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 March 31, 2014

 

or

 

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, LLC

(Exact name of registrant as specified in its charter)

 

Delaware

 

90-1036521

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer Identification No.)

 

860 Ridge Lake Boulevard, Memphis, Tennessee 38120

(Address of principal executive offices) (Zip Code)

 

901-597-1400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  o  No  x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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 limited liability company and its membership interests are not publicly traded. At May 2, 2014, all of the registrant’s membership interests were owned by CDRSVM Holding, LLC.

 

The ServiceMaster Company, LLC is not required to file this Quarterly Report on Form 10-Q with the Securities and Exchange Commission and is doing so on a voluntary basis.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page
No.

Part I. Financial Information

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2014 and March 31, 2013

3

 

 

Condensed Consolidated Statements of Financial Position as of March 31, 2014 and December 31, 2013

4

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and March 31, 2013

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

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

28

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

42

 

 

Item 4. Controls and Procedures

43

 

 

Part II. Other Information

43

 

 

Item 1. Legal Proceedings

43

 

 

Item 1A. Risk Factors

43

 

 

Item 6. Exhibits

53

 

 

Signature

55

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE SERVICEMASTER COMPANY, LLC

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

(In millions)

 

 

 

Three months ended
March 31,

 

 

 

2014

 

2013

 

Operating Revenue

 

$

533

 

$

514

 

Cost of services rendered and products sold

 

288

 

270

 

Selling and administrative expenses

 

151

 

158

 

Amortization expense

 

13

 

13

 

Impairment of software and other related costs

 

48

 

 

Restructuring charges

 

5

 

3

 

Interest expense

 

61

 

60

 

Interest and net investment income

 

(6

)

(2

)

 

 

 

 

 

 

(Loss) Income from Continuing Operations before Income Taxes

 

(27

)

12

 

(Benefit) Provision for income taxes

 

(9

)

6

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations

 

(18

)

6

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

(95

)

(29

)

Net Loss

 

$

(113

)

$

(23

)

 

 

 

 

 

 

Total Comprehensive Loss

 

$

(116

)

$

(20

)

 

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THE SERVICEMASTER COMPANY, LLC

Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions)

 

 

 

As of
March 31,
2014

 

As of
December 31,
2013

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

421

 

$

476

 

Marketable securities

 

23

 

27

 

Receivables, less allowances of $25 and $26, respectively

 

393

 

394

 

Inventories

 

38

 

39

 

Prepaid expenses and other assets

 

57

 

56

 

Deferred customer acquisition costs

 

28

 

30

 

Deferred taxes

 

107

 

107

 

Assets of discontinued operations

 

 

76

 

Total Current Assets

 

1,067

 

1,205

 

Property and Equipment:

 

 

 

 

 

At cost

 

345

 

381

 

Less: accumulated depreciation

 

(211

)

(204

)

Net Property and Equipment

 

134

 

177

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Goodwill

 

2,055

 

2,018

 

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

 

1,729

 

1,721

 

Notes receivable

 

37

 

37

 

Long-term marketable securities

 

90

 

122

 

Other assets

 

51

 

49

 

Debt issuance costs

 

38

 

41

 

Assets of discontinued operations

 

 

542

 

Total Assets

 

$

5,201

 

$

5,912

 

 

 

 

 

 

 

Liabilities and Shareholder’s (Deficit) Equity:

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

92

 

$

92

 

Accrued liabilities:

 

 

 

 

 

Payroll and related expenses

 

54

 

70

 

Self-insured claims and related expenses

 

86

 

78

 

Accrued interest payable

 

16

 

51

 

Other

 

55

 

55

 

Deferred revenue

 

487

 

448

 

Liabilities of discontinued operations

 

7

 

139

 

Current portion of long-term debt

 

41

 

39

 

Total Current Liabilities

 

838

 

972

 

 

 

 

 

 

 

Long-Term Debt

 

3,863

 

3,867

 

 

 

 

 

 

 

Other Long-Term Liabilities:

 

 

 

 

 

Deferred taxes

 

696

 

690

 

Liabilities of discontinued operations

 

 

162

 

Other long-term obligations, primarily self-insured claims

 

146

 

169

 

Total Other Long-Term Liabilities

 

842

 

1,021

 

 

 

 

 

 

 

Commitments and Contingencies (See Note 4)

 

 

 

 

 

 

 

 

 

 

 

Shareholder’s (Deficit) Equity:

 

 

 

 

 

Membership Interest

 

 

 

Additional paid-in capital

 

1,477

 

1,475

 

Retained deficit

 

(1,821

)

(1,430

)

Accumulated other comprehensive income

 

2

 

7

 

Total Shareholder’s (Deficit) Equity

 

(342

)

52

 

Total Liabilities and Shareholder’s (Deficit) Equity

 

$

5,201

 

$

5,912

 

 

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THE SERVICEMASTER COMPANY, LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

 

 

Three months ended
March 31,

 

 

 

2014

 

2013

 

Cash and Cash Equivalents at Beginning of Period

 

$

476

 

$

412

 

 

 

 

 

 

 

Cash Flows from Operating Activities from Continuing Operations:

 

 

 

 

 

Net Loss

 

(113

)

(23

)

Adjustments to reconcile net loss to net cash provided from operating activities:

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

95

 

29

 

Depreciation expense

 

12

 

12

 

Amortization expense

 

13

 

13

 

Amortization of debt issuance costs

 

2

 

2

 

Impairment of software and other related costs

 

48

 

 

Deferred income tax provision

 

(6

)

8

 

Stock-based compensation expense

 

1

 

1

 

Restructuring charges

 

5

 

3

 

Cash payments related to restructuring charges

 

(3

)

(4

)

Change in working capital, net of acquisitions:

 

 

 

 

 

Current income taxes

 

(5

)

(4

)

Receivables

 

13

 

15

 

Inventories and other current assets

 

 

(16

)

Accounts payable

 

6

 

14

 

Deferred revenue

 

17

 

10

 

Accrued liabilities

 

(57

)

(37

)

Other, net

 

(7

)

 

Net Cash Provided from Operating Activities from Continuing Operations

 

21

 

23

 

 

 

 

 

 

 

Cash Flows from Investing Activities from Continuing Operations:

 

 

 

 

 

Property additions

 

(14

)

(9

)

Other business acquisitions, net of cash acquired

 

(41

)

(3

)

Notes receivable, financial investments and securities, net

 

38

 

(4

)

Net Cash Used for Investing Activities from Continuing Operations

 

(17

)

(16

)

 

 

 

 

 

 

Cash Flows from Financing Activities from Continuing Operations:

 

 

 

 

 

Borrowings of debt

 

 

1

 

Payments of debt

 

(11

)

(11

)

Discount paid on issuance of debt

 

 

(12

)

Debt issuance costs paid

 

 

(5

)

Contribution to TruGreen Holding Corporation

 

(35

)

 

Net Cash Used for Financing Activities from Continuing Operations

 

