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, 2012
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 x No o
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.
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 Exchange Act). Yes o No x
The registrant is a privately held corporation and its equity shares are not publicly traded. At August 7, 2012, 1,000 shares of the registrants common stock were outstanding, all of which were owned by CDRSVM Holding, Inc.
THE SERVICEMASTER COMPANY
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands)
|
|
Three months ended |
| ||||
|
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2012 |
|
2011 |
| ||
Operating Revenue |
|
$ |
962,165 |
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$ |
967,440 |
|
|
|
|
|
|
| ||
Operating Costs and Expenses: |
|
|
|
|
| ||
Cost of services rendered and products sold |
|
532,954 |
|
520,634 |
| ||
Selling and administrative expenses |
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241,929 |
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259,148 |
| ||
Amortization expense |
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17,802 |
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26,387 |
| ||
Trade name impairment |
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67,700 |
|
|
| ||
Restructuring charges |
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5,026 |
|
94 |
| ||
Total operating costs and expenses |
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865,411 |
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806,263 |
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|
|
|
|
|
| ||
Operating Income |
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96,754 |
|
161,177 |
| ||
|
|
|
|
|
| ||
Non-operating Expense (Income): |
|
|
|
|
| ||
Interest expense |
|
59,700 |
|
68,378 |
| ||
Interest and net investment income |
|
(1,396 |
) |
(1,398 |
) | ||
Other expense |
|
177 |
|
173 |
| ||
|
|
|
|
|
| ||
Income from Continuing Operations before Income Taxes |
|
38,273 |
|
94,024 |
| ||
Provision for income taxes |
|
16,028 |
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33,462 |
| ||
Equity in losses of joint venture |
|
(111 |
) |
|
| ||
|
|
|
|
|
| ||
Income from Continuing Operations |
|
22,134 |
|
60,562 |
| ||
|
|
|
|
|
| ||
Income (loss) from discontinued operations, net of income taxes |
|
838 |
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(3,842 |
) | ||
Net Income |
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$ |
22,972 |
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$ |
56,720 |
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|
|
|
|
|
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Total Comprehensive Income |
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$ |
22,414 |
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$ |
55,510 |
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See accompanying Notes to the Condensed Consolidated Financial Statements
THE SERVICEMASTER COMPANY
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands)
|
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Six months ended |
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2012 |
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2011 |
| ||
Operating Revenue |
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$ |
1,616,854 |
|
$ |
1,582,111 |
|
|
|
|
|
|
| ||
Operating Costs and Expenses: |
|
|
|
|
| ||
Cost of services rendered and products sold |
|
919,542 |
|
891,203 |
| ||
Selling and administrative expenses |
|
433,299 |
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450,453 |
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Amortization expense |
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35,791 |
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52,750 |
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Trade name impairment |
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67,700 |
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|
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Restructuring charges |
|
9,016 |
|
2,683 |
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Total operating costs and expenses |
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1,465,348 |
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1,397,089 |
| ||
|
|
|
|
|
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Operating Income |
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151,506 |
|
185,022 |
| ||
|
|
|
|
|
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Non-operating Expense (Income): |
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|
|
|
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Interest expense |
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124,514 |
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136,893 |
| ||
Interest and net investment income |
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(4,038 |
) |
(3,591 |
) | ||
Loss on extinguishment of debt |
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39,193 |
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|
| ||
Other expense |
|
351 |
|
348 |
| ||
|
|
|
|
|
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(Loss) Income from Continuing Operations before Income Taxes |
|
(8,514 |
) |
51,372 |
| ||
(Benefit) Provision for income taxes |
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(1,653 |
) |
16,105 |
| ||
Equity in losses of joint venture |
|
(111 |
) |
|
| ||
|
|
|
|
|
| ||
(Loss) Income from Continuing Operations |
|
(6,972 |
) |
35,267 |
| ||
|
|
|
|
|
| ||
Loss from discontinued operations, net of income taxes |
|
(86 |
) |
(24,943 |
) | ||
Net (Loss) Income |
|
$ |
(7,058 |
) |
$ |
10,324 |
|
|
|
|
|
|
| ||
Total Comprehensive (Loss) Income |
|
$ |
(364 |
) |
$ |
20,312 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements
THE SERVICEMASTER COMPANY
Condensed Consolidated Statements of Financial Position (Unaudited)
(In thousands, except share data)
|
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As of |
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As of |
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|
|
|
|
|
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Assets |
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|
|
|
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Current Assets: |
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|
|
|
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Cash and cash equivalents |
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$ |
299,954 |
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$ |
328,930 |
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Marketable securities |
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35,161 |
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12,026 |
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Receivables, less allowance of $18,844 and $20,362, respectively |
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461,955 |
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374,200 |
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Inventories |
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58,888 |
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59,643 |
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Prepaid expenses and other assets |
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87,086 |
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38,295 |
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Deferred customer acquisition costs |
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51,065 |
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30,403 |
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Deferred taxes |
|
91,237 |
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90,609 |
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Assets of discontinued operations |
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|
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17 |
| ||
Total Current Assets |
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1,085,346 |
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934,123 |
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Property and Equipment: |
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|
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At cost |
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596,624 |
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541,817 |
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Less: accumulated depreciation |
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(261,449 |
) |
(235,058 |
) | ||
Net property and equipment |
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335,175 |
|
306,759 |
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|
|
|
|
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Other Assets: |
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|
|
|
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Goodwill |
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3,172,313 |
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3,161,980 |
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Intangible assets, primarily trade names, service marks and trademarks, net |
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2,443,002 |
