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TERMINIX GLOBAL HOLDINGS INC - Quarter Report: 2015 March (Form 10-Q)

Table of Contents

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

________________________________________________

 

FORM 10-Q

 

________________________________________________

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

 

or

 

 

 

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 001-36507

 

________________________________________________

 

ServiceMaster Global Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

20-8738320

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

Commission file number 001-14762

 

________________________________________________

 

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.

 

 

ServiceMaster Global Holdings, Inc.

Yes    No  

The ServiceMaster Company, LLC

Yes    No  

 

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).

 

 

ServiceMaster Global Holdings, Inc.

Yes    No  

The ServiceMaster Company, LLC

Yes    No  

 

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.

 

 

 

 

ServiceMaster Global Holdings, Inc.

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

 

(Do not check if a smaller reporting company)

 

The ServiceMaster Company, LLC

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

 

(Do not check if a smaller reporting company)

 

 

 

 


 

Table of Contents

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

ServiceMaster Global Holdings, Inc.

Yes    No  

The ServiceMaster Company, LLC

Yes    No  

 

The number of shares of the registrant’s common stock outstanding as of April 30, 2015:

 

 

ServiceMaster Global Holdings, Inc.

134,779,720 shares of common stock, par value $0.01 per share

The ServiceMaster Company, LLC is a privately held limited liability company, and its membership interests are not publicly traded. At April 30, 2015, all of the registrant’s membership interests were owned by CDRSVM Holding, LLC. 

 

 

 

 


 

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EXPLANATORY NOTE

This Form 10-Q is a combined quarterly report being filed separately by two registrants: ServiceMaster Global Holdings, Inc. and The ServiceMaster Company, LLC. Unless the context indicates otherwise, any reference in this report to Holdings refers to ServiceMaster Global Holdings, Inc., any reference to SvM refers to The ServiceMaster Company, LLC, the indirect wholly-owned subsidiary of Holdings, and any references to the Company, we, us, and our refer to ServiceMaster Global Holdings, Inc. together with its direct and indirect subsidiaries, including SvM. Each registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information. 

 

 

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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 (Loss) 

4

 

 

Condensed Consolidated Statements of Financial Position 

5

 

 

Condensed Consolidated Statements of Cash Flows 

6

 

 

Notes to Condensed Consolidated Financial Statements 

7

 

 

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

15

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

15

 

 

Item 4. Controls and Procedures 

15

 

 

Part II. Other Information 

15

 

 

Item 1. Legal Proceedings 

15

 

 

Item 1A. Risk Factors 

15

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

15

 

 

Item 6. Exhibits 

15

 

 

Signature 

15

 

 

 

 

3


 

Table of Contents

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

(In millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holdings

 

SvM

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31,

 

March 31,

 

 

2015

 

2014

 

2015

 

2014

Revenue 

 

$

571 

 

$

533 

 

$

571 

 

$

533 

Cost of services rendered and products sold

 

 

303 

 

 

288 

 

 

303 

 

 

288 

Selling and administrative expenses

 

 

151 

 

 

151 

 

 

151 

 

 

151 

Amortization expense

 

 

12 

 

 

13 

 

 

12 

 

 

13 

Impairment of software and other related costs

 

 

 —

 

 

48 

 

 

 —

 

 

48 

Restructuring charges

 

 

 

 

 

 

 

 

Interest expense

 

 

46 

 

 

61 

 

 

46 

 

 

61 

Interest and net investment income

 

 

(1)

 

 

(6)

 

 

(1)

 

 

(6)

Loss on extinguishment of debt

 

 

13 

 

 

 —

 

 

13 

 

 

 —

Income (Loss) from Continuing Operations before Income Taxes 

 

 

45 

 

 

(27)

 

 

45 

 

 

(27)

Provision (Benefit) for income taxes

 

 

17 

 

 

(9)

 

 

17 

 

 

(9)

Income (Loss) from Continuing Operations 

 

 

28 

 

 

(18)

 

 

28 

 

 

(18)

Loss from discontinued operations, net of income taxes

 

 

 —

 

 

(95)

 

 

 —

 

 

(95)

Net Income (Loss)

 

$

28 

 

$

(113)

 

$

28 

 

$

(113)

Total Comprehensive Income (Loss)

 

$

22 

 

$

(116)

 

$

22 

 

$

(116)

Weighted-average common shares outstanding - Basic

 

 

134.4 

 

 

91.7 

 

 

 

 

 

 

Weighted-average common shares outstanding - Diluted

 

 

136.1 

 

 

91.7 

 

 

 

 

 

 

Basic Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

$

0.21 

 

$

(0.20)

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

 

 —

 

 

(1.03)

 

 

 

 

 

 

Net Income (Loss)

 

 

0.21 

 

 

(1.23)

 

 

 

 

 

 

Diluted Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

$

0.21 

 

$

(0.20)

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

 

 —

 

 

(1.03)

 

 

 

 

 

 

Net Income (Loss)

 

 

0.20 

 

 

(1.23)

 

 

 

 

 

 

 

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except per share data)

                

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holdings

 

SvM

 

 

As of

 

As of

 

As of

 

As of

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

 

2015

 

2014

 

2015

 

2014

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

248 

 

$

389 

 

$

239 

 

$

368 

Marketable securities

 

 

19 

 

 

19 

 

 

19 

 

 

19 

Receivables, less allowances of $23 and $25, respectively

 

 

417 

 

 

441 

 

 

417 

 

 

441 

Inventories

 

 

40 

 

 

42 

 

 

40 

 

 

42 

Prepaid expenses and other assets

 

 

37 

 

 

44 

 

 

40 

 

 

44 

Deferred customer acquisition costs

 

 

31 

 

 

35 

 

 

31 

 

 

35 

Deferred taxes

 

 

81 

 

 

76 

 

 

100 

 

 

97 

Total Current Assets

 

 

872 

 

 

1,044 

 

 

885 

 

 

1,045 

Property and Equipment:

 

 

 

 

 

 

 

 

 

 

 

 

At cost

 

 

375 

 

 

369 

 

 

375 

 

 

369 

Less: accumulated depreciation

 

 

(243)

 

 

(233)

 

 

(243)

 

 

(233)

Net Property and Equipment

 

 

132 

 

 

136 

 

 

132 

 

 

136 

Other Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

2,076 

 

 

2,069 

 

 

2,076 

 

 

2,069 

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

 

 

1,687 

 

 

1,696 

 

 

1,687 

 

 

1,696 

Notes receivable

 

 

28 

 

 

26 

 

 

28 

 

 

26 

Long-term marketable securities

 

 

85 

 

 

88 

 

 

85 

 

 

88 

Other assets

 

 

39 

 

 

41 

 

 

39 

 

 

41 

Debt issuance costs

 

 

30 

 

 

34 

 

 

30 

 

 

34 

Total Assets 

 

$

4,949 

 

$

5,134 

 

$

4,962 

 

$

5,135 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

87 

 

$

84 

 

$

87 

 

