Table of Contents

 

 

 

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

 

36-3858106

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer Identification No.)

 

860 Ridge Lake Boulevard, Memphis, Tennessee 38120

(Address of principal executive offices) (Zip Code)

 

901-597-1400

(Registrant’s 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

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 registrant’s 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.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page
No.

Part I. Financial Information

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and June 30, 2010 (Unaudited)

 

3

 

 

 

Condensed Consolidated Statements of Operations for the six months ended June 30, 2011 and June 30, 2010 (Unaudited)

 

4

 

 

 

Condensed Consolidated Statements of Financial Position as of June 30, 2011 (Unaudited) and December 31, 2010 (Audited)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2010 (Unaudited)

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

50

 

 

 

Item 4. Controls and Procedures

 

50

 

 

 

Part II. Other Information

 

51

 

 

 

Item 1. Legal Proceedings

 

51

 

 

 

Item 6. Exhibits

 

51

 

 

 

Signature

 

52

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands)

 

 

 

Three months ended
June 30,

 

 

 

2011

 

2010

 

Operating Revenue

 

$

967,440

 

$

939,599

 

 

 

 

 

 

 

Operating Costs and Expenses:

 

 

 

 

 

Cost of services rendered and products sold

 

520,634

 

513,276

 

Selling and administrative expenses

 

259,148

 

257,822

 

Amortization expense

 

26,387

 

39,672

 

Restructuring charges

 

94

 

4,080

 

Total operating costs and expenses

 

806,263

 

814,850

 

 

 

 

 

 

 

Operating Income

 

161,177

 

124,749

 

 

 

 

 

 

 

Non-operating Expense (Income):

 

 

 

 

 

Interest expense

 

68,378

 

73,157

 

Interest and net investment income

 

(1,398

)

(996

)

Other expense

 

173

 

176

 

 

 

 

 

 

 

Income from Continuing Operations before Income Taxes

 

94,024

 

52,412

 

Provision for income taxes

 

33,462

 

9,024

 

 

 

 

 

 

 

Income from Continuing Operations

 

60,562

 

43,388

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

(3,842

)

(30,944

)

Net Income

 

$

56,720

 

$

12,444

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands)

 

 

 

Six months ended
June 30,

 

 

 

2011

 

2010

 

Operating Revenue

 

$

1,582,111

 

$

1,520,207

 

 

 

 

 

 

 

Operating Costs and Expenses:

 

 

 

 

 

Cost of services rendered and products sold

 

891,203

 

867,755

 

Selling and administrative expenses

 

450,453

 

435,942

 

Amortization expense

 

52,750

 

79,335

 

Restructuring charges

 

2,683

 

7,433

 

Total operating costs and expenses

 

1,397,089

 

1,390,465

 

 

 

 

 

 

 

Operating Income

 

185,022

 

129,742

 

 

 

 

 

 

 

Non-operating Expense (Income):

 

 

 

 

 

Interest expense

 

136,893

 

145,827

 

Interest and net investment income

 

(3,591

)

(3,498

)

Other expense

 

348

 

347

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations before Income Taxes

 

51,372

 

(12,934

)

Provision (Benefit) for income taxes

 

16,105

 

(21,867

)

 

 

 

 

 

 

Income from Continuing Operations

 

35,267

 

8,933

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

(24,943

)

(29,149

)

Net Income (Loss)

 

$

10,324

 

$

(20,216

)

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Financial Position

(In thousands, except share data)

 

 

 

As of
June 30, 2011

 

As of
December 31, 2010

 

 

 

(Unaudited)

 

(Audited)

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

324,134

 

$

252,698

 

Marketable securities

 

30,259

 

30,406

 

Receivables, less allowance of $21,795 and $16,709, respectively

 

431,105

 

352,094

 

Inventories

 

58,676

 

54,732

 

Prepaid expenses and other assets

 

86,705

 

40,864

 