(46

)

(27

)

 

 

 

 

 

 

Cash Flows from Discontinued Operations:

 

 

 

 

 

Cash used for operating activities

 

(8

)

(34

)

Cash used for investing activities

 

(2

)

(10

)

Cash used for financing activities

 

(3

)

(2

)

Net Cash Used for Discontinued Operations

 

(13

)

(46

)

 

 

 

 

 

 

Cash Decrease During the Period

 

(55

)

(66

)

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

$

421

 

$

346

 

 

5



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THE SERVICEMASTER COMPANY, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Basis of Presentation

 

The ServiceMaster Company, LLC (“ServiceMaster,” the “Company,” “we,” “us” or “our”) is a leading provider of essential residential and commercial services. ServiceMaster’s services include termite and pest control, home warranties, disaster restoration, janitorial, residential cleaning, furniture repair and home inspection. ServiceMaster provides these services through an extensive service network of company-owned, franchised and licensed locations operating primarily under the following leading brands: Terminix, American Home Shield, ServiceMaster Restore, 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 four principal reportable segments: Terminix, American Home Shield, Franchise Services Group and Other Operations and Headquarters. During the first quarter of 2014, the Company changed the composition of its reportable segments. See Note 14 for further details. 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, 2013, as filed with the SEC (the “2013 Form 10-K”). The condensed consolidated financial statements reflect all normal and recurring 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 “2007 Closing Date”), ServiceMaster was acquired pursuant to a merger transaction (the “2007 Merger”), and, immediately following the completion of the 2007 Merger, all of the outstanding common stock of ServiceMaster Global Holdings, Inc. (“Holdings”), the ultimate parent company of ServiceMaster, was owned by investment funds managed 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 owned shares of common stock of Holdings to StepStone Group LP (“StepStone”, and the investment funds managed by StepStone Group, the “StepStone Funds”). As of December 22, 2011, Holdings purchased from BAS 7.5 million shares of its common stock. On March 30, 2012, an affiliate of BAS sold 7.5 million shares of Holdings’ common stock to Ridgemont Partners Secondary Fund I, L.P, (‘‘Ridgemont’’). On July 24, 2012, BACSVM-A L.P., an affiliate of BAS, distributed 2.5 million shares of Holdings’ common stock to Charlotte Investor IV, L.P., its sole limited partner.

 

On January 14, 2014, the Company completed a separation transaction (the “TruGreen Spin-off”) resulting in the spin-off of the assets and certain liabilities of the business that comprises the lawn, tree and shrub care services previously conducted by the Company primarily under the TruGreen brand name (collectively, the “TruGreen Business”) through a tax-free, pro rata dividend to Holdings’ stockholders. As a result of the completion of the TruGreen Spin-off, TruGreen Holding Corporation (“New TruGreen”) operates the TruGreen Business as a private independent company. The historical results of the TruGreen Business, including the results of operations, cash flows and related assets and liabilities, are reported as discontinued operations for all periods presented herein.

 

Pursuant to an agreement and plan of merger entered into by ServiceMaster in connection with the TruGreen Spin-off, on January 14, 2014, the company formerly known as The ServiceMaster Company (“Old ServiceMaster”) was merged with and into ServiceMaster, with ServiceMaster continuing as the surviving entity in such merger. Pursuant to the terms of the merger agreement, all of the capital stock of Old ServiceMaster issued and outstanding immediately prior to the effective time of the merger was cancelled, and the sole stockholder of Old ServiceMaster immediately prior to the effective time of the merger (CDRSVM Holding, Inc., now known as CDRSVM Holding, LLC) was admitted as the sole member of ServiceMaster.

 

Note 2. Significant Accounting Policies

 

The Company’s significant accounting policies are included in the 2013 Form 10-K. The following selected accounting policies should be read in conjunction with the 2013 Form 10-K.

 

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Revenue. Revenues from 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 and termite inspection and protection contracts are frequently sold through annual contracts. Service costs for these contracts are expensed as incurred. The Company recognizes revenue over the life of these contracts in proportion to the expected direct costs. Those costs bear a direct relationship to the fulfillment of the Company’s obligations under the contracts and are representative of the relative value provided to the customer (proportional performance method). The Company regularly reviews its estimates of direct costs for its termite bait contracts and termite inspection and protection contracts and adjusts the estimates when appropriate.

 

Home warranty contracts are typically one year in duration. Home warranty claims costs are expensed as incurred. The Company recognizes revenue over the life of these contracts in proportion to the expected direct costs. Those costs bear a direct relationship to the fulfillment of the Company’s obligations under the contracts and are representative of the relative value provided to the customer (proportional performance method). The Company regularly reviews its estimates of claims costs and adjusts the estimates when appropriate.

 

The Company has franchise agreements in its Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec businesses. Franchise revenue (which in the aggregate represents approximately six percent of annual consolidated operating 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 generating activity is performed by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial fees resulting from the sale of a franchise or a license. These initial franchise or license 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 $17 million and $18 million for the three months ended March 31, 2014 and 2013, 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 $487 million and $448 million of deferred revenue as of March 31, 2014 and December 31, 2013, respectively. Deferred revenue consists primarily of payments received for annual contracts relating to home warranties, termite baiting, termite inspection and pest control services.

 

Deferred Customer Acquisition Costs. 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 $28 million and $30 million as of March 31, 2014 and December 31, 2013, respectively.

 

Advertising. On an interim basis, certain advertising costs are deferred and recognized approximately in proportion to the revenue over the year and are not deferred beyond the calendar year-end. Certain other advertising costs are expensed when the advertising occurs. The cost of direct-response advertising at Terminix, consisting primarily of direct-mail promotions, is capitalized and amortized over its expected period of future benefits. Deferred advertising costs are included in Prepaid expenses and other assets on our condensed consolidated statements of financial position.

 

Property and Equipment and Intangible Assets. Fixed assets and intangible assets with finite lives are depreciated and amortized on a straight-line basis over their estimated useful lives. These lives are based on the Company’s previous experience for similar assets, potential market obsolescence and other industry and business data. As required by accounting standards for the impairment or disposal of long-lived assets, the Company’s long-lived assets, including fixed assets and intangible assets (other than goodwill), are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, an impairment loss would be recognized equal to the difference between the carrying amount and the fair value of the asset. Changes in the estimated useful lives or in the asset values could cause the Company to adjust its book value or future expense accordingly.

 

The Company recorded an impairment charge of $48 million ($29 million, net of tax) in the first quarter of 2014 relating to its decision to abandon its efforts to deploy a new operating system at American Home Shield. Included in this charge are the impairment of the capitalized software of $45 million and the recognition of the remaining liabilities associated with the termination of lease, maintenance and hosting agreements totaling $3 million. This impairment represented an adjustment of the carrying value of the asset to its estimated fair value of zero on a non-recurring basis.