$

84 

Accrued liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related expenses

 

 

53 

 

 

82 

 

 

51 

 

 

80 

Self-insured claims and related expenses

 

 

94 

 

 

92 

 

 

94 

 

 

92 

Accrued interest payable

 

 

 

 

34 

 

 

 

 

34 

Other

 

 

47 

 

 

51 

 

 

47 

 

 

51 

Deferred revenue

 

 

531 

 

 

514 

 

 

531 

 

 

514 

Liabilities of discontinued operations

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

 

39 

 

 

39 

 

 

39 

 

 

39 

Total Current Liabilities

 

 

863 

 

 

905 

 

 

861 

 

 

902 

Long-Term Debt 

 

 

2,826 

 

 

3,017 

 

 

2,826 

 

 

3,017 

Other Long-Term Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes

 

 

715 

 

 

715 

 

 

715 

 

 

715 

Other long-term obligations, primarily self-insured claims

 

 

146 

 

 

138 

 

 

146 

 

 

138 

Total Other Long-Term Liabilities

 

 

861 

 

 

854 

 

 

861 

 

 

853 

Commitments and Contingencies (See Note 4)

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock $0.01 par value (authorized 2,000,000,000 shares with 142,374,976 shares issued and 134,733,533 outstanding at March 31, 2015 and 141,731,682 shares issued and 134,092,335 outstanding at December 31, 2014)

 

 

 

 

 

 

 —

 

 

 —

Additional paid-in capital

 

 

2,224 

 

 

2,207 

 

 

2,159 

 

 

2,129 

Retained deficit

 

 

(1,693)

 

 

(1,720)

 

 

(1,731)

 

 

(1,759)

Accumulated other comprehensive loss

 

 

(13)

 

 

(8)

 

 

(13)

 

 

(8)

Less common stock held in treasury, at cost (7,641,443 shares at March 31, 2015 and 7,639,347 shares at December 31, 2014)

 

 

(122)

 

 

(122)

 

 

 —

 

 

 —

Total Shareholders' Equity

 

 

398 

 

 

359 

 

 

414 

 

 

362 

Total Liabilities and Shareholders' Equity 

 

$

4,949 

 

$

5,134 

 

$

4,962 

 

$

5,135 

                       

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

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Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holdings

 

SvM

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31,

 

March 31,

 

 

2015

 

2014

 

2015

 

2014

Cash and Cash Equivalents at Beginning of Period 

 

$

389 

 

$

484 

 

$

368 

 

$

476 

Cash Flows from Operating Activities from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

28 

 

 

(113)

 

 

28 

 

 

(113)

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

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

 

 —

 

 

95 

 

 

 —

 

 

95 

Depreciation expense

 

 

12 

 

 

12 

 

 

12 

 

 

12 

Amortization expense

 

 

12 

 

 

13 

 

 

12 

 

 

13 

Amortization of debt issuance costs

 

 

 

 

 

 

 

 

Impairment of software and other related costs

 

 

 —

 

 

48 

 

 

 —

 

 

48 

Loss on extinguishment of debt

 

 

13 

 

 

 —

 

 

13 

 

 

 —

Call premium paid on retirement of debt

 

 

(11)

 

 

 —

 

 

(11)

 

 

 —

Deferred income tax provision

 

 

 

 

(6)

 

 

 

 

(6)

Stock-based compensation expense

 

 

 

 

 

 

 

 

Excess tax benefits from stock-based compensation

 

 

(8)

 

 

 —

 

 

(8)

 

 

 —

Gain on sales of marketable securities

 

 

 —

 

 

(4)

 

 

 —

 

 

(4)

Other

 

 

 —

 

 

 

 

 —

 

 

Change in working capital, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

21 

 

 

13 

 

 

21 

 

 

13 

Inventories and other current assets

 

 

 

 

(4)

 

 

 

 

(4)

Accounts payable

 

 

 

 

 

 

 

 

Deferred revenue

 

 

17 

 

 

17 

 

 

17 

 

 

17 

Accrued liabilities

 

 

(29)

 

 

(22)

 

 

(29)

 

 

(22)

Accrued interest payable

 

 

(25)

 

 

(35)

 

 

(25)

 

 

(35)

Accrued restructuring charges

 

 

(1)

 

 

 

 

(1)

 

 

Current income taxes

 

 

10 

 

 

(5)

 

 

 

 

(5)

Net Cash Provided from Operating Activities from Continuing Operations 

 

 

60 

 

 

21 

 

 

61 

 

 

22 

Cash Flows from Investing Activities from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

 

(8)

 

 

(14)

 

 

(8)

 

 

(14)

Sale of equipment and other assets

 

 

 

 

 —

 

 

 

 

 —

Other business acquisitions, net of cash acquired

 

 

(12)

 

 

(41)

 

 

(12)

 

 

(41)

Notes receivable, financial investments and securities, net

 

 

 

 

38 

 

 

 

 

38 

Net Cash Used for Investing Activities from Continuing Operations 

 

 

(14)

 

 

(17)

 

 

(14)

 

 

(17)

Cash Flows from Financing Activities from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings of debt

 

 

 

 

 —

 

 

 

 

 —

Payments of debt

 

 

(200)

 

 

(11)

 

 

(200)

 

 

(11)

Contribution to TruGreen Holding Corporation

 

 

 —

 

 

(35)

 

 

 —

 

 

(35)

Contribution from Holdings

 

 

 —

 

 

 —

 

 

20 

 

 

 —

Repurchase of common stock and RSU vesting

 

 

 —

 

 

(3)

 

 

 —

 

 

 —

Issuance of common stock

 

 

 

 

 

 

 —

 

 

 —

Excess tax benefits from stock-based compensation

 

 

 

 

 —

 

 

 

 

 —

Net Cash Used for Financing Activities from Continuing Operations 

 

 

(182)

 

 

(43)

 

 

(170)

 

 

(46)

Cash Flows from Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for operating activities

 

 

(5)

 

 

(8)

 

 

(5)

 

 

(8)

Cash used for investing activities

 

 

 —

 

 

(2)

 

 

 —

 

 

(2)

Cash used for financing activities

 

 

 —

 

 

(3)

 

 

 —

 

 

(3)

Net Cash Used for Discontinued Operations

 

 

(5)

 

 

(13)

 

 

(5)

 

 

(13)

Cash Decrease During the Period 

 

 

(141)

 

 

(52)

 

 

(128)

 

 

(55)

Cash and Cash Equivalents at End of Period 

 

$

248 

 

$

432 

 

$

239 

 

$

421 

 

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

 

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SERVICEMASTER GLOBAL HOLDINGS, INC. AND THE SERVICEMASTER COMPANY, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(UNAUDITED)

Note 1. Basis of Presentation

The unaudited condensed consolidated financial statements of ServiceMaster Global Holdings, Inc. include the accounts of ServiceMaster Global Holdings, Inc. (Holdings) and its majority-owned subsidiary partnerships, limited liability companies and corporations (collectively, the Company, we, us, and our), including The ServiceMaster Company, LLC (SvM). The unaudited condensed consolidated financial statements of The ServiceMaster Company, LLC include the accounts of SvM and its majority-owned subsidiary partnerships, limited liability companies and corporations. All consolidated Company subsidiaries are wholly-owned. Intercompany transactions and balances have been eliminated.