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2,543,539 |
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Notes receivable |
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22,109 |
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23,322 |
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Long-term marketable securities |
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117,606 |
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130,456 |
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Other assets |
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6,255 |
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8,846 |
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Debt issuance costs |
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37,058 |
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37,798 |
| ||
Total Assets |
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$ |
7,218,864 |
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$ |
7,146,823 |
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|
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|
|
|
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Liabilities and Shareholders Equity |
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|
|
|
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Current Liabilities: |
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|
|
|
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Accounts payable |
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$ |
114,496 |
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$ |
81,641 |
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Accrued liabilities: |
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|
|
|
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Payroll and related expenses |
|
73,861 |
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85,346 |
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Self-insured claims and related expenses |
|
82,453 |
|
73,071 |
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Accrued interest payable |
|
54,823 |
|
67,011 |
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Other |
|
72,404 |
|
70,103 |
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Deferred revenue |
|
526,499 |
|
473,242 |
| ||
Liabilities of discontinued operations |
|
939 |
|
805 |
| ||
Current portion of long-term debt |
|
55,640 |
|
51,838 |
| ||
Total Current Liabilities |
|
981,115 |
|
903,057 |
| ||
|
|
|
|
|
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Long-Term Debt |
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3,825,951 |
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3,824,032 |
| ||
|
|
|
|
|
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Other Long-Term Liabilities: |
|
|
|
|
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Deferred taxes |
|
1,035,887 |
|
1,036,693 |
| ||
Liabilities of discontinued operations |
|
|
|
2,070 |
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Other long-term obligations, primarily self-insured claims |
|
124,898 |
|
133,052 |
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Total Other Long-Term Liabilities |
|
1,160,785 |
|
1,171,815 |
| ||
|
|
|
|
|
| ||
Commitments and Contingencies (See Note 4) |
|
|
|
|
| ||
|
|
|
|
|
| ||
Shareholders Equity: |
|
|
|
|
| ||
Common stock $0.01 par value, authorized 1,000 shares; issued 1,000 shares |
|
|
|
|
| ||
Additional paid-in capital |
|
1,467,751 |
|
1,464,293 |
| ||
Retained deficit |
|
(217,220 |
) |
(210,162 |
) | ||
Accumulated other comprehensive income (loss) |
|
482 |
|
(6,212 |
) | ||
Total Shareholders Equity |
|
1,251,013 |
|
1,247,919 |
| ||
Total Liabilities and Shareholders Equity |
|
$ |
7,218,864 |
|
$ |
7,146,823 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements
THE SERVICEMASTER COMPANY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
|
|
Six months ended |
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|
|
2012 |
|
2011 |
| ||
Cash and Cash Equivalents at Beginning of Period |
|
$ |
328,930 |
|
$ |
252,698 |
|
|
|
|
|
|
| ||
Cash Flows from Operating Activities from Continuing Operations: |
|
|
|
|
| ||
Net (Loss) Income |
|
(7,058 |
) |
10,324 |
| ||
Adjustments to reconcile net (loss) income to net cash provided from operating activities: |
|
|
|
|
| ||
Loss from discontinued operations |
|
86 |
|
24,943 |
| ||
Equity in losses of joint venture |
|
111 |
|
|
| ||
Depreciation expense |
|
37,756 |
|
35,574 |
| ||
Amortization expense |
|
35,791 |
|
52,750 |
| ||
Amortization of debt issuance costs |
|
6,528 |
|
7,080 |
| ||
Loss on extinguishment of debt |
|
39,193 |
|
|
| ||
Call premium paid on retirement of debt |
|
(32,250 |
) |
|
| ||
Premium received on issuance of debt |
|
3,000 |
|
|
| ||
Deferred income tax (benefit) provision |
|
(3,787 |
) |
391 |
| ||
Stock-based compensation expense |
|
3,458 |
|
4,171 |
| ||
Trade name impairment |
|
67,700 |
|
|
| ||
Restructuring charges |
|
9,016 |
|
2,683 |
| ||
Cash payments related to restructuring charges |
|
(7,326 |
) |
(3,145 |
) | ||
Change in working capital, net of acquisitions: |
|
|
|
|
| ||
Current income taxes |
|
(4,612 |
) |
11,592 |
| ||
Receivables |
|
(79,724 |
) |
(76,105 |
) | ||
Inventories and other current assets |
|
(61,944 |
) |
(65,376 |
) | ||
Accounts payable |
|
38,204 |
|
40,146 |
| ||
Deferred revenue |
|
52,344 |
|
86,230 |
| ||
Accrued liabilities |
|
(18,470 |
) |
9,390 |
| ||
Other, net |
|
16,576 |
|
2,462 |
| ||
Net Cash Provided from Operating Activities from Continuing Operations |
|
94,592 |
|
143,110 |
| ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities from Continuing Operations: |
|
|
|
|
| ||
Property additions |
|
(48,362 |
) |
(57,834 |
) | ||
Sale of equipment and other assets |
|
434 |
|
951 |
| ||
Acquisition of The ServiceMaster Company |
|
|
|
(35 |
) | ||
Other business acquisitions, net of cash acquired |
|
(11,495 |
) |
(11,886 |
) | ||
Purchase of other intangibles |
|
|
|
(1,900 |
) | ||
Notes receivable, financial investments and securities, net |
|
(14,613 |
) |
(4,341 |
) | ||
Net Cash Used for Investing Activities from Continuing Operations |
|
(74,036 |
) |
(75,045 |
) | ||
|
|
|
|
|
| ||
Cash Flows from Financing Activities from Continuing Operations: |
|
|
|
|
| ||
Borrowings of debt |
|
600,000 |
|
|
| ||
Payments of debt |
|
(633,045 |
) |
(20,437 |
) | ||
Debt issuance costs paid |
|
(12,700 |
) |
(280 |
) | ||
Net Cash Used for Financing Activities from Continuing Operations |
|
(45,745 |
) |
(20,717 |
) | ||
|
|
|
|
|
| ||
Cash Flows from Discontinued Operations: |
|
|
|
|
| ||
Cash used for operating activities |
|
(238 |
) |
(1,818 |
) | ||
Cash (used for) provided from investing activities: |
|
|
|
|
| ||
Proceeds from sale of businesses |
|
(3,549 |
) |
27,523 |
| ||
Other investing activities |
|
|
|
(1,617 |
) | ||
Net Cash (Used for) Provided from Discontinued Operations |
|
(3,787 |
) |
24,088 |
| ||
|
|
|
|
|
| ||
Cash (Decrease) Increase During the Period |
|
(28,976 |
) |
71,436 |
| ||
|
|
|
|
|
| ||
Cash and Cash Equivalents at End of Period |
|
$ |
299,954 |
|
$ |
324,134 |
|
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 global company serving both residential and commercial customers. ServiceMasters services include termite and pest control, lawn care, home warranties and preventative maintenance contracts, cleaning and disaster restoration, house cleaning, furniture repair and home inspection. ServiceMaster provides these services through a network of company-owned, franchised and licensed locations operating primarily under the following leading brands: Terminix, TruGreen, American Home Shield, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec.
The condensed consolidated financial statements include the accounts of ServiceMaster and its majority-owned subsidiary partnerships, limited liability companies and corporations. All consolidated ServiceMaster subsidiaries are wholly owned. ServiceMaster is organized into five principal reportable segments: Terminix, TruGreen, 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, 2011, as filed with the SEC (the 2011 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.
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, LLC (CD&R), Citigroup Private Equity LP (Citigroup), BAS Capital Funding Corporation (BAS) and 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 its proprietary interests in such investment funds to Lexington Partners Advisors LP. CD&R, StepStone, as an assignee from Citigroup, JPMorgan and BAS are referred to as the Equity Sponsors herein.
Equity contributions totaling $1.431 billion, together with (i) borrowings under a then new $1.150 billion senior unsecured interim loan facility (the Interim Loan Facility), (ii) borrowings under a then new $2.650 billion 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 then new $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 2015 Notes).
Note 2. Significant Accounting Policies
The Companys significant accounting policies are included in the 2011 Form 10-K. The following selected accounting policies should be read in conjunction with the 2011 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 warranties, 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 warranties) 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 warranties and adjusts the estimates when appropriate.
