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, 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

 

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 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

 

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 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 registrant’s common stock were outstanding, all of which were owned by CDRSVM Holding, Inc.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page
No.

Part I. Financial Information

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended June 30, 2012 and June 30, 2011

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income for the six months ended June 30, 2012 and June 30, 2011

4

 

 

Condensed Consolidated Statements of Financial Position as of June 30, 2012 and December 31, 2011

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and June 30, 2011

6

 

 

Notes to Condensed Consolidated Financial Statements

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

51

 

 

Part II. Other Information

51

 

 

Item 1. Legal Proceedings

51

 

 

Item 1A. Risk Factors

52

 

 

Item 6. Exhibits

66

 

 

Signature

67

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In thousands)

 

 

 

Three months ended
June 30,

 

 

 

2012

 

2011

 

Operating Revenue

 

$

962,165

 

$

967,440

 

 

 

 

 

 

 

Operating Costs and Expenses:

 

 

 

 

 

Cost of services rendered and products sold

 

532,954

 

520,634

 

Selling and administrative expenses

 

241,929

 

259,148

 

Amortization expense

 

17,802

 

26,387

 

Trade name impairment

 

67,700

 

 

Restructuring charges

 

5,026

 

94

 

Total operating costs and expenses

 

865,411

 

806,263

 

 

 

 

 

 

 

Operating Income

 

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

 

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

 

(3,842

)

Net Income

 

$

22,972

 

$

56,720

 

 

 

 

 

 

 

Total Comprehensive Income

 

$

22,414

 

$

55,510

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In thousands)

 

 

 

Six months ended
June 30,

 

 

 

2012

 

2011

 

Operating Revenue

 

$

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

 

450,453

 

Amortization expense

 

35,791

 

52,750

 

Trade name impairment

 

67,700

 

 

Restructuring charges

 

9,016

 

2,683

 

Total operating costs and expenses

 

1,465,348

 

1,397,089

 

 

 

 

 

 

 

Operating Income

 

151,506

 

185,022

 

 

 

 

 

 

 

Non-operating Expense (Income):

 

 

 

 

 

Interest expense

 

124,514

 

136,893

 

Interest and net investment income

 

(4,038

)

(3,591

)

Loss on extinguishment of debt

 

39,193

 

 

Other expense

 

351

 

348

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations before Income Taxes

 

(8,514

)

51,372

 

(Benefit) Provision for income taxes

 

(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

 

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THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Financial Position (Unaudited)

(In thousands, except share data)

 

 

 

As of
June 30, 2012

 

As of
December 31, 2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

299,954

 

$

328,930

 

Marketable securities

 

35,161

 

12,026

 

Receivables, less allowance of $18,844 and $20,362, respectively

 

461,955

 

374,200

 

Inventories

 

58,888

 

59,643

 

Prepaid expenses and other assets

 

87,086

 

38,295

 

Deferred customer acquisition costs

 

51,065

 

30,403

 

Deferred taxes

 

91,237

 

90,609

 

Assets of discontinued operations

 

 

17

 

Total Current Assets

 

1,085,346

 

934,123

 

Property and Equipment:

 

 

 

 

 

At cost

 

596,624

 

541,817

 

Less: accumulated depreciation

 

(261,449

)

(235,058

)

Net property and equipment

 

335,175

 

306,759

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Goodwill

 

3,172,313

 

3,161,980

 

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

 

2,443,002

 

2,543,539

 

Notes receivable

 

22,109

 

23,322

 

Long-term marketable securities

 

117,606

 

130,456

 

Other assets

 

6,255

 

8,846

 

Debt issuance costs

 

37,058

 

37,798

 

Total Assets

 

$

7,218,864

 

$

7,146,823

 

 

 

 

 

 

 

Liabilities and Shareholder’s Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

114,496

 

$

81,641

 

Accrued liabilities:

 

 

 

 

 

Payroll and related expenses

 

73,861

 

85,346

 

Self-insured claims and related expenses

 

82,453

 

73,071

 

Accrued interest payable

 

54,823

 

67,011

 

Other

 