The Company is a leading provider of essential residential and commercial services. The Company’s services include termite and pest control, home warranties, disaster restoration, janitorial, residential cleaning, furniture repair and home inspection. The Company 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 unaudited 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 U.S. Securities and Exchange Commission (SEC). The Company recommends that the quarterly unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014,  as filed with the SEC (the 2014 Form 10-K). The unaudited 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.

Initial Public Offering

On June 25, 2014, Holdings’ registration statement on Form S-1 was declared effective by the SEC for an initial public offering of its common stock. Holdings registered the offering and sale of 35,900,000 shares of its common stock and an additional 5,385,000 shares of its common stock sold to the underwriters pursuant to an option to purchase additional shares. On July 1, 2014, Holdings completed the offering of 41,285,000 shares of its common stock at a price of $17.00 per share.

Secondary Public Offering

On February 4, 2015, Holdings’ registration statement on Form S-1 was declared effective by the SEC for a secondary offering of its common stock. Holdings registered on behalf of certain stockholders the offering and sale of 25,000,000 shares of common stock and an additional 3,750,000 shares of common stock sold to the underwriters pursuant to an option to purchase additional shares. On February 10, 2015, the selling stockholders completed the offering of 25,000,000 shares of common stock at a price of $29.50 per share. On February 13, 2015, the selling stockholders completed the offering of an additional 3,750,000 shares of common stock at a price of $29.50 per share pursuant to the underwriters’ option to purchase additional shares. Holdings did not receive any of the proceeds from the aggregate 28,750,000 shares of common stock sold by the selling stockholders.

 

 

Note 2. Significant Accounting Policies

The preparation of the unaudited condensed consolidated financial statements requires management to make certain estimates and assumptions required under GAAP which may differ from actual results. The more significant areas requiring the use of management estimates relate to 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; share based compensation; useful lives for depreciation and amortization expense; the valuation of marketable securities; and the valuation of tangible and intangible assets. In 2015, there have been no changes in the significant areas that require estimates or in the underlying methodologies used in determining the amounts of these associated estimates.

The allowance for receivables is developed based on several factors including overall customer credit quality, historical write-off experience and specific account analyses that project the ultimate collectability of the outstanding balances. As such, these factors may change over time causing the reserve level to vary.

The Company carries insurance policies on insurable risks at levels which 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

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accrual include 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.

The Company seeks to reduce the potential amount of loss arising from self-insured claims by insuring certain levels of risk. While insurance agreements are designed to limit the Company’s losses from large exposure and permit recovery of a portion of direct unpaid losses, insurance does not relieve the Company of its ultimate liability. Accordingly, the accruals for insured claims represent the Company’s total unpaid gross losses. Insurance recoverables, which are reported within Prepaid expenses and other assets and Other assets, relate to estimated insurance recoveries on the insured claims reserves.

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.

The Company records deferred income tax balances based on the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and income tax purposes. The Company records its deferred tax items based on the estimated value of the tax basis. The Company adjusts tax estimates when required to reflect changes based on factors such as changes in tax laws, relevant court decisions, results of tax authority reviews and statutes of limitations. The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes potential interest and penalties related to its uncertain tax positions in income tax expense.

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 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 $18 million and $17 million for the three months ended March 31, 2015 and 2014, respectively. 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.

Revenues are presented net of sales taxes collected and remitted to government taxing authorities on the condensed consolidated statements of operations and comprehensive income (loss).

The Company had $531 million and $514 million of deferred revenue as of March 31, 2015 and December 31, 2014, 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 $31 million and $35 million as of March 31, 2015 and December 31, 2014, respectively.

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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 the condensed consolidated statements of financial position.

Inventory

Inventories are recorded at the lower of cost (primarily on a weighted average cost basis) or market. The Company’s inventory primarily consists of finished goods to be used on the customers’ premises or sold to franchisees.

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.

Depreciation of property and equipment, including depreciation of assets held under capital leases, was $12 million for each of the three month periods ended March 31, 2015 and 2014.

The Company recorded an impairment charge of $48 million ($29 million, net of tax) in the three months ended March 31, 2014 relating to its decision in the first quarter of 2014 to abandon its efforts to deploy a new operating system at American Home Shield. Included in this charge were 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. 

Restricted Net Assets

There are third-party restrictions on the ability of certain of the Company’s subsidiaries to transfer funds to the Company. These restrictions are related to regulatory requirements at American Home Shield and to a subsidiary borrowing arrangement at 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. The payments of ordinary and extraordinary dividends by the Company’s home warranty and similar subsidiaries (through which the Company conducts its American Home Shield business) are subject to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws and regulations require certain such subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can pay to the Company. As of March 31, 2015, the total net assets subject to these third-party restrictions was $166 million. None of the Company’s subsidiaries are obligated to make funds available to the Company through the payment of dividends.

Fair Value of Financial Instruments and Credit Risk

See Note 16 for information relating to the fair value of financial instruments. Financial instruments, which potentially subject the Company to financial and credit risk, consist principally of investments and receivables. Investments consist primarily of publicly traded debt, certificates of deposit and common equity securities. 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 majority of the Company’s receivables have little concentration of credit risk due to the large number of customers with relatively small balances and their dispersion across geographical areas. The Company maintains an allowance for losses based upon the expected collectability of receivables.

Income Taxes

The Company and its subsidiaries file consolidated U.S. federal income tax returns. State and local returns are filed both on a separate company basis and on a combined unitary basis with the Company. Current and deferred income taxes are provided for on a separate company basis. The Company accounts for income taxes using an asset and liability approach for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred income taxes are provided to reflect the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized. The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in its tax return. The Company recognizes potential interest and penalties related to its uncertain tax positions in income tax expense.

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Stock-Based Compensation

Our stock-based compensation expense is estimated at the grant date based on an award’s fair value as calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-Scholes model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly. See Note 6 to our condensed consolidated financial statements.

Our board of directors and management intended all options granted to be exercisable, at a price per share not less than the per share fair value of our common stock on the date of grant. We grant options to participants with an exercise price equal to the then current fair value of the common stock.

Earnings Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and restricted stock units (RSUs) are reflected in diluted net income (loss) per share by applying the treasury stock method. See Note 17 to our condensed consolidated financial statements.