 

Use of Estimates. 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 2013 Form 10-K presented the significant areas requiring the use of management estimates and discussed how management formed its judgments. The areas discussed include 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

 

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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.

 

Newly Issued Accounting Statements and Positions

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists” to eliminate the diversity in practice associated with the presentation of unrecognized tax benefits in instances where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 generally requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. The amendments in ASU 2013-11 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity” to change the criteria for reporting discontinued operations and enhance the convergence of the FASB’s and the International Standard Board’s reporting requirements for discontinued operations. The changes in ASU 2014-08 amend the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have or will have a major effect on an entity’s operations and financial results. ASU 2014-08 requires expanded disclosures for discontinued operations and also requires an entity to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company anticipates the adoption of this standard will not have a material impact on the Company’s condensed consolidated financial statements.

 

Note 3. Restructuring Charges

 

The Company incurred restructuring charges of $5 million ($3 million, net of tax) and $3 million ($2 million, net of tax) for the three months ended March 31, 2014 and 2013, respectively. Restructuring charges were comprised of the following:

 

 

 

Three months ended
March 31,

 

(In millions)

 

2014

 

2013

 

Terminix branch optimization(1)

 

$

1

 

$

1

 

Centers of excellence initiative(2)

 

4

 

2

 

Total restructuring charges

 

$

5

 

$

3

 

 


(1)                                 For the three months ended March 31, 2014, these charges included severance costs. For the three months ended March 31, 2013, these charges included lease termination costs.

 

(2)                                 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 March 31, 2014, these charges included professional fees of $1 million and severance and other costs of $3 million. For the three months ended March 31, 2013, these charges included professional fees of $1 million and severance and other costs of $1 million. During the remainder of 2014, the Company will continue to assess the mix and cost of its Company-wide administrative services in light of the TruGreen Spin-off. The Company does not expect additional charges related to this initiative to be significant.

 

The pretax charges discussed above are reported in Restructuring charges in the condensed consolidated statements of operations and comprehensive loss.

 

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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 millions)

 

Accrued
Restructuring

Charges

 

Balance as of December 31, 2013

 

$

1

 

Costs incurred

 

5

 

Costs paid or otherwise settled

 

(3

)

Balance as of March 31, 2014

 

$

3

 

 

Note 4. Commitments and Contingencies

 

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, net of reinsurance recoverables, which are included in Prepaid expenses and other assets and Other assets on the condensed consolidated statements of financial position, is presented as follows:

 

(In millions)

 

Accrued
Self-insured
Claims, Net

 

Balance as of December 31, 2013

 

$

101

 

Provision for self-insured claims

 

19

 

Cash payments

 

(17

)

Balance as of March 31, 2014

 

$

103

 

 

(In millions)

 

Accrued
Self-insured
Claims, Net

 

Balance as of December 31, 2012

 

$

103

 

Provision for self-insured claims

 

11

 

Cash payments

 

(11

)

Balance as of March 31, 2013

 

$

103

 

 

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 in the Terminix business 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.

 

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 give no assurance that the results

 

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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

 

Goodwill and intangible assets that are not amortized are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. The Company’s annual assessment date is October 1. There were no goodwill or trade name impairment charges recorded in continuing operations in the three months ended March 31, 2014 and 2013.

 

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

 

(In millions)

 

Terminix

 

American
Home Shield

 

Franchise
Services Group

 

Total

 

Balance as of December 31, 2013

 

$

1,480

 

$

347

 

$

191

 

$

2,018

 

Acquisitions

 

6

 

31

 

 

37

 

Balance as of March 31, 2014

 

$

1,486

 

$

378

 

$

191

 

$

2,055

 

 

There were no accumulated impairment losses recorded in continuing operations as of March 31, 2014.

 

The table below summarizes the other intangible asset balances for continuing operations:

 

 

 

Estimated
Remaining
Useful

 

As of March 31, 2014

 

As of December 31, 2013

 

(In millions)

 

Lives
(Years)

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Trade names(1)

 

N/A

 

$

1,608

 

$

 

$

1,608

 

$

1,608

 

$

 

$

1,608

 

Customer relationships

 

3 — 10

 

530

 

(457

)

73

 

512

 

(447

)

65

 

Franchise agreements

 

20 — 25

 

88

 

(55

)

33

 

88

 

(54

)

34

 

Other

 

4 — 30

 

44

 

(29

)

15

 

41

 

(27

)

14

 

Total

 

 

 

$

2,270

 

$

(541

)

$

1,729

 

$

2,249

 

$

(528

)

$

1,721

 

 


(1)                                Not subject to amortization.

 

In the three months ended March 31, 2014, the TruGreen Business recorded an impairment change of $139 million ($84 million, net of tax) in discontinued operations, net of income taxes.

 

Note 6. Stock-Based Compensation

 

For the three months ended March 31, 2014 and 2013, the Company recognized stock-based compensation expense of $1 million ($1 million, net of tax) and $1 million ($1 million, net of tax), respectively. As of March 31, 2014, there was $20 million of total unrecognized compensation costs 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. These remaining costs are expected to be recognized over a weighted-average period of 3.14 years.

 

Note 7. Comprehensive Income (Loss)

 

Comprehensive income (loss), which primarily includes net income (loss), unrealized gain (loss) on marketable securities, unrealized gain (loss) on derivative instruments and the effect of foreign currency translation is disclosed in the condensed consolidated statements of operations and comprehensive income (loss).

 

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Table of Contents

 

The following tables summarize the activity in other comprehensive income (loss), net of the related tax effects.

 

(In millions)

 

Unrealized
Gains on
Derivatives

 

Unrealized
Gains on
Available-for-
Sale Securities

 

Foreign
Currency
Translation

 

Total

 

Balance as of December 31, 2013

 

$

1

 

$

7

 

$

(1

)

$

7

 

Other comprehensive income (loss) before reclassifications:

 

 

 

 

 

 

 

 

 

Pre-tax amount

 

 

1

 

(1

)

 

Tax provision (benefit)

 

 

 

 

 

After tax amount

 

 

1

 

(1

)

 

Amounts reclassified from accumulated other comprehensive income (loss) (1)

 

 

(3

)

 

(3

)

Spin-off of the TruGreen Business

 

 

 

(2

)

(2

)

Net current period other comprehensive loss

 

 

(2

)

(3

)

(5

)

Balance as of March 31, 2014

 

$

1

 

$

5

 

$

(4

)

$

2

 

 

(In millions)

 

Unrealized
Losses on
Derivatives

 

Unrealized
Gains on
Available-for-
Sale Securities

 

Foreign
Currency
Translation

 

Total

 

Balance as of December 31, 2012

 

$

(2

)

$

6

 

$

3

 

$

7

 

Other comprehensive income (loss) before reclassifications:

 

 

 

 

 

 

 

 

 

Pre-tax amount

 

1

 

4

 

(1

)

4

 

Tax provision (benefit)

 

 

2

 

 

2

 

After tax amount

 

1

 

2

 

(1

)

2

 

Amounts reclassified from accumulated other comprehensive income (loss)(1)

 

1

 

 

 

1

 

Net current period other comprehensive income (loss)

 

2

 

2

 

(1

)

3

 

Balance as of March 31, 2013

 

$

 

$

8

 

$

2

 

$

10

 

 


(1)                               Amounts are net of tax. See reclassifications out of accumulated other comprehensive income below for further details.