The Company has franchise agreements in its Terminix, TruGreen, 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 initial franchise fees are pre-established, fixed amounts 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 $16.8 million and $33.6 million for the three and six months ended June 30, 2012, respectively, and $17.7 million and $34.1 million for the three and six months ended June 30, 2011, respectively. Consolidated operating income from continuing operations was $96.8 million and $151.5 million for the three and six months ended June 30, 2012, respectively, and $161.2 million and $185.0 million for the three and six months ended June 30, 2011, 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 $526.5 million and $473.2 million of deferred revenue as of June 30, 2012 and December 31, 2011, respectively. Deferred revenue consists primarily of payments received for annual contracts relating to home warranties, 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. Deferred customer acquisition costs amounted to $51.1 million and $30.4 million as of June 30, 2012 and December 31, 2011, respectively.
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 Companys total comprehensive income (loss) consists primarily of net income (loss), unrealized gain (loss) on marketable securities, unrealized gain (loss) on derivative instruments and the effect of foreign currency translations.
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 2011 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 warranties 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 $5.0 million ($3.1 million, net of tax) and $0.1 million ($0.1 million, net of tax) for the three months ended June 30, 2012 and 2011, respectively and $9.0 million ($5.5 million, net of tax) and $2.7 million ($1.6 million, net of tax) for the six months ended June 30, 2012 and 2011, respectively. Restructuring charges (credits) were comprised of the following:
|
|
Three months ended |
|
Six months ended |
| ||||||||
(In thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Terminix branch optimization (1) |
|
$ |
697 |
|
$ |
(73 |
) |
$ |
2,817 |
|
$ |
2,467 |
|
TruGreen reorganization and restructuring (2) |
|
149 |
|
|
|
820 |
|
|
| ||||
ServiceMaster Clean reorganization (3) |
|
467 |
|
|
|
467 |
|
|
| ||||
Centers of excellence initiative(4) |
|
3,713 |
|
|
|
4,912 |
|
|
| ||||
Other(5) |
|
|
|
167 |
|
|
|
216 |
| ||||
Total restructuring charges |
|
$ |
5,026 |
|
$ |
94 |
|
$ |
9,016 |
|
$ |
2,683 |
|
(1) Represents restructuring charges (credits) related to a branch optimization project. For the three and six months ended June 30, 2012, these charges included lease termination costs. For the three months ended June 30, 2011, these credits included adjustments to lease termination reserves. For the six months ended June 30, 2011, these charges included lease termination costs of $2.4 million and severance costs of $0.1 million.
(2) Represents restructuring charges related to a reorganization of field leadership and a restructuring of branch operations. For the three months ended June 30, 2012, these charges included severance costs. For the six months ended June 30, 2012, these charges included severance and lease termination costs of $0.3 million and $0.5 million, respectively.
(3) Represents restructuring charges related to a reorganization of leadership. For the three and six months ended June 30, 2012, these charges included severance costs.
(4) Represents restructuring charges related to an initiative to enhance capabilities and reduce costs in the Companys headquarters functions that provide company-wide administrative services for our operations that we refer to as centers of excellence. For the three months ended June 30, 2012, these charges included professional fees of $0.7 million and severance and other costs of $3.0 million. For the six months ended June 30, 2012, these charges included professional fees of $1.4 million and severance and other costs of $3.5 million.
(5) For the three and six months ended June 30, 2011, these charges included reserve adjustments associated with previous restructuring initiatives.
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, 2011 |
|
$ |
3,890 |
|
Costs incurred |
|
9,016 |
| |
Costs paid or otherwise settled |
|
(7,500 |
) | |
Balance as of June 30, 2012 |
|
$ |
5,406 |
|
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, 2012, the
Companys residual value guarantees related to the leased assets totaled $25.9 million for which the Company has recorded a liability for the estimated fair value of these guarantees of $0.5 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. 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.
A reconciliation of beginning and ending accrued self-insured claims, which are included in Accrued liabilities Self-insured claims and related expenses and Other long-term obligations, primarily self-insured claims on the condensed consolidated statements of financial position, is presented as follows:
(In thousands) |
|
Accrued |
| |
Balance as of December 31, 2011 |
|
$ |
108,082 |
|
Provision for self-insured claims |
|
19,515 |
| |
Cash payments |
|
(18,921 |
) | |
Balance as of June 30, 2012 |
|
$ |
108,676 |
|
(In thousands) |
|
Accrued |
| |
Balance as of December 31, 2010 |
|
$ |
121,692 |
|
Provision for self-insured claims(1) |
|
15,229 |
| |
Cash payments |
|
(16,509 |
) | |
Balance as of June 30, 2011 |
|
$ |
120,412 |
|
(1) For the six months ending June 30, 2011, provisions for uninsured claims of $2.0 million were included in loss from discontinued operations, net of income taxes, in the condensed consolidated statements of operations and comprehensive income.
Accruals for home warranty 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 on behalf of 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 was approximately $1.5 million as of June 30, 2012. The TruGreen LandCare purchase agreement requires that the buyer replace the bonds at the bonds expiration date. 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 fair value of the Companys obligations related to these guarantees is not significant and no liability has been recorded.
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 insured and uninsured matters that are brought on an individual, collective, representative and class action basis, or other proceedings involving regulatory, employment, general and commercial liability, automobile liability, wage and hour, environmental and other matters. The Company has entered into settlement agreements in certain cases, including with respect to putative collective and class actions, which are subject to court or other approvals. 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. The results for the three and six months ended June 30, 2012 include a non-cash impairment charge of $67.7 million to reduce the carrying value of the TruGreen trade name as a result of the Companys interim impairment testing of indefinite-lived intangible assets. There were no similar trade name impairment charges included in continuing operations for the three and six months ended June 30, 2011.
Based on the revenue results at TruGreen in the first six months of 2012 and a lower revenue outlook for the remainder of 2012 and future years, the Company concluded that there was an impairment indicator requiring the performance of an interim indefinite-lived intangible asset impairment test for the TruGreen trade name as of June 30, 2012.
The impairment test for intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are determined using a discounted cash flow (DCF) valuation analysis. The DCF methodology used to value trade names is known as the relief from royalty method and entails identifying the hypothetical cash flows generated by an assumed royalty rate that a third party would pay to license the trade names and discounting them back to the valuation date. Significant judgments inherent in this analysis include the selection of appropriate discount rates and hypothetical royalty rates, estimating the amount and timing of future revenue attributable to the trade names over a defined projection period and identification of appropriate long-term revenue growth rate assumptions after the defined projection period. The discount rates used in the DCF analyses are intended to reflect the risk inherent in the projected future cash flows generated by the respective intangible assets.