Newly Issued Accounting Statements and Positions

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” to provide a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This model supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” Entities have the option of using either a full retrospective or modified approach to adopt the guidance. The amendments in ASU 2014-09 must be applied using either the retrospective or cumulative effect transition method and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016; however, the FASB has decided to propose a one-year delay in the effective date. Early adoption is not permitted. The Company is currently evaluating the impact of adopting ASU 2014-09.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” to change the presentation of debt issuance costs in financial statements as part of the FASB’s simplification initiative. Under current guidance, an entity reports debt issuance costs in the balance sheet as deferred charges (i.e., as an asset). The ASU specifies that now “debt issuance costs related to a note shall be reported in the balance sheet as a direct deduction from the face amount of that note” and that “amortization of debt issuance costs also shall be reported as interest expense.” The amendments in ASU 2015-03 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The adoption of ASU 2015-03 will result in the retrospective presentation of debt issuance costs as a direct deduction from the face amount of that note instead of the current presentation as an asset for each of the balance sheet periods presented. The Company currently reports the amortization of debt issuance costs as interest expense.

 

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Note 3. Restructuring Charges

The Company incurred restructuring charges of $2 million ($1 million, net of tax) and $5 million ($3 million, net of tax) for the three months ended March 31, 2015 and 2014, respectively. Restructuring charges were comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Terminix branch optimization(1)

 

$

 

$

Corporate(2)

 

 

 

 

Total restructuring charges

 

$

 

$

___________________________________

(1)

For the three months ended March 31, 2015 and 2014, these charges included severance 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. For the three months ended March 31, 2015, these charges primarily included severance costs. For the three months ended March 31, 2014, these charges included professional fees of $1 million and severance and other costs of $3 million.

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

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:

 

 

 

 

 

 

 

 

 

 

 

Accrued

 

 

Restructuring

(In millions)

 

Charges

Balance as of December 31, 2014

 

$

Costs incurred

 

 

Costs paid or otherwise settled

 

 

(4)

Balance as of March 31, 2015

 

$

 

 

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 include 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:

 

 

 

 

 

 

 

 

 

 

 

Accrued

 

 

Self-insured

(In millions)

 

Claims, Net

Balance as of December 31, 2014

 

$

104 

Provision for self-insured claims

 

 

12 

Cash payments

 

 

(6)

Balance as of March 31, 2015

 

$

109 

 

 

 

 

Balance as of December 31, 2013

 

$

101 

Provision for self-insured claims

 

 

14 

Cash payments

 

 

(12)

Balance as of March 31, 2014

 

$

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

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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.

On March 25, 2015, the Company was informed that the United States Department of Justice initiated a criminal investigation into allegations that a local Terminix branch used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands, resulting in serious injuries to four members of a family vacationing there. The U.S. Virgin Islands Department of Planning and Natural Resources is also investigating the matter, as is the United States Environmental Protection Agency (the EPA). The EPA has also requested information concerning the possible distribution, sale or use of methyl bromide in Puerto Rico. The extent of potential fines and other sanctions that the federal and local governmental authorities may impose, and the impact of any judicial, administrative or regulatory proceedings or other issues resulting from or related to the incident, including claims by third parties, investigation costs and reputational harm, is not currently known. The Company is in the process of investigating this matter and is fully cooperating with all relevant governmental authorities. In the first quarter of 2015, the Company recorded a charge of $3 million in connection with unasserted civil claims related to the foregoing matter, an amount equal to the Company’s insurance deductible under its general liability insurance program. The range of any potential criminal or other penalties or governmental fines or sanctions is not currently known or reasonably estimable.

In addition to the matter discussed above, 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. Subject to the paragraph above, the Company does not expect any of these proceedings to have a material effect on its reputation, business, financial position, results of operations or cash flows; however, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial position, results of operations and cash flows. 

 

 

Note 5. Goodwill and Intangible Assets

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, 2015 and 2014. There were no accumulated impairment losses recorded in continuing operations as of March 31, 2015.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American

 

Franchise

 

 

 

(In millions)

 

Terminix

 

Home Shield

 

Services Group

 

Total

Balance as of December 31, 2014

 

$

1,497 

 

$

381 

 

$

191 

 

$

2,069 

Acquisitions

 

 

10 

 

 

 —

 

 

 —

 

 

10 

Disposals

 

 

 —

 

 

 —

 

 

(1)

 

 

(1)

Other (1)

 

 

(2)

 

 

 —

 

 

 —

 

 

(2)

Balance as of March 31, 2015

 

$

1,505 

 

$

381 

 

$

190 

 

$

2,076 

___________________________________

(1)

Reflects the impact of foreign exchange rates.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

As of March 31, 2015

 

As of December 31, 2014

 

 

Useful Lives

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Accumulated

 

 

 

(In millions)

 

(Years)

 

Gross

 

Amortization

 

Net

 

Gross

 

Amortization

 

Net

Trade names(1)

 

N/A

 

$

1,608 

 

$

 —

 

$

1,608 

 

$

1,608 

 

$

 —

 

$

1,608 

Customer relationships

 

3 - 10

 

 

536 

 

 

(500)

 

 

37 

 

 

533 

 

 

(489)

 

 

44 

Franchise agreements

 

20 - 25

 

 

88 

 

 

(60)

 

 

28 

 

 

88 

 

 

(59)

 

 

29 

Other

 

4 - 30

 

 

47 

 

 

(33)

 

 

14 

 

 

47 

 

 

(32)

 

 

15 

Total

 

 

 

$

2,279 

 

$

(593)

 

$

1,687 

 

$

2,277 

 

$

(581)

 

$

1,696 

___________________________________

(1)

Not subject to amortization.

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For the existing intangible assets, the Company anticipates amortization expense for the remainder of 2015 and each of the next five years of $23 million, $16 million, $11 million, $7 million, $4 million and $3 million, respectively.

In the three months ended March 31, 2014, the Company recorded a pre-tax non-cash impairment charge of $139 million ($84 million, net of tax) associated with the trade name at its former TruGreen business, which is reported in Loss from discontinued operations, net of income taxes.

 

 

Note 6. Stock-Based Compensation

For the three months ended March 31, 2015 and 2014, the Company recognized stock-based compensation expense of $2 million ($1 million, net of tax) and $1 million ($1 million, net of tax), respectively. As of March 31, 2015, there was $25 million of total unrecognized compensation costs related to non-vested stock options and RSUs granted under the Amended and Restated ServiceMaster Global Holdings, Inc. Stock Incentive Plan (MSIP) and Omnibus Incentive Plan. These remaining costs are expected to be recognized over a weighted-average period of 2.75 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).