 

Reclassifications out of accumulated other comprehensive income included the following components for the periods indicated.

 

 

 

Amount Reclassified from
Accumulated Other
Comprehensive Income

 

 

 

 

 

As of March 31,

 

Condensed Consolidated Statements of

 

(In millions)

 

2014

 

2013

 

Operations and Comprehensive Loss Location

 

Losses on derivatives:

 

 

 

 

 

 

 

Fuel swap contracts

 

$

 

$

 

Cost of services rendered and products sold

 

Interest rate swap contracts

 

 

2

 

Interest expense

 

Net losses on derivatives

 

 

2

 

 

 

Impact of income taxes

 

 

1

 

(Benefit) Provision for income taxes

 

Total reclassifications related to derivatives

 

$

 

$

1

 

 

 

 

 

 

 

 

 

 

 

Gains on available-for-sale securities

 

$

(4

)

$

 

Interest and net investment income

 

Impact of income taxes

 

1

 

 

(Benefit) Provision for income taxes

 

Total reclassifications related to securities

 

$

(3

)

$

 

 

 

 

 

 

 

 

 

 

 

Total reclassifications for the period

 

$

(3

)

$

1

 

 

 

 

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Table of Contents

 

Note 8. Supplemental Cash Flow Information

 

Supplemental information relating to the condensed consolidated statements of cash flows is presented in the following table:

 

 

 

Three months ended
March 31,

 

(In millions)

 

2014

 

2013

 

Cash paid for or (received from):

 

 

 

 

 

Interest expense

 

$

92

 

$

89

 

Interest and dividend income

 

(1

)

(1

)

Income taxes, net of refunds

 

2

 

2

 

 

The Company acquired $2 million and $6 million of property and equipment through capital leases and other non-cash financing transactions in the three months ended March 31, 2014 and 2013, respectively, which have been excluded from the condensed consolidated statements of cash flows as non-cash investing and financing activities.

 

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 March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013 were as follows:

 

(In millions)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Available-for-sale and trading securities, March 31, 2014:

 

 

 

 

 

 

 

 

 

Debt securities

 

$

71

 

$

1

 

$

 

$

72

 

Equity securities

 

34

 

7

 

 

41

 

Total securities

 

$

105

 

$

8

 

$

 

$

113

 

 

(In millions)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Available-for-sale and trading securities, December 31, 2013:

 

 

 

 

 

 

 

 

 

Debt securities

 

$

97

 

$

3

 

$

(1

)

$

99

 

Equity securities

 

41

 

9

 

 

50

 

Total securities

 

$

138

 

$

12

 

$

(1

)

$

149

 

 

There were no unrealized losses which had been in a loss position for more than one year as of March 31, 2014 and December 31, 2013. The aggregate fair value of the investments with unrealized losses was $18 million and $30 million as of March 31, 2014 and December 31, 2013, respectively.

 

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 and gross realized gains resulting from sales of available-for-sale securities. There were no gross realized losses or impairment charges due to other than temporary declines in the value of certain investments for the three months ended March 31, 2014 and 2013.

 

 

 

Three months ended
March 31,

 

(In millions)

 

2014

 

2013

 

Proceeds from sale of securities

 

$

42

 

$

4

 

Gross realized gains, pre-tax

 

5

 

1

 

Gross realized gains, net of tax

 

3

 

 

 

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Table of Contents

 

Note 10. Long-Term Debt

 

Long-term debt as of March 31, 2014 and December 31, 2013 is summarized in the following table:

 

(In millions)

 

As of
March 31, 2014

 

As of
December 31, 2013

 

Senior secured term loan facility maturing in 2017 (Tranche B)

 

$

988

 

$

991

 

Senior secured term loan facility maturing in 2017 (Tranche C)(1)

 

1,196

 

1,198

 

7.00% senior notes maturing in 2020

 

750

 

750

 

8.00% senior notes maturing in 2020(2)

 

602

 

602

 

Revolving credit facility maturing in 2017

 

 

 

7.10% notes maturing in 2018(3)

 

72

 

71

 

7.45% notes maturing in 2027

 

159

 

159

 

7.25% notes maturing in 2038

 

63

 

63

 

Vehicle capital leases(4)

 

32

 

32

 

Other

 

42

 

40

 

Less current portion

 

(41

)

(39

)

Total long-term debt

 

$

3,863

 

$

3,867

 

 


(1)                               As of March 31, 2014 and December 31, 2013, presented net of $9 million and $10 million, respectively, in unamortized original issue discount paid as part of the 2013 amendment (the “2013 Term Loan Facility Amendment”).

 

(2)                               As of March 31, 2014 and December 31, 2013, includes $2 million in unamortized premium received on the sale of $100.0 million aggregate principal amount of such notes.

 

(3)                               The increase in the balance from December 31, 2013 to March 31, 2014 reflects the amortization of fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown above.

 

(4)                               The Company has entered into a fleet management services agreement (the “Fleet Agreement”) which, among other things, allows the Company to obtain fleet vehicles through a leasing program. All leases under the Fleet Agreement are capital leases for accounting purposes. The lease rental payments include an interest component calculated using a variable rate based on one-month LIBOR plus other contractual adjustments and a borrowing margin totaling 2.45 percent as of March 31, 2014.

 

Note 11. Acquisitions

 

Acquisitions have been accounted for using the acquisition method and, accordingly, the results of operations of the acquired businesses have been included in the Company’s condensed consolidated financial statements since their dates of acquisition. The assets and liabilities of these businesses were recorded in the financial statements at their estimated fair values as of the acquisition dates.

 

On February 28, 2014, the Company acquired Home Security of America, Inc. (“HSA”), based in Madison, Wisconsin. The total net purchase price for this acquisition was $32 million. The Company recorded goodwill of $30 million and other intangibles of $17 million related to this acquisition. As of March 31, 2014, the purchase price allocation for this acquisition has not been finalized.

 

During the three months ended March 31, 2014, the Company completed several pest control and termite acquisitions. The total net purchase price for these acquisitions was $11 million. The Company recorded goodwill of $7 million and other intangibles of $4 million related to these acquisitions.

 

During the three months ended March 31, 2013, the Company completed several pest control and termite acquisitions. The total net purchase price for these acquisitions was $4 million. The Company recorded goodwill of $3 million and other intangibles of $1 million related to these acquisitions.