Deferred customer acquisition costs

 

55,180

 

34,377

 

Deferred taxes

 

15,044

 

11,558

 

Assets of discontinued operations

 

177

 

51,004

 

Total Current Assets

 

1,001,280

 

827,733

 

Property and Equipment:

 

 

 

 

 

At cost

 

501,364

 

440,049

 

Less: accumulated depreciation

 

(205,084

)

(173,151

)

Net property and equipment

 

296,280

 

266,898

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Goodwill

 

3,136,494

 

3,125,293

 

Intangible assets, primarily trade names, service marks and trademarks, net

 

2,607,127

 

2,653,511

 

Notes receivable

 

21,958

 

22,550

 

Long-term marketable securities

 

117,070

 

110,177

 

Other assets

 

7,194

 

7,164

 

Debt issuance costs

 

45,566

 

52,366

 

Assets of discontinued operations

 

 

32,398

 

Total Assets

 

$

7,232,969

 

$

7,098,090

 

 

 

 

 

 

 

Liabilities and Shareholder’s Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

114,869

 

$

72,645

 

Accrued liabilities:

 

 

 

 

 

Payroll and related expenses

 

91,214

 

85,647

 

Self-insured claims and related expenses

 

87,680

 

81,278

 

Accrued interest payable

 

70,916

 

69,645

 

Other

 

79,890

 

83,114

 

Deferred revenue

 

536,465

 

449,647

 

Liabilities of discontinued operations

 

1,652

 

16,300

 

Current portion of long-term debt

 

58,255

 

49,412

 

Total Current Liabilities

 

1,040,941

 

907,688

 

 

 

 

 

 

 

Long-Term Debt

 

3,882,021

 

3,899,075

 

 

 

 

 

 

 

Other Long-Term Liabilities:

 

 

 

 

 

Deferred taxes

 

943,296

 

934,971

 

Liabilities of discontinued operations

 

1,895

 

4,848

 

Other long-term obligations

 

152,806

 

163,981

 

Total Other Long-Term Liabilities

 

1,097,997

 

1,103,800

 

 

 

 

 

 

 

Commitments and Contingencies (See Note 4)

 

 

 

 

 

 

 

 

 

 

 

Shareholder’s Equity:

 

 

 

 

 

Common stock $0.01 par value, authorized 1,000 shares; issued 1,000 shares

 

 

 

Additional paid-in capital

 

1,460,052

 

1,455,881

 

Retained deficit

 

(240,659

)

(250,983

)

Accumulated other comprehensive loss

 

(7,383

)

(17,371

)

Total Shareholder’s Equity

 

1,212,010

 

1,187,527

 

Total Liabilities and Shareholder’s Equity

 

$

7,232,969

 

$

7,098,090

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Six months ended
June 30,

 

 

 

2011

 

2010

 

Cash and Cash Equivalents at Beginning of Period

 

$

252,698

 

$

255,356

 

 

 

 

 

 

 

Cash Flows from Operating Activities from Continuing Operations:

 

 

 

 

 

Net Income (Loss)

 

10,324

 

(20,216

)

Adjustments to reconcile net income (loss) to net cash provided from operating activities:

 

 

 

 

 

Loss from discontinued operations

 

24,943

 

29,149

 

Depreciation expense

 

35,574

 

29,083

 

Amortization expense

 

52,750

 

79,335

 

Amortization of debt issuance costs

 

7,080

 

7,333

 

Deferred income tax provision (benefit)

 

391

 

(2,796

)

Stock-based compensation expense

 

4,171

 

4,339

 

Restructuring charges

 

2,683

 

7,433

 

Cash payments related to restructuring charges

 

(3,145

)

(7,608

)

Change in working capital, net of acquisitions:

 

 

 

 

 

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

 

Accrued liabilities

 

9,390

 

42,552

 

Other, net

 

2,462

 

5,499

 

Net Cash Provided from Operating Activities from Continuing Operations

 

143,110

 

95,512

 

 

 

 

 

 

 

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

)

 

 

 

 

 

 

Cash Flows from Financing Activities from Continuing Operations:

 

 

 

 

 

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

)

 

 

 

 

 

 

Cash Flows from Discontinued Operations:

 

 

 

 

 

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

 

 

 

 

 

 

 

Cash Increase During the Period

 

71,436

 

35,789

 

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

$

324,134

 

$

291,145

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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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. ServiceMaster’s 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 Company’s 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 Company’s 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”).