As a result of the aforementioned impairment indicators and in accordance with applicable accounting standards, the Company performed an impairment analysis on its indefinite-lived intangible asset related to TruGreens trade name to determine the fair value as of June 30, 2012. Based on the lower projected revenue for TruGreen as discussed above, the Company determined the fair value attributable to the TruGreen trade name was less than its carrying value by $67.7 million, which was recorded as a trade name impairment in the second quarter of 2012.
The impairment charge in the second quarter of 2012 was primarily attributable to a decrease in projected future growth in revenue at TruGreen over a defined projection period as of June 30, 2012 compared to the projections used in the last annual impairment assessment performed on October 1, 2011. Although the Company projected future growth in revenue at TruGreen as part of its June 30, 2012 impairment analysis, such growth was lower than the revenue growth projected at the time the trade name was tested for impairment in 2011. The long-term revenue growth rates used in the impairment tests at June 30, 2012 and October 1, 2011 were the same and in line with historical U.S. gross domestic product growth rates. The discount rate used in the June 30, 2012 impairment test was 50 basis points (bps) lower than the discount rate used in the October 1, 2011 impairment test for the TruGreen trade name. The decrease in the discount rate is primarily attributable to changes in market conditions which indicated an improved outlook for the U.S. financial markets since the last analysis. Had the Company used a discount rate in assessing the impairment of its TruGreen trade name that was 100 bps higher (holding all other assumptions unchanged), the Company would have recorded an additional impairment charge of approximately $93.7 million in the second quarter of 2012.
As a result of the trade name impairment recorded in the second quarter of 2012, the carrying value of the TruGreen trade name was adjusted to its estimated fair value as of June 30, 2012. Any further decline in the estimated fair value of this trade name will result in additional trade name impairment. It is possible that such impairment, if required, could be material and may need to be recorded prior to the fourth quarter of 2012 (i.e., during the third quarter) if the Companys results of operations or other factors require such assets to be tested for impairment at an interim date.
Although the TruGreen reporting unit has lowered its projected revenue as compared with previous forecasts, the Company does not believe such changes would more likely than not reduce the fair value of the TruGreen reporting unit below its carrying amount. As such, the Company did not perform an interim goodwill impairment test for the TruGreen reporting unit.
The Company determined that there were no impairment indicators for the goodwill or other indefinite-lived intangible assets of any reporting units other than TruGreen as of June 30, 2012.
During the six months ended June 30, 2012, the increase in goodwill and other intangible assets related primarily to tuck-in acquisitions completed throughout the period by Terminix, TruGreen and Merry Maids.
The table below summarizes the goodwill balances by segment for continuing operations:
(In thousands) |
|
Terminix |
|
TruGreen |
|
American |
|
ServiceMaster |
|
Other |
|
Total |
| ||||||
Balance as of December 31, 2011 |
|
$ |
1,424,518 |
|
$ |
1,201,922 |
|
$ |
347,573 |
|
$ |
135,677 |
|
$ |
52,290 |
|
$ |
3,161,980 |
|
Acquisitions |
|
8,728 |
|
2,674 |
|
|
|
|
|
130 |
|
11,532 |
| ||||||
Other(1) |
|
(883 |
) |
(202 |
) |
(47 |
) |
(60 |
) |
(7 |
) |
(1,199 |
) | ||||||
Balance as of June 30, 2012 |
|
$ |
1,432,363 |
|
$ |
1,204,394 |
|
$ |
347,526 |
|
$ |
135,617 |
|
$ |
52,413 |
|
$ |
3,172,313 |
|
(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, 2012.
The table below summarizes the other intangible asset balances for continuing operations:
|
|
As of June 30, 2012 |
|
As of December 31, 2011 |
| ||||||||||||||
(In thousands) |
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
| ||||||
Trade names(1) |
|
$ |
2,265,800 |
|
$ |
|
|
$ |
2,265,800 |
|
$ |
2,333,500 |
|
$ |
|
|
$ |
2,333,500 |
|
Customer relationships |
|
688,781 |
|
(568,056 |
) |
120,725 |
|
683,324 |
|
(539,638 |
) |
143,686 |
| ||||||
Franchise agreements |
|
88,000 |
|
(45,528 |
) |
42,472 |
|
88,000 |
|
(42,406 |
) |
45,594 |
| ||||||
Other |
|
55,962 |
|
(41,957 |
) |
14,005 |
|
58,471 |
|
(37,712 |
) |
20,759 |
| ||||||
Total |
|
$ |
3,098,543 |
|
$ |
(655,541 |
) |
$ |
2,443,002 |
|
$ |
3,163,295 |
|
$ |
(619,756 |
) |
$ |
2,543,539 |
|
(1) Not subject to amortization. Includes a non-cash impairment charge of $67.7 million recorded in the six months ended June 30, 2012 to reduce the carrying value of the TruGreen trade name as a result of the Companys interim impairment testing of indefinite-lived intangible assets.
Note 6. Stock-Based Compensation
For the three months ended June 30, 2012 and 2011, the Company recognized stock-based compensation expense of $1.8 million ($1.1 million, net of tax) and $1.8 million ($1.1 million, net of tax), respectively. For the six months ended June 30, 2012 and 2011, the Company recognized stock-based compensation expense of $3.5 million ($2.1 million, net of tax) and $4.2 million ($2.6 million, net of tax), respectively. As of June 30, 2012, there was $14.1 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 2.6 years.
Note 7. Supplemental Cash Flow Information
Supplemental information relating to the condensed consolidated statements of cash flows for the six months ended June 30, 2012 and 2011 is presented in the following table:
|
|
Six months ended |
| ||||
(In thousands) |
|
2012 |
|
2011 |
| ||
Cash paid for or (received from): |
|
|
|
|
| ||
Interest expense |
|
$ |
125,607 |
|
$ |
126,620 |
|
Interest and dividend income |
|
(2,575 |
) |
(2,462 |
) | ||
Income taxes, net of refunds |
|
6,766 |
|
8,366 |
| ||
The Company acquired $27.7 million and $5.3 million of property and equipment through capital leases and other non-cash financing transactions in the six months ended June 30, 2012 and 2011, respectively, which has been excluded from the condensed consolidated statements of cash flows as non-cash investing and financing activities.
Note 8. Receivable Sales
The Company has an accounts receivable securitization arrangement under which Terminix and TruGreen 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 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, 2012, the amount of eligible receivables was $50.0 million.
During the six months ended June 30, 2012, there were no transfers of interests in the pool of trade accounts receivables to Purchasers under this arrangement. As of June 30, 2012 and December 31, 2011, the Company had $10.0 million outstanding under the arrangement and, as of June 30, 2012, had $40.0 million of remaining capacity available under the accounts receivable securitization arrangement.