72,404

 

70,103

 

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

 

 

 

 

 

 

 

Long-Term Debt

 

3,825,951

 

3,824,032

 

 

 

 

 

 

 

Other Long-Term Liabilities:

 

 

 

 

 

Deferred taxes

 

1,035,887

 

1,036,693

 

Liabilities of discontinued operations

 

 

2,070

 

Other long-term obligations, primarily self-insured claims

 

124,898

 

133,052

 

Total Other Long-Term Liabilities

 

1,160,785

 

1,171,815

 

 

 

 

 

 

 

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

 

1,467,751

 

1,464,293

 

Retained deficit

 

(217,220

)

(210,162

)

Accumulated other comprehensive income (loss)

 

482

 

(6,212

)

Total Shareholder’s Equity

 

1,251,013

 

1,247,919

 

Total Liabilities and Shareholder’s Equity

 

$

7,218,864

 

$

7,146,823

 

 

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,

 

 

 

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

 

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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 global company serving both residential and commercial customers. ServiceMaster’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s

 

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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 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 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 Company’s 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 Company’s 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.

 

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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
June 30,

 

Six months ended
June 30,

 

(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 Company’s 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
Restructuring
Charges

 

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 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, 2012, the

 

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Table of Contents

 

Company’s 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 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.

 

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
Self-insured
Claims

 

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
Self-insured
Claims

 

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 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 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 Company’s 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 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

 

10



Table of Contents

 

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. 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 Company’s 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 TruGreen’s 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 Company’s 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.

 

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Table of Contents

 

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

 

(In thousands)

 

Terminix

 

TruGreen

 

American
Home
Shield

 

ServiceMaster
Clean

 

Other
Operations &
Headquarters

 

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
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

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 Company’s 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
June 30,

 

(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.

 

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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 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 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 Company’s 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 Company’s 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 Company’s 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
Gains

 

Gross Unrealized
Losses

 

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
Gains

 

Gross Unrealized
Losses

 

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 Shield’s investment portfolio has been invested in a combination of high quality, short duration fixed income securities and equities.

 

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Table of Contents

 

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
June 30,

 

Six months ended
June 30,

 

(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
June 30, 2012

 

As of
December 31, 2011

 

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
Date

 

Expiration
Date

 

Notional
Amount

 

Fixed
Rate(1)

 

Floating
Rate

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.

 

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Table of Contents

 

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 Company’s 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
June 30,

 

Six months ended
June 30,

 

(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 LandCare’s 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
December 31, 2011

 

Cash Payments
or Other

 

(Income)
Expense

 

As of
June 30, 2012

 

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.

 

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Table of Contents

 

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 Company’s 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 Company’s 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 Company’s 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

 

 

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(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&R’s 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.

 

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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 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. 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 Company’s 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 Company’s 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 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, 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 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. 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.

 

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Table of Contents

 

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 Company’s financial instruments that are recorded at fair value on a recurring basis for the periods presented are as follows:

 

 

 

 

 

As of
June 30, 2012

 

As of
December 31, 2011

 

 

 

 

 

 

 

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

 

$

11,114

 

$

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 Company’s 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
Contract
Assets (Liabilities)

 

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
Contract
Assets (Liabilities)

 

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.

 

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Table of Contents

 

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
June 30, 2012
(in thousands)

 

Valuation
Technique

 

Unobservable
Input

 

Range

 

Weighted
Average

 

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 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 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 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 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
Cash Flow Hedge

 

Effective Portion of
Gain (Loss) Recognized in
Accumulated Other
Comprehensive Income (Loss)

 

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

 

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
Cash Flow Hedge

 

Effective Portion of
Gain Recognized in
Accumulated Other
Comprehensive Income (Loss)

 

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

 

 

 

$

 

$

271

 

Loss from discontinued operations, net of income taxes

 

Interest rate swap contracts

 

$

11,554

 

$

(19,483

)

Interest expense

 

 

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Table of Contents

 

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 Company’s 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 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 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 Company’s 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.

 

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Table of Contents

 

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

 

 

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Table of Contents

 

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

)