 

Supplemental cash flow information regarding the Company’s acquisitions is as follows:

 

 

 

Three months ended
March 31,

 

(In millions)

 

2014

 

2013

 

Purchase price (including liabilities assumed)

 

$

71

 

$

4

 

Less liabilities assumed

 

(28

)

 

Net purchase price

 

$

43

 

$

4

 

 

 

 

 

 

 

Net cash paid for acquisitions

 

$

41

 

$

3

 

Seller financed debt

 

2

 

1

 

Payment for acquisitions

 

$

43

 

$

4

 

 

Note 12. Discontinued Operations

 

TruGreen Spin-off

 

                On January 14, 2014, the Company completed the TruGreen Spin-off resulting in the spin-off of the assets and certain liabilities of the TruGreen Business through a tax-free, pro rata dividend to Holdings’ stockholders. As a result of the completion of the TruGreen Spin-off, New TruGreen operates the TruGreen Business as a private independent company. The TruGreen Business experienced a significant downturn in recent years. Since 2011, the TruGreen Business lost 400,000 customers, or 19 percent of its customer base. The TruGreen Business’s operating margins also eroded during this time-frame due to production inefficiencies, higher chemical costs and inflationary pressures, compounded by lower fixed cost leverage as falling customer counts drove revenue down. The TruGreen Business experienced operating revenue and Adjusted EBITDA declines of 18.6 percent and 87.6 percent, respectively, from 2011 to 2013. In light of these developments, the Company made the decision to effect the TruGreen Spin-off, which we expect will enable the Company’s management to increase its focus on Terminix, American Home Shield and the Franchise Services Group segment while providing New TruGreen, as an independently operated, private company, the time and focus required to execute a turnaround.

 

As a result of the TruGreen Spin-off, we were required to perform an interim impairment analysis as of January 14, 2014 on the TruGreen trade name. The assumptions were developed with the view of the TruGreen Business as a stand-alone company, resulting in an increase in the assumed discount rate of 350 basis points (“bps”) as compared to the discount rate used in the October 1, 2013 impairment test for the TruGreen trade name. This interim impairment analysis resulted in a pre-tax non-cash trade name impairment charge of $139 million ($84 million, net of tax) to reduce the carrying value of the TruGreen trade name to its estimated fair value. This impairment charge was recorded in Loss from discontinued operations, net of income taxes, in the three months ended March 31, 2014. The impairment of the TruGreen trade name represented an adjustment of the carrying value of the asset to its estimated fair value on a non-recurring basis using significant unobservable inputs on the date of the TruGreen Spin-off.

 

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Table of Contents

 

The following is a summary of the assets and liabilities distributed to New TruGreen as part of the TruGreen spin-off on January 14, 2014:

 

(In millions)

 

 

 

Assets:

 

 

 

Cash and cash equivalents

 

$

57

 

Receivables, net

 

22

 

Inventories and other current assets

 

40

 

Property and equipment, net

 

181

 

Intangible assets, net

 

216

 

Other long-term assets

 

6

 

Total Assets

 

$

522

 

 

 

 

 

Liabilities:

 

 

 

Current liabilities

 

$

149

 

Long-term debt and other long-term liabilities

 

93

 

Total Liabilities

 

$

242

 

 

 

 

 

Net assets distributed to New TruGreen

 

$

280

 

 

The historical results of the TruGreen Business, including the results of operations, cash flows and related assets and liabilities, are reported as discontinued operations for all periods presented herein.

 

In connection with the TruGreen Spin-off, the Company and TruGreen Limited Partnership (“TGLP”), an indirect wholly owned subsidiary of New TruGreen, entered into a transition services agreement pursuant to which the Company and its subsidiaries provide TGLP with specified communications, public relations, finance and accounting, tax, treasury, internal audit, human resources operations and benefits, risk management and insurance, supply management, real estate management, marketing, facilities, information technology and other support services. The charges for the transition services allow the Company to fully recover the allocated direct costs of providing the services, plus specified margins and any out-of-pocket costs and expenses. The services provided under the transition services agreement will terminate at various specified times, and in no event later than January 14, 2016 (except certain information technology services, which the Company expects to provide to TGLP beyond the two-year period). TGLP may terminate the transition services agreement (or certain services under the transition services agreement) for convenience upon 90 days written notice, in which case TGLP will be required to reimburse the Company for early termination costs.

 

Under this transition services agreement, in the three months ended March 31, 2014, the Company recorded $10 million of fees due from TGLP, which is included, net of costs incurred, in Selling and administrative expenses in the consolidated statement of operations and comprehensive loss. As of March 31, 2014, all amounts owed by TGLP under this agreement have been paid.

 

During the three months ended March 31, 2014, the Company processed certain of TGLP’s accounts payable transactions. Through this process, in the three months ended March 31, 2014, $44 million was paid on TGLP’s behalf, of which $41 million was repaid by TGLP. As of March 31, 2014, the Company recorded a $3 million receivable due from TGLP, which is included in Receivables on the condensed consolidated statement of financial position.

 

In addition, the Company, Holdings, New TruGreen and TGLP entered into (1) a separation and distribution agreement containing key provisions relating to the separation of the TruGreen Business and the distribution of New TruGreen common stock to Holdings’ stockholders (including relating to specified TruGreen legal matters with respect to which we have agreed to retain liability, as well as insurance coverage, non-competition, indemnification and other matters), (2) an employee matters agreement allocating liabilities and responsibilities relating to employee benefit plans and programs and other related matters and (3) a tax matters agreement governing the respective rights, responsibilities and obligations of the parties thereto with respect to taxes, including allocating liabilities for income taxes attributable to New TruGreen and its subsidiaries generally to the Company for tax periods (or portions thereof) ending on or before January 14, 2014 and generally to New TruGreen for tax periods (or portions thereof) beginning after that date.

 

Financial Information for Discontinued Operations

 

Loss from discontinued operations, net of income taxes, for all periods presented includes the operating results of the TruGreen Business and the previously sold businesses noted in the 2013 Form 10-K.

 

14



Table of Contents

 

The operating results of discontinued operations are as follows:

 

 

 

Three months ended
March 31,

 

(In millions)

 

2014

 

2013

 

Operating Revenue

 

$

6

 

$

94

 

 

 

 

 

 

 

Loss before income taxes(1)

 

(155

)

(50

)

Benefit for income taxes(1)

 

(60

)

(21

)

Loss from discontinued operations, net of income taxes(1)

 

$

(95

)

$

(29

)

 


(1)                                 During the first quarter of 2014, a pre-tax non-cash trade name impairment charge of $139 million ($84 million, net of tax) was recorded to reduce the carrying value of the TruGreen trade name to its estimated fair value.