The accounts receivable securitization arrangement is a 364-day facility that was scheduled to mature on July 17, 2012. In July 2012, the maturity date of the accounts receivable securitization arrangement was extended to September 17, 2012. The Company is currently in negotiations with the Purchasers to extend the arrangement until September 2013. The Company has recorded its obligation to repay the Purchasers for their interest in the pool of receivables within the current portion of long-term debt on the condensed consolidated statements 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 (0.24 percent as of June 30, 2012). In addition, the Company pays usage fees on its obligations and commitment fees on undrawn amounts committed by the Purchasers. Unless the arrangement is renegotiated or extended prior to its expiration, all obligations under the accounts receivable securitization arrangement must be repaid by September 17, 2012.
Note 9. 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, 2012 and December 31, 2011, the Companys investments consisted primarily of domestic publicly traded debt and certificates of deposit (Debt securities) and common equity securities (Equity securities). The amortized cost, fair value and gross unrealized gains and losses of the Companys short- and long-term investments in Debt and Equity securities as of June 30, 2012 and December 31, 2011 were as follows:
(In thousands) |
|
Amortized Cost |
|
Gross Unrealized |
|
Gross Unrealized |
|
Fair Value |
| ||||
Available-for-sale and trading securities, June 30, 2012: |
|
|
|
|
|
|
|
|
| ||||
Debt securities |
|
$ |
104,790 |
|
$ |
6,187 |
|
$ |
(62 |
) |
$ |
110,915 |
|
Equity securities |
|
39,571 |
|
4,061 |
|
(1,780 |
) |
41,852 |
| ||||
Total securities |
|
$ |
144,361 |
|
$ |
10,248 |
|
$ |
(1,842 |
) |
$ |
152,767 |
|
(In thousands) |
|
Amortized Cost |
|
Gross Unrealized |
|
Gross Unrealized |
|
Fair Value |
| ||||
Available-for-sale and trading securities, December, 31, 2011: |
|
|
|
|
|
|
|
|
| ||||
Debt securities |
|
$ |
95,135 |
|
$ |
5,795 |
|
$ |
(68 |
) |
$ |
100,862 |
|
Equity securities |
|
40,558 |
|
2,953 |
|
(1,891 |
) |
41,620 |
| ||||
Total securities |
|
$ |
135,693 |
|
$ |
8,748 |
|
$ |
(1,959 |
) |
$ |
142,482 |
|
The portion of unrealized losses which had been in a loss position for more than one year was $1.7 million as of June 30, 2012 and December 31, 2011. The aggregate fair value of the investments with unrealized losses was $17.2 million and $13.6 million as of June 30, 2012 and December 31, 2011, respectively.
As of June 30, 2012 and December 31, 2011, $258.4 million and $226.2 million, respectively, of the cash and short- and long-term marketable securities balance were associated with regulatory requirements at American Home Shield and for other purposes. Such amounts are identified as being potentially unavailable to be paid to the Company by its subsidiaries. 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 proceeds, 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, 2012 and 2011.
|
|
Three months ended |
|
Six months ended |
| ||||||||
(In thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Proceeds from sale of securities |
|
$ |
5,251 |
|
$ |
1,580 |
|
$ |
7,730 |
|
$ |
5,373 |
|
Gross realized gains, pre-tax |
|
493 |
|
104 |
|
879 |
|
611 |
| ||||
Gross realized gains, net of tax |
|
304 |
|
64 |
|
542 |
|
374 |
| ||||
Gross realized losses, pre-tax |
|
(20 |
) |
(21 |
) |
(20 |
) |
(36 |
) | ||||
Gross realized losses, net of tax |
|
(12 |
) |
(13 |
) |
(12 |
) |
(22 |
) | ||||
Note 10. Long-Term Debt
Long-term debt as of June 30, 2012 and December 31, 2011 is summarized in the following table:
(In thousands) |
|
As of |
|
As of |
| ||
Senior secured term loan facility maturing in 2014 |
|
$ |
2,508,292 |
|
$ |
2,530,750 |
|
8.00% senior notes maturing in 2020(1) |
|
602,895 |
|
|
| ||
10.75% senior notes maturing in 2015 |
|
396,000 |
|
996,000 |
| ||
Revolving credit facility maturing in 2017 |
|
|
|
|
| ||
7.10% notes maturing in 2018(2) |
|
68,438 |
|
67,474 |
| ||
7.45% notes maturing in 2027(2) |
|
154,559 |
|
153,225 |
| ||
7.25% notes maturing in 2038(2) |
|
61,846 |
|
61,441 |
| ||
Other |
|
89,561 |
|
66,980 |
| ||
Less current portion |
|
(55,640 |
) |
(51,838 |
) | ||
Total long-term debt |
|
$ |
3,825,951 |
|
$ |
3,824,032 |
|
(1) Includes unamortized portion of $3.0 million premium received on the sale of $100.0 million aggregate principal amount of such notes.
(2) The increase in the balance from December 31, 2011 to June 30, 2012 reflects the amortization of fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown above.
Interest rate swap agreements in effect as of June 30, 2012 are as follows:
Trade Date |
|
Effective |
|
Expiration |
|
Notional |
|
Fixed |
|
Floating |
September 15, 2008 |
|
October 1, 2008 |
|
October 1, 2012 |
|
200,000 |
|
3.53 |
% |
One month LIBOR |
June 10, 2010 |
|
March, 3, 2011 |
|
March 1 ,2013 |
|
100,000 |
|
1.77 |
% |
One month LIBOR |
June 10, 2010 |
|
September 1, 2011 |
|
September 1, 2013 |
|
50,000 |
|
2.25 |
% |
One month LIBOR |
June 15, 2010 |
|
March 3, 2011 |
|
March 1, 2013 |
|
150,000 |
|
1.66 |
% |
One month LIBOR |
June 15, 2010 |
|
September 1, 2011 |
|
September 1, 2013 |
|
150,000 |
|
2.21 |
% |
One month LIBOR |
August 18, 2011 |
|
September 1, 2011 |
|
August 1, 2013 |
|
530,000 |
|
1.51 |
% |
One month LIBOR |
(1) Before the application of the incremental borrowing margin (2.50 percent as of June 30, 2012).
On January 30, 2012, ServiceMaster entered into the Extension Amendment and the Increase Supplement to its Revolving Credit Facility, which provides for senior secured revolving loans and stand-by and other letters of credit. After effectiveness on February 13, 2012 of the Extension Amendment and the Increase Supplement, we have available borrowing capacity under the Revolving Credit Facility of $447.7 million through July 24, 2013, $324.2 million from July 25, 2013 through July 24, 2014 and $265.2 million from July 25, 2014 through January 31, 2017. The Company will continue to have access to letters of credit up to $75.0 million through January 31, 2017.
In February 2012, the Company sold in transactions exempt from registration under the Securities Act of 1933, as amended, $600 million aggregate principal amount of 8 percent senior notes due 2020 (the 2020 Notes). The 2020 Notes will mature on February 15, 2020 and bear interest at a rate of 8 percent per annum. The 2020 Notes are guaranteed on a senior unsecured basis by certain of the Companys domestic subsidiaries excluding certain subsidiaries subject to regulatory requirements in various states (the Guarantors). The Company used the proceeds from the sale of the 2020 Notes, together with available cash, to redeem $600 million aggregate principal amount of its outstanding 2015 Notes during the first quarter of 2012.