 

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Note 2. Significant Accounting Policies

 

The Company’s 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 Company’s 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 franchisee’s 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 Company’s 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

 

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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
June 30,

 

Six months ended
June 30,

 

(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
Restructuring
Charges

 

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 Company’s vehicle fleet and some equipment are leased through month-to-month operating leases, cancelable at the Company’s 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 Company’s guarantee obligations under the agreements. As of June 30, 2011, the Company’s 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.

 

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Table of Contents

 

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 Company’s 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 Company’s 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 bond’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 LandCare’s goodwill and trade name as a result of the Company’s 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.

 

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Table of Contents

 

The table below summarizes the goodwill balances by segment for continuing operations:

 

(In thousands)

 

TruGreen

 

Terminix

 

American
Home
Shield

 

ServiceMaster
Clean

 

Other
Operations &
Headquarters

 

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
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

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
June 30,

 

(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

 

 

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Table of Contents

 

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 Company’s 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 Company’s obligation are based on a fluctuating rate of interest based on the Purchaser’s 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 Company’s 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 Company’s 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 Shield’s 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.

 

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Table of Contents

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

(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
June 30, 2011

 

As of
December 31, 2010

 

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
June 30, 2011

 

As of
December 31, 2010

 

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 lender’s 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.

 

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Table of Contents

 

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 LandCare’s 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
June 30, 2011

 

As of
December 31, 2010

 

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
June 30,

 

Six months ended
June 30,

 

(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
December 31, 2010

 

Cash Payments
or Other

 

Income

 

As of
June 30, 2011

 

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

 

 

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Table of Contents

 

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 Company’s 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 Company’s headquarters operations, which provide various technology, marketing, finance, legal and other support services to the business units.

 

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Table of Contents

 

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

 

 

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Table of Contents

 

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&R’s 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 vendor’s 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 Company’s 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.

 

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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 Company’s 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 Company’s 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.

 

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Table of Contents

 

The carrying amount and estimated fair value of the Company’s financial instruments that are recorded at fair value for the periods presented are as follows:

 

 

 

 

 

As of
June 30, 2011

 

As of
December 31, 2010

 

 

 

 

 

 

 

Estimated Fair Value Measurements

 

 

 

 

 

(In thousands)

 

Balance Sheet Locations

 

Carrying
Value

 

Quoted
Prices In
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Carrying
Value

 

Estimated
Fair Value

 

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
Contract
Assets (Liabilities)

 

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
Contract
Assets (Liabilities)

 

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.

 

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Table of Contents

 

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 Company’s 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 Company’s 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
Cash Flow Hedge

 

Effective Portion of
Gain Recognized in
Accumulated Other
Comprehensive Loss

 

Effective Portion of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive Loss into Income

 

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
Cash Flow Hedge

 

Effective Portion of
Loss Recognized in
Accumulated Other
Comprehensive Loss

 

Effective Portion of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive Loss into Income

 

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 Company’s 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.

 

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Table of Contents

 

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 Company’s 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 management’s 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 Company’s 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”).

 

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Table of Contents

 

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

 

 

22



Table of Contents

 

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

 

 

23



Table of Contents

 

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

 

 

24



Table of Contents

 

THE SERVICEMASTER COMPANY AND SUBSIDIARIES

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2010 (Unaudited)

(In thousands)

 

 

 

The

 

 

 

 

 

 

 

 

 

&n