 

Assets and liabilities of discontinued operations are summarized below:

 

(In millions)

 

As of
March 31, 2014

 

As of
December 31, 2013

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

10

 

Receivables, net

 

 

28

 

Inventories

 

 

17

 

Prepaid expenses and other current assets

 

 

21

 

Total Current Assets

 

 

76

 

Property and equipment, net

 

 

181

 

Intangible assets, net

 

 

355

 

Other long-term assets

 

 

6

 

Total Assets

 

$

 

$

618

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable

 

$

 

$

19

 

Accrued liabilities

 

7

 

17

 

Deferred revenue

 

 

91

 

Current portion of long-term debt

 

 

12

 

Total Current Liabilities

 

7

 

139

 

Long-term debt

 

 

37

 

Deferred taxes and other long-term liabilities

 

 

125

 

Total Liabilities

 

$

7

 

$

301

 

 

At March 31, 2014, the liabilities of discontinued operations relate primarily to accruals for legal and other reserves. At December 31, 2013, these balances also reflect the historical assets and liabilities of the TruGreen Business, which was spun off in the three months ended March 31, 2014.

 

Note 13. Income Taxes

 

As of March 31, 2014 and December 31, 2013, the Company had $7 million and $8 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 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 Company’s estimated tax rate is adjusted each quarter in accordance with ASC 740.

 

The effective tax rate on (loss) income from continuing operations was a benefit of 33.2 percent for the three months ended March 31, 2014 compared to a provision of 48.3 percent for the three months ended March 31, 2013. The effective tax rate on loss from continuing operations for the three months ended March 31, 2014 was affected by various discrete events, including an adjustment to deferred state taxes resulting from a change in the Company’s state apportionment factors primarily attributable to the

 

15



Table of Contents

 

TruGreen Spin-off. The effective tax rate on income from continuing operations for the three months ended March 31, 2013 was affected by the reclassification of the TruGreen Business to discontinued operations and the resulting impact on the allocation of the full year effective tax rate on income from continuing operations to interim periods.

 

Note 14. Business Segment Reporting

 

The business of the Company is conducted through four reportable segments: Terminix, American Home Shield, Franchise Services Group 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 American Home Shield segment provides home warranties for household systems and appliances. The Franchise Services Group segment provides residential and commercial disaster restoration, janitorial and cleaning services through franchises primarily under the ServiceMaster, ServiceMaster Restore and ServiceMaster Clean brand names, home cleaning services through franchises and Company-owned locations primarily under the Merry Maids brand name, on-site wood 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 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 (substantially all of which costs are allocated to the Company’s other segments), which provide various technology, marketing, finance, legal and other support services to the business units.

 

During the first quarter of 2014, the Company changed the composition of its reportable segments. Merry Maids, previously reported within the Other Operations and Headquarters segment, is now included in the Franchise Services Group segment with the franchise businesses previously reported as the ServiceMaster Clean segment. The composition of our reportable segments is consistent with that used by our chief operating decision maker (the “CODM”) to evaluate performance and allocate resources. The changes in the composition of the Company’s reportable segments have been reflected in the historical results for all periods presented herein.

 

Information regarding the accounting policies used by the Company is described in Note 2. The Company derives substantially all of its revenue from customers and franchisees in the United States with less than two percent generated in foreign markets. Operating expenses of the business units consist of direct costs and indirect costs allocated from the Other Operations and Headquarters segment. During the first quarter of 2014, the Company changed its methodology for allocating general corporate overhead expenses. In prior periods, allocations were limited to corporate support services incurred directly on behalf of each reportable segment. Under the new method, certain expenses related to general corporate support services previously reflected in the Other Operations and Headquarters segment are now allocated to each reportable segment. In periods prior to the TruGreen Spin-off, expenses which are allocated to TruGreen under the new method but are not reflected in discontinued operations are included in the Other Operations and Headquarters segment. Such expenses amounted to $9 million in the three months ended March 31, 2013. This change has no impact to the Company’s consolidated Net Income or Adjusted EBITDA.

 

The Company uses Adjusted EBITDA as its measure of segment profitability. Accordingly, the CODM evaluates performance and allocates resources based primarily on Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) before: income (loss) from discontinued operations, net of income taxes; provision (benefit) for income taxes; gain (loss) on extinguishment of debt; interest expense; depreciation and amortization expense; non-cash goodwill and trade name impairment; non-cash impairment of software and other related costs; non-cash impairment of property and equipment; non-cash stock-based compensation expense; restructuring charges; management and consulting fees; and non-cash effects attributable to the application of purchase accounting. The Company’s definition of Adjusted EBITDA may not be calculated or comparable to similarly titled measures of other companies.

 

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Table of Contents

 

Segment information for continuing operations is presented below:

 

 

 

Three months ended
March 31,

 

(In millions)

 

2014

 

2013

 

Operating Revenue:

 

 

 

 

 

Terminix

 

$

320

 

$

313

 

American Home Shield

 

151

 

143

 

Franchise Services Group

 

60

 

56

 

Other Operations and Headquarters

 

2

 

2

 

Total Operating Revenue

 

$

533

 

$

514

 

 

 

 

 

 

 

Adjusted EBITDA:(1)

 

 

 

 

 

Terminix

 

$

78

 

$

75

 

American Home Shield

 

23

 

21

 

Franchise Services Group

 

18

 

17

 

Other Operations and Headquarters

 

(4

)

(10

)

Total Adjusted EBITDA

 

$

115

 

$

103

 

 


(1)          Presented below is a reconciliation of Adjusted EBITDA to Net Loss:

 

 

 

Three months ended
March 31,

 

(In millions)

 

2014

 

2013

 

Adjusted EBITDA:

 

 

 

 

 

Terminix

 

$

78

 

$

75

 

American Home Shield

 

23

 

21

 

Franchise Services Group

 

18

 

17

 

Other Operations and Headquarters

 

(4

)

(10

)

Total Adjusted EBITDA

 

$

115

 

$

103

 

Depreciation and amortization expense

 

(25

)

(25

)

Non-cash impairment of software and other related costs

 

(48

)

 

Non-cash stock-based compensation expense

 

(1

)

(1

)

Restructuring charges

 

(5

)

(3

)

Management and consulting fees

 

(2

)

(2

)

Loss from discontinued operations, net of income taxes

 

(95

)

(29

)

Benefit (provision) for income taxes

 

9

 

(6

)

Interest expense

 

(61

)

(60

)

Net Loss

 

$

(113

)

$

(23

)

 

Note 15. Related Party Transactions

 

Consulting Agreements

 

The Company and Holdings are parties to a consulting agreement with CD&R under which CD&R provides the Company with on-going consulting and management advisory services. The annual consulting fee payable under the consulting agreement with CD&R is $6.25 million. Under this agreement, the Company recorded consulting fees of $2 million in each of the three month periods ended March 31, 2014 and 2013, which is included in Selling and administrative expenses in the condensed consolidated statements of operations and comprehensive loss. The consulting agreement also provides that CD&R may receive additional fees in connection with certain subsequent financing and acquisition or disposition transactions. There were no additional fees incurred in each of the three month periods ended March 31, 2014 and 2013. The consulting agreement will terminate on July 24, 2017, unless terminated earlier at CD&R’s election. On March 24, 2014, Holdings, our ultimate parent, filed a Registration Statement on Form S-1 with the SEC for an initial public offering (“IPO”).  As disclosed in the Registration Statement and as described below, we intend to terminate the CD&R consulting agreement in connection with the IPO.  No assurances can be given that the IPO will be completed and that the CD&R consulting agreement will terminate as expected.