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

Unrealized

 

Gains on

 

 

 

 

 

 

 

 

(Losses)

 

Available

 

Foreign

 

 

 

 

 

Gains on

 

-for-Sale

 

Currency

 

 

 

(In millions)

 

Derivatives

 

Securities

 

Translation

 

Total

Balance as of December 31, 2014

 

$

(6)

 

$

 

$

(8)

 

$

(8)

Other comprehensive (loss) income before reclassifications:

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax amount

 

 

(6)

 

 

 —

 

 

(4)

 

 

(9)

Tax (benefit) provision

 

 

(2)

 

 

 —

 

 

 —

 

 

(2)

After-tax amount

 

 

(4)

 

 

 —

 

 

(4)

 

 

(7)

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

 

 

 

 

 —

 

 

 —

 

 

Net current period other comprehensive loss

 

 

(2)

 

 

 —

 

 

(4)

 

 

(6)

Balance as of March 31, 2015

 

$

(8)

 

$

 

$

(11)

 

$

(13)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2013

 

$

 

$

 

$

(1)

 

$

Other comprehensive income (loss) before reclassifications:

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax amount

 

 

 —

 

 

 

 

(1)

 

 

 —

Tax provision (benefit)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

After-tax amount

 

 

 —

 

 

 

 

(1)

 

 

 —

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

 

 

 —

 

 

(3)

 

 

 —

 

 

(3)

Net current period other comprehensive loss

 

 

 —

 

 

(2)

 

 

(1)

 

 

(3)

Spin-off of the former TruGreen business

 

 

 —

 

 

 —

 

 

(2)

 

 

(2)

Balance as of March 31, 2014

 

$

 —

 

$

 

$

(3)

 

$

___________________________________

(1)

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts Reclassified from Accumulated

 

 

 

Other Comprehensive Income (Loss)

 

 

 

Three Months Ended

Condensed Consolidated Statements of

 

 

March 31,

Operations and Comprehensive Income (Loss) 

(In millions)

 

2015

 

2014

Location

Losses on derivatives:

 

 

 

 

 

 

 

Fuel swap contracts

 

$

 

$

 —

Cost of services rendered and products sold

Interest rate swap contracts

 

 

 

 

 —

Interest expense

Net losses on derivatives

 

 

 

 

 —

 

Impact of income taxes

 

 

(1)

 

 

 —

Provision for income taxes

Total reclassifications related to derivatives

 

$

 

$

 —

 

Gains on available-for-sale securities

 

$

 —

 

$

(4)

Interest and net investment income

Impact of income taxes

 

 

 —

 

 

Provision for income taxes

Total reclassifications related to securities

 

$

 —

 

$

(3)

 

Total reclassifications for the period

 

$

 

$

(3)

 

 

 

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)

 

2015

 

2014

Cash paid for or (received from):

 

 

 

 

 

 

Interest expense

 

$

67 

 

$

92 

Interest and dividend income

 

 

(1)

 

 

(1)

Income taxes, net of refunds

 

 

 

 

The Company acquired $2  million of property and equipment through capital leases and other non-cash financing transactions in each of the three month periods ended March 31, 2015 and 2014, 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, 2015 and December 31, 2014, 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 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

(In millions)

 

Cost

 

Gains

 

Losses

 

Value

Available-for-sale and trading securities, March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

$

61 

 

$

 

$

 —

 

$

62 

Equity securities

 

 

33 

 

 

 

 

(1)

 

 

41 

Total securities

 

$

94 

 

$

10 

 

$

(1)

 

$

103 

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

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

$

65 

 

$

 

$

 —

 

$

66 

Equity securities

 

 

33 

 

 

 

 

(1)

 

 

41 

Total securities

 

$

98 

 

$

10 

 

$

(1)

 

$

107 

There were no unrealized losses which had been in a loss position for more than one year as of March 31, 2015 and December 31, 2014. The aggregate fair value of the investments with unrealized losses was $23 million and $29 million as of March 31, 2015 and December 31, 2014, 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

14


 

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or the market(s) in which the issuer competes. The table below summarizes proceeds, gross realized gains and gross realized losses 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 months ended March 31, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Proceeds from sale of securities

 

$

 —

 

$

42 

Gross realized gains, pre-tax

 

 

 —

 

 

Gross realized gains, net of tax

 

 

 —

 

 

Gross realized losses, pre-tax

 

 

 —

 

 

 —

Gross realized losses, net of tax

 

 

 —

 

 

 —

 

 

 

Note 10. Long-Term Debt

Long-term debt is summarized in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

March 31,

 

December 31,

(In millions)

 

2015

 

2014

Senior secured term loan facility maturing in 2021(1)

 

 

1,800 

 

 

1,803 

7.00% senior notes maturing in 2020

 

 

488 

 

 

488 

8.00% senior notes maturing in 2020(2)

 

 

201 

 

 

391 

Revolving credit facility maturing in 2019

 

 

 —

 

 

 —

7.10% notes maturing in 2018(3)

 

 

74 

 

 

73 

7.45% notes maturing in 2027(3)

 

 

162 

 

 

161 

7.25% notes maturing in 2038(3)

 

 

64 

 

 

64 

Vehicle capital leases(4)

 

 

38 

 

 

39 

Other

 

 

39 

 

 

37 

Less current portion

 

 

(39)

 

 

(39)

Total long-term debt

 

$

2,826 

 

$

3,017 

___________________________________

(1)

As of March 31, 2015 and December 31, 2014, presented net of $16 million and $17 million, respectively, in unamortized original issue discount.

(2)

As of March 31, 2015 and December 31, 2014, includes $1 million in unamortized premium received on the sale of $100 million aggregate principal amount of such notes.

(3)

As of March 31, 2015 and December 31, 2014, collectively presented net of $57 million and $59 million, respectively, of unamortized fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown above.

(4)

SvM has entered into a fleet management services agreement (the Fleet Agreement) which, among other things, allows SvM 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.

Refinancing of Indebtedness

On February 17, 2015, SvM redeemed $190 million in aggregate principal amount of its outstanding 8 percent senior notes due February 15, 2020 (the 8% 2020 Notes) at a redemption price of 106.0% of the principal amount using available cash. In connection with the partial redemption, we recorded a loss on extinguishment of debt of $13 million in the three months ended March 31, 2015, which includes a pre-payment premium of $11 million and the write-off of $2 million of debt issuance costs.   

On April 1, 2015, SvM entered into a first amendment (the First Term Loan Amendment) which amends the Credit Agreement governing SvM’s $1,825 million term loan facility maturing July 1, 2021 (the Term Loan Facility) and $300 million revolving credit facility maturing July 1, 2019 (the Revolving Credit Facility) (together with the Term Loan Facility, the Credit Facilities). The First Term Loan Amendment provides for incremental term loans (the Incremental Term Loans) under the Term Loan Facility in an aggregate principal amount of $175 million. On April 1, 2015, SvM used the net proceeds from the Incremental Term Loans, together with cash on hand, to redeem the remaining outstanding $200 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount. In connection with the redemption, we expect to record a loss on extinguishment of debt of approximately $14 million in the second quarter of 2015, which includes a pre‑payment premium of $12 million and the write‑off of approximately $2 million of debt issuance costs. The April 1, 2015 refinancing activities are not reflected in the table above as they occurred after March 31, 2015.   

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Interest Rate Swaps

Interest rate swap agreements in effect as of March 31, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Trade Date

 

Effective
Date

 

Expiration
Date

 

Notional
Amount

 

Fixed
Rate(1)

 

Floating
Rate

July 23, 2014

 

August 1, 2014

 

July 31, 2018

 

300,000

 

1.786

%

One month LIBOR

July 23, 2014

 

March 1, 2015

 

July 31, 2018

 

400,000

 

1.927

%

One month LIBOR


(1)Before the application of the applicable borrowing margin.