The 2015 Notes and 2020 Notes are senior unsecured obligations of ours and rank equally in right of payment with all of our other existing and future senior unsecured indebtedness. The 2015 Notes and 2020 Notes are jointly and severally guaranteed on a senior unsecured basis by the Guarantors. The subsidiary guarantees are general unsecured senior obligations of the Guarantors and rank equally in right of payment with all of the existing and future senior unsecured indebtedness of all other subsidiaries of the Company, either directly or indirectly owned (the Non-Guarantors). The 2015 Notes and 2020 Notes are effectively junior to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
Note 11. Discontinued Operations
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 2011 Form 10-K.
The operating results of discontinued operations were as follows:
|
|
Three months ended |
|
Six months ended |
| ||||||||
(In thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Operating Results: |
|
|
|
|
|
|
|
|
| ||||
Operating revenue |
|
$ |
|
|
$ |
19,464 |
|
$ |
|
|
$ |
75,765 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating loss(1) |
|
(277 |
) |
(5,115 |
) |
(608 |
) |
(39,375 |
) | ||||
Benefit for income taxes(1) |
|
(106 |
) |
(1,986 |
) |
(235 |
) |
(15,145 |
) | ||||
Operating loss, net of income taxes(1) |
|
(171 |
) |
(3,129 |
) |
(373 |
) |
(24,230 |
) | ||||
Gain (loss) on sale, net of income taxes |
|
1,009 |
|
(713 |
) |
287 |
|
(713 |
) | ||||
Income (loss) from discontinued operations, net of income taxes(1) |
|
$ |
838 |
|
$ |
(3,842 |
) |
$ |
(86 |
) |
$ |
(24,943 |
) |
(1) During the first quarter of 2011, a pre-tax non-cash impairment charge of $34.2 million ($21.0 million, net of tax) was recorded to reduce the carrying value of TruGreen LandCares assets to their estimated fair value less cost to sell in accordance with applicable accounting standards.
The table below summarizes the activity for the six months ended June 30, 2012 for the remaining liabilities from operations that were discontinued in years prior to 2012. The remaining obligations primarily relate to self-insurance claims and related costs. 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 |
|
$ |
228 |
|
$ |
(91 |
) |
$ |
(37 |
) |
$ |
100 |
|
Certified Systems, Inc. and other |
|
2,100 |
|
(2,041 |
) |
|
|
59 |
| ||||
InStar |
|
279 |
|
32 |
|
58 |
|
369 |
| ||||
TruGreen LandCare |
|
268 |
|
(209 |
) |
352 |
|
411 |
| ||||
Total liabilities of discontinued operations |
|
$ |
2,875 |
|
$ |
(2,309 |
) |
$ |
373 |
|
$ |
939 |
|
Note 12. Income Taxes
As of June 30, 2012 and December 31, 2011, the Company had $9.4 million and $9.0 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 $1.7 million during the next 12 months.
As required by Accounting Standard Codification (ASC) 740 Income Taxes, the Company computes 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. The Companys estimated tax rate is adjusted each quarter in accordance with ASC 740.
The effective tax rate on income from continuing operations was 41.9 percent for the three months ended June 30, 2012 compared to 35.6 percent for the three months ended June 30, 2011. The effective tax rate for the three months ended June 30, 2011 was favorably impacted by the recognition of previously unrecognized tax benefits.
The effective tax rate on income from continuing operations was 19.4 percent for the six months ended June 30, 2012 compared to 31.3 percent for the six months ended June 30, 2011. The effective tax rate for the six months ended June 30, 2012 was affected by the impairment of the TruGreen trade name and the resulting impact on the allocation of the full year effective tax rate on income from continuing operations to interim periods.
Note 13. Business Segment Reporting
The business of the Company is conducted through five reportable segments: Terminix, TruGreen, 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 Terminix segment provides termite and pest control services to residential and commercial customers and distributes pest control products. The TruGreen segment provides residential and commercial lawn, tree and shrub care services. The American Home Shield segment provides home warranties and preventative maintenance contracts for household systems and appliances. The ServiceMaster Clean segment provides residential and commercial disaster restoration, janitorial and cleaning services through franchises 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 provide home 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) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Operating Revenue: |
|
|
|
|
|
|
|
|
| ||||
Terminix |
|
$ |
347,245 |
|
$ |
334,258 |
|
$ |
658,664 |
|
$ |
618,414 |
|
TruGreen |
|
351,372 |
|
383,022 |
|
482,483 |
|
519,283 |
| ||||
American Home Shield |
|
208,394 |
|
195,326 |
|
367,439 |
|
336,258 |
| ||||
ServiceMaster Clean |
|
32,409 |
|
32,870 |
|
64,354 |
|
65,702 |
| ||||
Other Operations and Headquarters |
|
22,745 |
|
21,964 |
|
43,914 |
|
42,454 |
| ||||
Total Operating Revenue |
|
$ |
962,165 |
|
$ |
967,440 |
|
$ |
1,616,854 |
|
$ |
1,582,111 |
|
Operating Income (Loss):(1),(2) |
|
|
|
|
|
|
|
|
| ||||
Terminix |
|
$ |
68,438 |
|
$ |
72,108 |
|
$ |
137,508 |
|
$ |
123,489 |
|
TruGreen |
|
8,791 |
|
68,588 |
|
(5,531 |
) |
48,828 |
| ||||
American Home Shield |
|
40,556 |
|
31,356 |
|
68,384 |
|
44,513 |
| ||||
ServiceMaster Clean |
|
10,537 |
|
12,529 |
|
22,813 |
|
25,262 |
| ||||
Other Operations and Headquarters |
|
(31,568 |
) |
(23,404 |
) |
(71,668 |
) |
(57,070 |
) | ||||
Total Operating Income |
|
$ |
96,754 |
|
$ |
161,177 |
|
$ |
151,506 |
|
$ |
185,022 |
|
(1) Presented below is a reconciliation of operating income to income (loss) from continuing operations before income taxes:
|
|
Three months ended |
|
Six months ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
(In thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Total Operating Income |
|
$ |
96,754 |
|
$ |
161,177 |
|
$ |
151,506 |
|
$ |
185,022 |
|
Non-operating Expense (Income): |
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
59,700 |
|
68,378 |
|
124,514 |
|
136,893 |
| ||||
Interest and net investment income |
|
(1,396 |
) |
(1,398 |
) |
(4,038 |
) |
(3,591 |
) | ||||
Loss on extinguishment of debt |
|
|
|
|
|
39,193 |
|
|
| ||||
Other expense |
|
177 |
|
173 |
|
351 |
|
348 |
| ||||
Income (Loss) from Continuing Operations before Income Taxes |
|
$ |
38,273 |
|
$ |
94,024 |
|
$ |
(8,514 |
) |
$ |
51,372 |
|
(2) Includes restructuring charges primarily related to a branch optimization project at Terminix, a reorganization of field leadership and a restructuring of branch operations at TruGreen, a reorganization of field leadership at ServiceMaster Clean, an initiative to enhance capabilities and reduce costs in our centers of excellence at Other Operations and Headquarters and other restructuring costs. Presented below is a summary of restructuring charges (credits) by segment:
|
|
Three months ended |
|
Six months ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
(In thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Restructuring charges: |
|
|
|
|
|
|
|
|
| ||||
Terminix |
|
$ |
697 |
|
$ |
(73 |
) |
$ |
2,817 |
|
$ |
2,467 |
|
TruGreen |
|
149 |
|
8 |
|
820 |
|
5 |
| ||||
American Home Shield |
|
|
|
|
|
|
|
|
| ||||
ServiceMaster Clean |
|
467 |
|
|
|
467 |
|
20 |
| ||||
Other Operations and Headquarters |
|
3,713 |
|
159 |
|
4,912 |
|
191 |
| ||||
Total restructuring charges |
|
$ |
5,026 |
|
$ |
94 |
|
$ |
9,016 |
|
$ |
2,683 |
|
Note 14. 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 in the three and six months ended June 30, 2012 and 2011, respectively, which is included in Selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income. 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 or was 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 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. As of December 22, 2011, Holdings purchased from BAS 7.5 million shares of capital stock of Holdings, and, effective January 1, 2012, the annual management fee payable to BAS was reduced to $0.25 million. The Company pays annual management fees of $0.5 million, $0.25 million and $0.25 million to StepStone, BAS and JPMorgan, respectively. The Company recorded aggregate consulting fees related to these agreements of $0.25 million and $0.3 million in the three months ended June 30, 2012 and 2011, respectively, and $0.5 million and $0.6 million in the six months ended June 30, 2012 and 2011, respectively, which is included in Selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income.
In 2008 and 2009, Holdings completed open market purchases totaling $65.0 million in face value of the 2015 Notes for a cost of $21.4 million. On December 21, 2011, the Company purchased from Holdings and retired $65.0 million in face value of the 2015 Notes for an aggregate purchase price of $68.0 million, which included payment of accrued interest of $3.0 million. The Company recorded interest expense of $3.5 million for the six months ended June 30, 2011 related to the 2015 Notes held by Holdings. The Company paid interest to Holdings of $3.5 million for the six months ended June 30, 2011. As a result of the purchase of the 2015 Notes from Holdings, the Company did not have interest payable to Holdings as of June 30, 2012 and December 31, 2011.
Note 15. Newly Issued Accounting Statements and Positions
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). This ASU is the result of joint efforts by the FASB and the International Accounting Standards Board 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 (calendar year 2012). The Company adopted the required provisions of this standard during the first quarter of 2012. 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. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income, to effectively defer the changes from ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements. 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 adopted the required provisions of this standard during the first quarter of 2012. The adoption of this standard changed the presentation of the Companys condensed consolidated financial statements.
Note 16. 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 and comprehensive income if the decline in value is other than temporary. The carrying amount of total debt was $3.882 billion and $3.876 billion and the estimated fair value was $3.917 billion and $3.788 billion as of June 30, 2012 and December 31, 2011, respectively. The fair value of the Companys debt is estimated based on available market prices for the same or similar instruments which are considered significant other observable inputs (Level 2) within the fair value hierarchy. 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, 2012 and December 31, 2011.
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 Company regularly reviews the forward price curves obtained from third party market data providers and related changes in fair value for reasonableness utilizing information available to the Company from other published sources.
The Company has not changed its valuation techniques for measuring the fair value of any financial assets and liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period. There were no significant transfers between levels during the six months ended June 30, 2012 or 2011.
The carrying amount and estimated fair value of the Companys financial instruments that are recorded at fair value on a recurring basis 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 |
|
$ |
11,114 |
|
$ |
11,114 |
|
$ |
|
|
$ |
|
|
$ |
10,834 |
|
$ |
10,834 |
|
Investments in marketable securities |
|
Marketable securities and Long-term marketable securities |
|
141,653 |
|
51,575 |
|
90,078 |
|
|
|
131,648 |
|
131,648 |
| ||||||
Fuel swap contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current |
|
Prepaid expenses and other assets |
|
213 |
|
|
|
|
|
213 |
|
548 |
|
548 |
| ||||||
Noncurrent |
|
Other assets |
|
35 |
|
|
|
|
|
35 |
|
|
|
|
| ||||||
Total financial assets |
|
|
|
$ |
153,015 |
|
$ |
62,689 |
|
$ |
90,078 |
|
$ |
248 |
|
$ |
143,030 |
|
$ |
143,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fuel swap contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current |
|
Other accrued liabilities |
|
2,225 |
|
|
|
|
|
2,225 |
|
1,281 |
|
1,281 |
| ||||||
Interest rate swap contracts |
|
Other long-term obligations |
|
15,326 |
|
|
|
15,326 |
|
|
|
23,467 |
|
23,467 |
| ||||||
Total financial liabilities |
|
|
|
$ |
17,551 |
|
$ |
|
|
$ |
15,326 |
|
$ |
2,225 |
|
$ |
24,748 |
|
$ |
24,748 |
|
The carrying amount and estimated fair value of the Companys assets that were recorded at fair value on a nonrecurring basis as of June 30, 2012 are as follows:
|
|
|
|
As of |
| ||||||||||
|
|
|
|
June 30, 2012 |
| ||||||||||
|
|
|
|
|
|
Estimated Fair Value Measurements |
| ||||||||
|
|
|
|
|
|
Quoted |
|
Significant |
|
|
| ||||
|
|
|
|
|
|
Prices In |
|
Other |
|
Significant |
| ||||
|
|
|
|
|
|
Active |
|
Observable |
|
Unobservable |
| ||||
|
|
|
|
Carrying |
|
Markets |
|
Inputs |
|
Inputs |
| ||||
(In thousands) |
|
Balance Sheet Location |
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
TruGreen Trade Name (1) |
|
Intangible assets, primarily trade names, service marks and trademarks, net |
|
$ |
657,800 |
|
$ |
|
|
$ |
|
|
$ |
657,800 |
|
(1) In the second quarter of 2012, we recognized a non-cash impairment charge of $67.7 million to reduce the carrying value of the TruGreen trade name to its fair value as a result of our interim impairment testing of indefinite-lived intangible assets. See Note 5 for further information regarding the factors that led to the completion of the interim impairment analysis along with a description of the methodology, assumptions, and significant unobservable inputs used to estimate the fair value of the TruGreen trade name.