 

The Company and Holdings are parties to consulting agreements with StepStone, JPMorgan and Ridgemont (and formerly with BAS). The consulting agreements terminate on June 30, 2016 or upon the earlier termination of the consulting agreement with CD&R (the Ridgemont consulting agreement also provides for termination upon an IPO). Effective January 1, 2012, the annual consulting fee formerly payable to BAS (and now payable to Ridgemont) was reduced to $0.25 million. Pursuant to the consulting agreements, the Company is required to pay aggregate annual consulting fees of $1 million to StepStone, JPMorgan and Ridgemont (formerly payable to BAS), respectively.

 

In connection with the IPO, we intend to enter into termination agreements with CD&R, StepStone, JPMorgan and Ridgemont pursuant to which the parties will agree to terminate the ongoing consulting fees described above. Pursuant to the termination agreements, we intend to pay termination fees payable upon the consummation of the IPO.  Thereafter, the consulting fees will terminate.  As described above, no assurances can be given that the IPO will be completed and that the consulting agreements will terminate as expected.

 

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Table of Contents

 

Revolving Promissory Note

 

On April 19, 2013, the Company entered into a revolving promissory note with Holdings with a maximum borrowing capacity of $25 million that is scheduled to mature on April 18, 2018. Amounts outstanding under this agreement shall bear interest at the rate of 5.0 percent per annum. As of March 31, 2014, Holdings had borrowed $14 million under this note. The funds borrowed under this note are used by Holdings to repurchase shares of its common stock from associates who have left the Company.

 

Note 16. Fair Value Measurements

 

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 receivable approximate fair value as the effective interest rates for these instruments are comparable to period-end market rates. The period-end carrying amounts of short- 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 income 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 loss if the decline in value is other than temporary. The carrying amount of total debt was $3,904 million and $3,906 million and the estimated fair value was $4,039 million and $3,906 million as of March 31, 2014 and December 31, 2013, 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 presented 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 March 31, 2014 and December 31, 2013.

 

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.

 

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 each of the three month periods ended March 31, 2014 and 2013.

 

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Table of Contents

 

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

 

 

 

 

 

As of March 31, 2014

 

 

 

 

 

 

 

Estimated Fair Value Measurements

 

(In millions)

 

Statement of Financial
Position Location

 

Carrying
Value

 

Quoted
Prices In
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation trust assets

 

Long-term marketable securities

 

$

10

 

$

10

 

$

 

$

 

Investments in marketable securities

 

Marketable securities and Long-term marketable securities

 

103

 

55

 

48

 

 

Fuel swap contracts:

 

 

 

 

 

 

 

 

 

 

 

Current

 

Prepaid expenses and other assets

 

1

 

 

 

1

 

Total financial assets

 

 

 

$

114

 

$

65

 

$

48

 

$

1

 

 

 

 

 

 

As of December 31, 2013

 

 

 

 

 

 

 

Estimated Fair Value Measurements

 

(In millions)

 

Statement of Financial
Position Location

 

Carrying
Value

 

Quoted
Prices In
Active
Markets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation trust assets

 

Long-term marketable securities

 

$

13

 

$

13

 

$

 

$

 

Investments in marketable securities

 

Marketable securities and Long-term marketable securities

 

136

 

61

 

75

 

 

Fuel swap contracts:

 

 

 

 

 

 

 

 

 

 

 

Current

 

Prepaid expenses and other assets

 

1

 

 

 

1

 

Total financial assets

 

 

 

$

150

 

$

74

 

$

75

 

$

1

 

 

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 millions)

 

Fuel Swap
Contract
Assets (Liabilities)

 

Balance as of December 31, 2013

 

$

1

 

Total gains (realized and unrealized)

 

 

 

Included in accumulated other comprehensive income

 

 

Balance as of March 31, 2014

 

$

1

 

 

(In millions)

 

Fuel Swap
Contract
Assets (Liabilities)

 

Balance as of December 31, 2012

 

$

2

 

Total gains (realized and unrealized)

 

 

 

Included in accumulated other comprehensive income

 

1

 

Balance as of March 31, 2013

 

$

3

 

 

19



Table of Contents

 

The following tables present information relating to the significant unobservable inputs of our Level 3 financial instruments as of March 31, 2014 and December 31, 2013:

 

Item

 

Fair Value as of
March 31, 2014
(in millions)

 

Valuation
Technique

 

Unobservable Input

 

Range

 

Weighted
Average

 

Fuel swap contracts

 

$

1

 

Discounted Cash Flows

 

Forward Unleaded Price per Gallon(1)

 

$3.23 - $3.86

 

$

3.62

 

 

Item

 

Fair Value as of
December 31, 2013
(in millions)

 

Valuation
Technique

 

Unobservable Input

 

Range

 

Weighted
Average

 

Fuel swap contracts

 

$

1

 

Discounted Cash Flows

 

Forward Unleaded Price per Gallon(1)

 

$3.20 - $3.87

 

$

3.60

 

 


(1)                                 Forward prices per gallon 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 has in the past used, and may in the future use, derivative financial instruments to manage risks associated with changes in 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. The Company has also historically hedged the interest payments on a portion of its variable rate debt through the use of interest rate swap agreements, although the Company has no interest rate swap agreements outstanding as of March 31, 2014. 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. 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 loss and accumulated other comprehensive income on the condensed consolidated statements of financial position is presented as follows:

 

(In millions)

 

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

 

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

 

 

 

Derivatives designated as Cash Flow

 

Income

 

into Earnings

 

Location of Gain (Loss)

 

Hedge Relationships

 

Three months ended March 31, 2014

 

included in Earnings

 

 

 

 

 

 

 

 

 

Fuel swap contracts

 

$

 

$

 

Cost of services rendered and products sold

 

 

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Table of Contents

 

 

 

Effective Portion
of Gain
Recognized in
Accumulated Other
Comprehensive

 

Effective Portion
of Loss
Reclassified from
Accumulated Other
Comprehensive Income

 

 

 

Derivatives designated as Cash Flow

 

Income

 

into Earnings

 

Location of Gain (Loss)

 

Hedge Relationships

 

Three months ended March 31, 2013

 

included in Earnings

 

 

 

 

 

 

 

 

 

Fuel swap contracts

 

$

1

 

$

 

Cost of services rendered and products sold

 

Interest rate swap contracts

 

$

2

 

$

(2

)

Interest expense

 

 

Ineffective portions of derivative instruments designated in accordance with accounting standards as cash flow hedge relationships were insignificant during the three months ended March 31, 2014. As of March 31, 2014, the Company had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $21 million, maturing through 2014. 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 March 31, 2014, the Company had posted $1 million in letters of credit as collateral under its fuel hedging program, none of which were posted under the Company’s senior secured revolving credit facility (the “Revolving Credit Facility”).