 

 

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.

During the three months ended March 31, 2015, the Company completed several pest control and termite acquisitions. The total net purchase price for these acquisitions was $14 million. The Company recorded goodwill of $10 million and other intangibles of $4 million related to these acquisitions.

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. During the three months ended March 31, 2014, the Company recorded goodwill of $30 million and other intangibles of $17 million related to this acquisition. 

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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Purchase price (including liabilities assumed)

 

$

14 

 

$

71 

Less liabilities assumed

 

 

 —

 

 

(28)

Net purchase price

 

$

14 

 

$

43 

 

 

 

 

 

 

 

Net cash paid for acquisitions

 

$

12 

 

$

41 

Seller financed debt

 

 

 

 

Payment for acquisitions

 

$

14 

 

$

43 

 

 

Note 12. Discontinued Operations

Loss from discontinued operations, net of income taxes, for all periods presented includes the operating results of the previously sold businesses.

The operating results of discontinued operations are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Revenue

 

$

 —

 

$

Cost of services rendered and products sold

 

 

 —

 

 

12 

Selling and administrative expenses

 

 

 

 

Goodwill and trade name impairment(1)

 

 

 —

 

 

139 

Restructuring charges

 

 

 —

 

 

Loss before income taxes(1)

 

 

(1)

 

 

(155)

Benefit for income taxes(1)

 

 

 —

 

 

(60)

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

 

$

 —

 

$

(95)

___________________________________

(1)

In the three months ended March 31, 2014, the Company recorded a pre-tax non-cash impairment charge of $139 million ($84 million, net of tax) associated with the trade name at its former TruGreen business, which is reported in Loss from discontinued operations, net of income taxes.

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The table below summarizes the activity during the three months ended March 31, 2015 for the remaining liabilities of previously sold businesses. The remaining obligations primarily relate to legal and other reserves. The Company believes that the remaining reserves continue to be adequate and reasonable.

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities of

 

 

 

Discontinued

 

(In millions)

 

Operations

 

Balance as of December 31, 2014

 

$

 

Costs incurred

 

 

 

Costs paid or otherwise settled

 

 

(5)

 

Balance as of March 31, 2015

 

$

 

 

Note 13. Income Taxes

As of March 31, 2015 and December 31, 2014, the Company had $14 million and $13 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 $2 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 income (loss) from continuing operations at Holdings was 37.0 percent for the three months ended March 31, 2015 compared to 33.3 percent for the three months ended March 31, 2014. The effective tax rate on income (loss) from continuing operations at SvM was 37.0 percent for the three months ended March 31, 2015 compared to 33.2 percent for the three months ended March 31, 2014. The effective tax rate on income from continuing operations for the three months ended March 31, 2015 was primarily affected by a reduction of the state valuation allowance on net operating losses during the quarter. 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 TruGreen spin-off on January 14, 2014. 

 

Note 14. Business Segment Reporting

The business of the Company is conducted through three reportable segments: Terminix, American Home Shield and Franchise Services Group.

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. Corporate includes SMAC and the Company’s headquarters operations (substantially all of which costs are allocated to the Company’s reportable segments), which provide various technology, human resources, finance, legal and other support services to the reportable segments. 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.

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 primarily of direct costs and indirect costs allocated from Corporate. Identifiable assets are those used in carrying out the operations of the business unit and include intangible assets directly related to its operations.

The Company uses Reportable Segment Adjusted EBITDA as its measure of segment profitability. Accordingly, the CODM evaluates performance and allocates resources based primarily on Reportable Segment Adjusted EBITDA. Reportable Segment Adjusted EBITDA is defined as net income (loss) before: unallocated corporate expenses; 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 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; consulting agreement termination fees; and other non-operating expenses. The Company’s definition of Reportable Segment Adjusted EBITDA may not be calculated or comparable to similarly titled measures of other companies. We believe Reportable Segment Adjusted EBITDA is useful for

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investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, consulting agreements and equity-based, long-term incentive plans.

Information for continuing operations for each reportable segment and Corporate is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Revenue:

 

 

 

 

 

 

Terminix

 

$

336 

 

$

320 

American Home Shield

 

 

175 

 

 

151 

Franchise Services Group

 

 

59 

 

 

60 

Reportable Segment Revenue

 

$

571 

 

$

531 

Corporate

 

 

 

 

Total Revenue

 

$

571 

 

$

533 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Reportable Segment Adjusted EBITDA:(1)

 

 

 

 

 

 

Terminix

 

$

89 

 

$

78 

American Home Shield

 

 

29 

 

 

23 

Franchise Services Group

 

 

19 

 

 

18 

Reportable Segment Adjusted EBITDA

 

$

137 

 

$

119 

___________________________________

(1)

Presented below is a reconciliation of Reportable Segment Adjusted EBITDA to Net Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holdings

 

SvM

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31,

 

March 31,

(In millions)

 

2015

 

2014

 

2015

 

2014

Reportable Segment Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

Terminix

 

$

89 

 

$

78 

 

$

89 

 

$

78 

American Home Shield

 

 

29 

 

 

23 

 

 

29 

 

 

23 

Franchise Services Group

 

 

19 

 

 

18 

 

 

19 

 

 

18 

Reportable Segment Adjusted EBITDA

 

$

137 

 

$

119 

 

$

137 

 

$

119 

Unallocated corporate expenses

 

$

(4)

 

$

(4)

 

$

(4)

 

$

(4)

Depreciation and amortization expense

 

 

(24)

 

 

(25)

 

 

(24)

 

 

(25)

Non-cash impairment of software and other related costs

 

 

 —

 

 

(48)

 

 

 —

 

 

(48)

Non-cash stock-based compensation expense

 

 

(2)

 

 

(1)

 

 

(2)

 

 

(1)

Restructuring charges

 

 

(2)

 

 

(5)

 

 

(2)

 

 

(5)

Management and consulting fees

 

 

 —

 

 

(2)

 

 

 —

 

 

(2)

Loss from discontinued operations, net of income taxes

 

 

 —

 

 

(95)

 

 

 —

 

 

(95)

(Provision) benefit for income taxes

 

 

(17)

 

 

 

 

(17)

 

 

Loss on extinguishment of debt

 

 

(13)

 

 

 —

 

 

(13)

 

 

 —

Interest expense

 

 

(46)

 

 

(61)

 

 

(46)

 

 

(61)

Net Income (Loss)

 

$

28 

 

$

(113)

 

$

28 

 

$

(113)

 

 

Note 15. Related Party Transactions

On July 24, 2007, we were taken private pursuant to a merger transaction, and, following the completion of the merger and other subsequent transactions and prior to Holdings’ initial public offering, the significant majority of Holdings’ outstanding common stock was owned by investment funds managed by, or affiliated with, Clayton, Dubilier & Rice, LLC (CD&R or the CD&R Funds), JPMorgan Chase Funding Inc. (JPMorgan), StepStone Group LP (StepStone), the investment funds managed by StepStone (the StepStone Funds) and Ridgemont Partners Secondary Fund I, L.P. (Ridgemont) (collectively, the Equity Sponsors). Upon completion of Holdings’ initial public offering on July 1, 2014 and the secondary public offering in February 2015, the Equity Sponsors continued to hold approximately 42 percent of Holdings’ common stock.