A reconciliation of the beginning and ending fair values of financial instruments valued using significant unobservable inputs (Level 3) on a recurring basis is presented as follows:
(In thousands) |
|
Fuel Swap |
| |
Balance as of December 31, 2011 |
|
$ |
(733 |
) |
Total gains (realized and unrealized) |
|
|
| |
Included in earnings(1) |
|
1,134 |
| |
Included in accumulated other comprehensive loss |
|
(1,244 |
) | |
Settlements, net |
|
(1,134 |
) | |
Balance as of June 30, 2012 |
|
$ |
(1,977 |
) |
(In thousands) |
|
Fuel Swap |
| |
Balance as of December 31, 2010 |
|
$ |
6,649 |
|
Total gains (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 |
|
(1) Gains included in earnings are reported in Cost of services rendered and products sold, with the exception of $0.3 million of gains in the six months ended June 30, 2011, which are reported in loss from discontinued operations, net of income taxes.
The following table presents information relating to the significant unobservable inputs of our Level 3 financial instruments as of June 30, 2012:
Item |
|
Fair Value as of |
|
Valuation |
|
Unobservable |
|
Range |
|
Weighted |
| ||
Fuel swap contracts |
|
$ |
(1,977 |
) |
Discounted Cash Flows |
|
Forward Unleaded Price per Gallon(1) |
|
$3.05-$3.33 |
|
$ |
3.16 |
|
|
|
|
|
|
|
Forward Diesel Price per Gallon(1) |
|
$3.60-$3.68 |
|
$ |
3.62 |
| |
(1) Forward price per gallon for unleaded and diesel were derived from third-party market data providers. A decrease in the forward price would result in a decrease in the fair value of the fuel swap contracts.
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 21 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 income (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 comprehensive income and accumulated other comprehensive income (loss) on the condensed consolidated statements of financial position for the six months ended June 30, 2012 and 2011, 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, 2012 |
|
included in Income |
| ||||
|
|
|
|
|
|
|
| ||
Fuel swap contracts |
|
$ |
(1,244 |
) |
$ |
1,134 |
|
Cost of services rendered and products sold |
|
Interest rate swap contracts |
|
$ |
11,011 |
|
$ |
(14,665 |
) |
Interest expense |
|
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 |
|
|
|
$ |
|
|
$ |
271 |
|
Loss from discontinued operations, net of income taxes |
|
Interest rate swap contracts |
|
$ |
11,554 |
|
$ |
(19,483 |
) |
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, 2012. As of June 30, 2012, the Company had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $23.4 million, maturing through 2013. 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, 2012, the Company had posted $4.0 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, 2012, the Company had interest rate swap contracts to pay fixed rates for interest on long-term debt with an aggregate notional amount of $1.180 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 income (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 income (loss) expected to be recognized in earnings is a loss of $11.2 million, net of tax, as of June 30, 2012. 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 17. 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 2015 Notes and the 2020 Notes are jointly and severally guaranteed on a senior unsecured basis by the Guarantors. Each of the Guarantors is wholly owned, directly or indirectly, by the Company, and all guarantees are full and unconditional. The Non-Guarantors do not guarantee the 2015 Notes or the 2020 Notes. A Guarantor will be released from its obligations under its guarantee under certain customary circumstances, including (i) the sale or disposition of the Guarantor, (ii) the release of the Guarantor from all of its obligations under all guarantees related to any indebtedness of the Company, (iii) the merger or consolidation of the Guarantor as specified in the indenture governing the 2015 Notes or the 2020 Notes, as the case may be, (iv) the Guarantor becomes an unrestricted subsidiary under the indenture governing the 2015 Notes or the 2020 Notes, as the case may be, (v) the defeasance of the Companys obligations under the indenture governing the 2015 Notes or the 2020 Notes, as the case may be, or (vi) the payment in full of the principal amount of the 2015 Notes or the 2020 Notes, as the case may be.
THE SERVICEMASTER COMPANY AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income
For the Three Months Ended June 30, 2012 (Unaudited)
(In thousands)
|
|
The |
|
|
|
|
|
|
|
|
| |||||
|
|
ServiceMaster |
|
|
|
Non- |
|
|
|
|
| |||||
|
|
Company |
|
Guarantors |
|
Guarantors |
|
Eliminations |
|
Consolidated |
| |||||
Operating Revenue |
|
$ |
|
|
$ |
731,404 |
|
$ |
245,522 |
|
$ |
(14,761 |
) |
$ |
962,165 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of services rendered and products sold |
|
|
|
434,105 |
|
113,503 |
|
(14,654 |
) |
532,954 |
| |||||
Selling and administrative expenses |
|
2,031 |
|
137,013 |
|
102,992 |
|
(107 |
) |
241,929 |
| |||||
Amortization expense |
|
56 |
|
16,563 |
|
1,183 |
|
|
|
17,802 |
| |||||
Trade name impairment |
|
|
|
67,700 |
|
|
|
|
|
67,700 |
| |||||
Restructuring charges |
|
|
|
1,310 |
|
3,716 |
|
|
|
5,026 |
| |||||
Total operating costs and expenses |
|
2,087 |
|
656,691 |
|
221,394 |
|
(14,761 |
) |
865,411 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating (Loss) Income |
|
(2,087 |
) |
74,713 |
|
24,128 |
|
|
|
96,754 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Non-operating Expense (Income): |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest expense (income) |
|
42,514 |
|
21,589 |
|
(4,403 |
) |
|
|
59,700 |
| |||||
Interest and net investment loss (income) |
|
654 |
|
4,729 |
|
(6,779 |
) |
|
|
(1,396 |
) | |||||
Other expense |
|
|
|
|
|
177 |
|
|
|
177 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) Income from Continuing Operations before Income Taxes |
|
(45,255 |
) |
48,395 |
|
35,133 |
|
|
|
38,273 |
| |||||
(Benefit) provision for income taxes |
|
(14,574 |
) |
6,964 |
|
23,638 |
|
|
|
16,028 |
| |||||
Equity in losses of joint venture |
|
|
|
|
|
(111 |
) |
|
|
(111 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(Loss) Income from Continuing Operations |
|
(30,681 |
) |
41,431 |
|
11,384 |
|
|
|
22,134 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income from discontinued operations, net of income taxes |
|
|
|
798 |
|
40 |
|
|
|
838 |
| |||||
Equity in earnings of subsidiaries (net of tax) |
|
53,653 |
|
9,799 |
|
|
|
(63,452 |
) |
|
| |||||
Net Income |
|
$ |
22,972 |
|
$ |
52,028 |
|
$ |
11,424 |
|
$ |
(63,452 |
) |
$ |
22,972 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Comprehensive Income |
|
$ |
22,414 |
|
$ |
52,387 |
|
$ |
10,393 |
|
$ |
(62,780 |
) |
$ |
22,414 |
|
THE SERVICEMASTER COMPANY AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income
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 |
) |