 

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. 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. Specifically, as the underlying forecasted transactions occur during the next 12 months, the hedging gains and losses in accumulated other comprehensive income expected to be recognized in earnings is a gain of less than $1 million, net of tax, as of March 31, 2014. The amounts that are ultimately reclassified into earnings will be based on actual 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, LLC 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 $600 million aggregate principal amount of 8 percent senior notes due 2020 (the “8% 2020 Notes”) and $750 million aggregate principal amount of 7 percent senior notes due 2020 (the “7% 2020 Notes”, and together with the 8% 2020 Notes, the “2020 Notes”) are jointly and severally guaranteed on a senior unsecured basis by the Company’s domestic subsidiaries that guarantee our indebtedness under the Term Loan Facility, the pre-funded letter of credit facility (together, the “Term Facilities”) and the Revolving Credit Facility (together with the Term Facilities, the “Credit Facilities”) (the “Guarantors”). Each of the Guarantors is wholly owned, directly or indirectly, by the Company, and all guarantees are full and unconditional. Our non-U.S. subsidiaries, our subsidiaries subject to regulation as an insurance, home warranty, service contract or similar company, and certain other subsidiaries (the “Non-Guarantors”) do not guarantee 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 2020 Notes, (iv) the Guarantor becomes an unrestricted subsidiary under the indenture governing the 2020 Notes, (v) the defeasance of the Company’s obligations under the indenture governing the 2020 Notes or (vi) the payment in full of the principal amount of the 2020 Notes.

 

21



Table of Contents

 

THE SERVICEMASTER COMPANY, LLC AND SUBSIDIARIES

Condensed Consolidating Statement of Operations and Comprehensive Loss

For the Three Months Ended March 31, 2014 (Unaudited)

(In millions)

 

 

 

Parent
Issuer

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Operating Revenue

 

$

 

$

371

 

$

177

 

$

(15

)

$

533

 

Cost of services rendered and products sold

 

 

213

 

89

 

(14

)

288

 

Selling and administrative expenses

 

2

 

70

 

79

 

 

151

 

Amortization expense

 

 

12

 

1

 

 

13

 

Impairment of software and other related costs

 

 

 

48

 

 

48

 

Restructuring charges

 

 

1

 

4

 

 

5

 

Interest expense

 

55

 

5

 

1

 

 

61

 

Interest and net investment loss (income)

 

1

 

 

(6

)

(1

)

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations before Income Taxes

 

(58

)

70

 

(39

)

 

(27

)

(Benefit) Provision for income taxes

 

(19

)

19

 

(9

)

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations

 

(39

)

51

 

(30

)

 

(18

)

(Loss) income from discontinued operations, net of income taxes

 

(4

)

59

 

(150

)

 

(95

)

Equity in earnings of subsidiaries (net of tax)

 

(70

)

(183

)

 

253

 

 

Net Loss

 

$

(113

)

$

(73

)

$

(180

)

$

253

 

$

(113

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Loss

 

$

(116

)

$

(75

)

$

(183

)

$

258

 

$

(116

)

 

22



Table of Contents

 

THE SERVICEMASTER COMPANY, LLC AND SUBSIDIARIES

Condensed Consolidating Statement of Operations and Comprehensive (Loss) Income

For the Three Months Ended March 31, 2013 (Unaudited)

(In millions)

 

 

 

Parent
Issuer

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Operating Revenue

 

$

 

$

360

 

$

169

 

$

(15

)

$

514

 

Cost of services rendered and products sold

 

 

209

 

76

 

(15

)

270

 

Selling and administrative expenses

 

2

 

68

 

88

 

 

158

 

Amortization expense

 

 

12

 

1

 

 

13

 

Restructuring charges

 

 

1

 

2

 

 

3

 

Interest expense

 

26

 

28

 

6

 

 

60

 

Interest and net investment income

 

 

 

(2

)

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations before Income Taxes

 

(28

)

42

 

(2

)

 

12

 

(Benefit) provision for income taxes

 

(3

)

(5

)

14

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations

 

(25

)

47

 

(16

)

 

6

 

(Loss) income from discontinued operations, net of income taxes

 

(1

)

20

 

(48

)

 

(29

)

Equity in earnings of subsidiaries (net of tax)

 

3

 

(60

)

 

57

 

 

Net (Loss) Income

 

$

(23

)

$

7

 

$

(64

)

$

57

 

$

(23

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive (Loss) Income

 

$

(20

)

$

8

 

$

(62

)

$

54

 

$

(20

)

 

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Table of Contents

 

THE SERVICEMASTER COMPANY, LLC AND SUBSIDIARIES

Condensed Consolidating Statement of Financial Position (Unaudited)

As of March 31, 2014

(In millions)

 

 

 

Parent
Issuer

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

251

 

$

8

 

$

162

 

$

 

$

421

 

Marketable securities

 

 

 

23

 

 

23

 

Receivables

 

2

 

95

 

427

 

(131

)

393

 

Inventories

 

 

36

 

2

 

 

38

 

Prepaid expenses and other assets

 

9

 

22

 

27

 

(1

)

57

 

Deferred customer acquisition costs

 

 

12

 

16

 

 

28

 

Deferred taxes

 

76

 

28

 

3

 

 

107

 

Total Current Assets

 

338

 

201

 

660

 

(132

)

1,067

 

Property and Equipment:

 

 

 

 

 

 

 

 

 

 

 

At cost

 

 

199

 

146

 

 

345

 

Less: accumulated depreciation

 

 

(115

)

(96

)

 

(211

)

Net Property and Equipment

 

 

84

 

50

 

 

134

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

1,663

 

392

 

 

2,055

 

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

 

 

969

 

760

 

 

1,729

 

Notes receivable

 

34

 

 

22

 

(19

)

37

 

Long-term marketable securities

 

10

 

 

80

 

 

90

 

Investments in and advances to subsidiaries

 

3,281

 

1,046

 

 

(4,327

)

 

Other assets

 

62

 

24

 

7

 

(42

)

51

 

Debt issuance costs

 

38

 

 

 

 

38

 

Total Assets

 

$

3,763

 

$

3,987

 

$

1,971

 

$

(4,520

)

$

5,201

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholder’s (Deficit) Equity:

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

40

 

$

52

 

$

 

$

92

 

Accrued liabilities:

 

 

 

 

 

 

 

 

 

 

 

Payroll and related expenses

 

2

 

20

 

32

 

 

54

 

Self-insured claims and related expenses

 

7

 

24

 

55

 

 

86

 

Accrued interest payable

 

17

 

 

 

(1

)

16

 

Other

 

 

28

 

27

 

 

55

 

Deferred revenue

 

 

94

 

393

 

 

487

 

Liabilities of discontinued operations

 

7