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Consulting Agreements

The Company was a party to a consulting agreement with CD&R under which CD&R provided the Company with ongoing consulting and management advisory services. The annual consulting fee payable under the consulting agreement with CD&R was $6 million. Under this agreement, the Company recorded consulting fees of $2 million in the three months ended March 31, 2014, which is included in Selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). The Company was also a party to consulting agreements with StepStone, JPMorgan and Ridgemont. Pursuant to the consulting agreements, the Company was required to pay aggregate annual consulting fees of $1 million to StepStone, JPMorgan and Ridgemont. There were no consulting fees recorded in the three months ended March 31, 2015 due to the termination of the consulting fee agreements in connection with the completion of Holding’s initial public offering on July 1, 2014.

TruGreen Spin-off

In connection with the TruGreen spin-off on January 14, 2014, the Company and TruGreen Holding Corporation (New TruGreen) entered into a transition services agreement pursuant to which the Company and its subsidiaries provide New TruGreen 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 are designed to allow the Company to fully recover the 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 New TruGreen beyond the two-year period). New TruGreen may terminate the transition services agreement (or certain services under the transition services agreement) for convenience upon 90 days written notice, in which case New TruGreen will be required to reimburse the Company for early termination costs. Under this transition services agreement, in the three months ended March 31, 2015 and 2014, the Company recorded $8 million and $10 million, respectively, of fees due from New TruGreen, which is included, net of costs incurred, in Selling and administrative expenses in the consolidated statement of operations and comprehensive income (loss). As of March 31, 2015, all amounts owed by New TruGreen under this agreement have been paid.

In addition, the Company, New TruGreen and TruGreen Limited Partnership, an indirectly wholly-owned subsidiary of New TruGreen, (TGLP) entered into (1) a separation and distribution agreement containing key provisions relating to the separation of the former 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.

 

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 (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 (loss) if the decline in value is other than temporary. The carrying amount of total debt was $2,865 million and $3,057 million and the estimated fair value was $2,987 million and $3,102 million as of March 31, 2015 and December 31, 2014, 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, 2015 and December 31, 2014.

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.

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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, 2015 and 2014.

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value Measurements

 

 

 

 

 

 

 

Quoted

 

Significant

 

 

 

 

 

 

 

 

 

 

Prices In

 

Other

 

Significant

 

 

 

 

 

 

 

Active

 

Observable

 

Unobservable

 

 

Statement of Financial

 

Carrying

 

Markets

 

Inputs

 

Inputs

(In millions)

 

Position Location

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

As of March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation trust

 

Long-term marketable securities

 

$

 

$

 

$

 —

 

$

 —

Investments in marketable securities

 

Marketable securities and Long-term marketable securities

 

 

95 

 

 

53 

 

 

42 

 

 

 —

Total financial assets

 

 

 

$

103 

 

$

61 

 

$

42 

 

$

 —

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

Other accrued liabilities

 

$

 

$

 —

 

$

 —

 

$

Interest rate swap contracts

 

Other long-term liabilities

 

 

 

 

 —

 

 

 

 

 —

Total financial liabilities

 

 

 

$

13 

 

$

 —

 

$

 

$

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation trust

 

Long-term marketable securities

 

$

 

$

 

$

 —

 

$

 —

Investments in marketable securities

 

Marketable securities and Long-term marketable securities

 

 

99 

 

 

53 

 

 

45 

 

 

 —

Total financial assets

 

 

 

$

107 

 

$

62 

 

$

45 

 

$

 —

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

Other accrued liabilities

 

$

 

$

 —

 

$

 —

 

$

Interest rate swap contracts

 

Other long-term liabilities

 

 

 

 

 —

 

 

 

 

 —

Total financial liabilities

 

 

 

$

10 

 

$

 —

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20


 

Table of Contents

 

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:

 

 

 

 

 

 

 

 

 

 

 

Fuel Swap

 

 

Contract

 

 

Assets

(In millions)

 

(Liabilities)

Balance as of December 31, 2014

 

$

(6)

Total gains (realized and unrealized)

 

 

 

Included in earnings

 

 

(2)

Included in accumulated other comprehensive income

 

 

Settlements, net

 

 

Balance as of March 31, 2015

 

$

(4)

 

 

 

 

Balance as of December 31, 2013

 

$

Total gains (realized and unrealized)

 

 

 

Included in earnings

 

 

 —

Included in accumulated other comprehensive income

 

 

 —

Settlements, net

 

 

 —

Balance as of March 31, 2014

 

$

The following tables present information relating to the significant unobservable inputs of our Level 3 financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

Valuation

 

 

 

 

 

Weighted

 

 

(in millions)

 

Technique

 

Unobservable Input

 

Range

 

Average

As of March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Fuel swap contracts

 

$

(4)

 

Discounted Cash Flows

 

Forward Unleaded Price per Gallon(1)

 

$2.23 - $2.53

 

$

2.43 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Fuel swap contracts

 

$

(6)

 

Discounted Cash Flows

 

Forward Unleaded Price per Gallon(1)

 

$2.06 - $2.71

 

$

2.39 

___________________________________

(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 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. 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.

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Table of Contents

 

The effect of derivative instruments on the condensed consolidated statements of operations and comprehensive income (loss) and accumulated other comprehensive income (loss) on the condensed consolidated statements of financial position is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion

 

 

 

 

Effective Portion

 

of Gain (Loss)

 

 

 

 

of Gain (Loss)

 

Reclassified from

 

 

 

 

Recognized in

 

Accumulated Other

 

 

(In millions)

 

Accumulated Other

 

Comprehensive

 

 

Derivatives designated as Cash Flow

 

Comprehensive

 

Income

 

 

Hedge Relationships

 

Income

 

Into Earnings

 

Location of Gain (Loss) included in Earnings

Three Months Ended March 31, 2015:

 

 

 

 

 

 

 

 

Fuel swap contracts

 

$

 

$

(2)

 

Cost of services rendered and products sold

Interest rate swap contracts

 

$

(5)

 

$

(1)

 

Interest expense

Three Months Ended March 31, 2014:

 

 

 

 

 

 

 

 

Fuel swap contracts

 

$

 —

 

$

 —

 

Cost of services rendered and products sold

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, 2015. As of March 31, 2015, the Company had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $17 million, maturing through 2015. 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, 2015, the Company had posted $6 million in letters of credit as collateral under its fuel hedging program, which were issued under the Company’s 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 (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 $6 million, net of tax, as of March 31, 2015. The amounts that are ultimately reclassified into earnings will be based on actual fuel prices and interest rates at the time the positions are settled and may differ materially from the amount noted above. 

