104 |
|
|
|
(87,027 |
) |
|
| |||||
Net Income |
|
$ |
56,720 |
|
$ |
84,753 |
|
$ |
2,274 |
|
$ |
(87,027 |
) |
$ |
56,720 |
|
THE SERVICEMASTER COMPANY AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2010 (Unaudited)
(In thousands)
|
|
The |
|
|
|
|
|
|
|
|
| |||||
|
|
ServiceMaster |
|
|
|
Non- |
|
|
|
|
| |||||
|
|
Company |
|
Guarantors |
|
Guarantors |
|
Eliminations |
|
Consolidated |
| |||||
Operating Revenue |
|
$ |
|
|
$ |
735,341 |
|
$ |
223,052 |
|
$ |
(18,794 |
) |
$ |
939,599 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of services rendered and products sold |
|
|
|
426,629 |
|
105,124 |
|
(18,477 |
) |
513,276 |
| |||||
Selling and administrative expenses |
|
2,277 |
|
158,300 |
|
97,245 |
|
|
|
257,822 |
| |||||
Amortization expense |
|
56 |
|
30,650 |
|
8,966 |
|
|
|
39,672 |
| |||||
Restructuring charges |
|
1,005 |
|
2,971 |
|
104 |
|
|
|
4,080 |
| |||||
Total operating costs and expenses |
|
3,338 |
|
618,550 |
|
211,439 |
|
(18,477 |
) |
814,850 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating (Loss) Income |
|
(3,338 |
) |
116,791 |
|
11,613 |
|
(317 |
) |
124,749 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-operating Expense (Income): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest expense |
|
50,486 |
|
19,048 |
|
3,623 |
|
|
|
73,157 |
| |||||
Interest and net investment loss (income) |
|
1,518 |
|
1,545 |
|
(4,059 |
) |
|
|
(996 |
) | |||||
Other expense |
|
|
|
|
|
176 |
|
|
|
176 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) Income from Continuing Operations before Income Taxes |
|
(55,342 |
) |
96,198 |
|
11,873 |
|
(317 |
) |
52,412 |
| |||||
(Benefit) provision for income taxes |
|
(30,825 |
) |
23,436 |
|
16,413 |
|
|
|
9,024 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) Income from Continuing Operations |
|
(24,517 |
) |
72,762 |
|
(4,540 |
) |
(317 |
) |
43,388 |
| |||||
Income (loss) from discontinued operations, net of income taxes |
|
|
|
19,619 |
|
(50,880 |
) |
317 |
|
(30,944 |
) | |||||
Equity in earnings (losses) of subsidiaries (net of tax) |
|
36,961 |
|
(66,903 |
) |
|
|
29,942 |
|
|
| |||||
Net Income (Loss) |
|
$ |
12,444 |
|
$ |
25,478 |
|
$ |
(55,420 |
) |
$ |
29,942 |
|
$ |
12,444 |
|
THE SERVICEMASTER COMPANY AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2011 (Unaudited)
(In thousands)
|
|
The |
|
|
|
|
|
|
|
|
| |||||
|
|
ServiceMaster |
|
|
|
Non- |
|
|
|
|
| |||||
|
|
Company |
|
Guarantors |
|
Guarantors |
|
Eliminations |
|
Consolidated |
| |||||
Operating Revenue |
|
$ |
|
|
$ |
1,215,057 |
|
$ |
395,297 |
|
$ |
(28,243 |
) |
$ |
1,582,111 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of services rendered and products sold |
|
|
|
742,926 |
|
176,142 |
|
(27,865 |
) |
891,203 |
| |||||
Selling and administrative expenses |
|
4,684 |
|
260,195 |
|
185,787 |
|
(213 |
) |
450,453 |
| |||||
Amortization expense |
|
109 |
|
34,713 |
|
17,928 |
|
|
|
52,750 |
| |||||
Restructuring charges |
|
35 |
|
2,492 |
|
156 |
|
|
|
2,683 |
| |||||
Total operating costs and expenses |
|
4,828 |
|
1,040,326 |
|
380,013 |
|
(28,078 |
) |
1,397,089 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating (Loss) Income |
|
(4,828 |
) |
174,731 |
|
15,284 |
|
(165 |
) |
185,022 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-operating Expense (Income): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest expense |
|
92,598 |
|
42,118 |
|
2,177 |
|
|
|
136,893 |
| |||||
Interest and net investment loss (income) |
|
869 |
|
4,458 |
|
(8,918 |
) |
|
|
(3,591 |
) | |||||
Other expense |
|
|
|
|
|
348 |
|
|
|
348 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) Income from Continuing Operations before Income Taxes |
|
(98,295 |
) |
128,155 |
|
21,677 |
|
(165 |
) |
51,372 |
| |||||
(Benefit) provision for income taxes |
|
(40,197 |
) |
23,341 |
|
32,961 |
|
|
|
16,105 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) Income from Continuing Operations |
|
(58,098 |
) |
104,814 |
|
(11,284 |
) |
(165 |
) |
35,267 |
| |||||
Income (loss) from discontinued operations, net of income taxes |
|
|
|
15,761 |
|
(40,869 |
) |
165 |
|
(24,943 |
) | |||||
Equity in earnings (losses) of subsidiaries (net of tax) |
|
68,422 |
|
(53,891 |
) |
|
|
(14,531 |
) |
|
| |||||
Net Income (Loss) |
|
$ |
10,324 |
|
$ |
66,684 |
|
$ |
(52,153 |
) |
$ |
(14,531 |
) |
$ |
10,324 |
|
THE SERVICEMASTER COMPANY AND SUBSIDIARIES
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2010 (Unaudited)
(In thousands)
|
|
The |
|
|
|
|
|
|
|
|
| |||||
&n |