 

 

 

Note 17. Earnings Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and RSUs are reflected in diluted net income (loss) per share by applying the treasury stock method.

A reconciliation of the amounts included in the computation of basic earnings per share from continuing operations and diluted earnings per share from continuing operations is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions, except per share data)

 

2015

 

2014

Income (Loss) from continuing operations

 

$

28 

 

$

(18)

Weighted average common shares outstanding

 

 

134.4 

 

 

91.7 

Effect of dilutive securities:(1)

 

 

 

 

 

 

RSUs

 

 

0.2 

 

 

 —

Stock options(2)

 

 

1.4 

 

 

 —

Weighted average common share outstanding—assuming dilution

 

 

136.1 

 

 

91.7 

Basic earnings (loss) earnings per share from continuing operations

 

$

0.21 

 

$

(0.20)

Diluted earnings (loss) earnings per share from continuing operations

 

$

0.21 

 

$

(0.20)

___________________________________

(1)

Securities are not included in the table in periods when anti-dilutive. For the three months ended March 31, 2014, weighted average potentially dilutive shares from RSUs of 0.2 million and weighted average potentially dilutive shares from stock options of 0.1 million with a weighted average exercise price per share of $11.43 were excluded from the diluted earnings per share calculation due to the anti-dilutive effect such shares would have on net loss per common share.  There were no similar exclusions for the three months ended March 31, 2015.

22


 

Table of Contents

 

(2)

Options to purchase 0.4  million and 3.6 million shares for the three months ended March 31, 2015 and 2014, respectively, were not included in the diluted earnings (loss) per share calculation because either their exercise price or proceeds per share exceeded the average market price of the Company’s common stock for each respective reporting date.

On June 25, 2014, Holdings’ registration statement on Form S-1 was declared effective by the SEC for an initial public offering of its common stock, and, on July 1, 2014, Holdings completed the offering of 41,285,000 shares of its common stock. For further details, see Note 1. 

 

 

 

Note 18. Condensed Consolidating Financial Statements of The ServiceMaster Company, LLC and Subsidiaries

The following condensed consolidating financial statements of SvM and its subsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X. These condensed consolidating financial statements have been prepared from SvM’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 SvM’s subsidiaries based on management’s estimates. ServiceMaster Global Holdings, Inc. is not an obligor, nor guarantor, to the 8% 2020 Notes and the outstanding 7 percent senior notes due August 15, 2020 (the 7% 2020 Notes) (collectively, the 2020 Notes), or the Credit Facilities.

The payment obligations of SvM under the 2020 Notes are jointly and severally guaranteed on a senior unsecured basis by SvM’s domestic subsidiaries that guarantee our indebtedness under the Credit Facilities (the Guarantors). Each of the Guarantors is wholly owned, directly or indirectly, by SvM, and all guarantees are full and unconditional. SvM’s non-U.S. subsidiaries, SvM’s subsidiaries subject to regulation as an insurance, home warranty, service contract or similar company, and certain other subsidiaries of SvM (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 SvM, (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 SvM’s obligations under the indenture governing the 2020 Notes or (vi) the payment in full of the principal amount of the 2020 Notes.

Effective July 1, 2014, commensurate with entering the Term Loan Facility, SvM began recording interest expense at the Guarantors pursuant to the Term Loan Facility and the 2020 Notes. For the three months ended March 31, 2015, interest expense recorded by the Guarantors related to these debt instruments was $34 million.

 

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Table of Contents

 

THE SERVICEMASTER COMPANY, LLC AND SUBSIDIARIES

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

For the Three Months Ended March 31, 2015 (Unaudited)

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

 

 

Non-

 

 

 

 

SvM

 

 

Issuer

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

Revenue

 

$

 —

 

$

382 

 

$

203 

 

$

(14)

 

$

571 

Cost of services rendered and products sold

 

 

 —

 

 

213 

 

 

103 

 

 

(13)

 

 

303 

Selling and administrative expenses

 

 

 

 

68 

 

 

82 

 

 

 —

 

 

151 

Amortization expense

 

 

 —

 

 

11 

 

 

 

 

 —

 

 

12 

Restructuring charges

 

 

 —

 

 

 

 

 

 

 —

 

 

Interest expense

 

 

11 

 

 

34 

 

 

 —

 

 

 —

 

 

46 

Interest and net investment loss (income)

 

 

 

 

 —

 

 

(2)

 

 

 —

 

 

(1)

Loss on extinguishment of debt

 

 

13 

 

 

 —

 

 

 —

 

 

 —

 

 

13 

(Loss) Income from Continuing Operations before Income Taxes

 

 

(27)

 

 

55 

 

 

17 

 

 

 —

 

 

45 

(Benefit) Provision for income taxes

 

 

(9)

 

 

 

 

18 

 

 

 —

 

 

17 

(Loss) Income from Continuing Operations

 

 

(17)

 

 

47 

 

 

(1)

 

 

 —

 

 

28 

Equity in earnings of subsidiaries (net of tax)

 

 

45 

 

 

 

 

 —

 

 

(48)

 

 

 —

Net Income (Loss) 

 

$

28 

 

$

50 

 

$

(1)

 

$

(48)

 

$

28 

Total Comprehensive Income (Loss) 

 

$

22 

 

$

50 

 

$

(4)

 

$

(45)

 

$

22 

 

24


 

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, 2014 (Unaudited)

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

 

 

Non-

 

 

 

 

SvM

 

 

Issuer

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

Revenue

 

$

 —

 

$

371 

 

$

177 

 

$

(15)

 

$

533 

Cost of services rendered and products sold

 

 

 —

 

 

213 

 

 

89 

 

 

(14)

 

 

288 

Selling and administrative expenses

 

 

 

 

70 

 

 

79 

 

 

 —

 

 

151 

Amortization expense

 

 

 —

 

 

12 

 

 

 

 

 —

 

 

13 

Impairment of software and other related costs

 

 

 —

 

 

 —

 

 

48 

 

 

 —

 

 

48 

Restructuring charges

 

 

 —

 

 

 

 

 

 

 —

 

 

Interest expense

 

 

55 

 

 

 

 

 

 

 —

 

 

61 

Interest and net investment loss (income)

 

 

 

 

 —

 

 

(6)

 

 

(1)

 

 

(6)

(Loss) Income from Continuing Operations before Income Taxes

 

 

(59)

 

 

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)

 

25


 

Table of Contents

 

THE SERVICEMASTER COMPANY, LLC AND SUBSIDIARIES

Condensed Consolidating Statement of Financial Position (Unaudited)

As of March 31, 2015

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

 

 

Non-

 

 

 

 

SvM

 

 

Issuer

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101 

 

$

 

$

129 

 

$

 —

 

$

239 

Marketable securities

 

 

 —

 

 

 —

 

 

19 

 

 

 —

 

 

19 

Receivables

 

 

 

 

96 

 

 

430 

 

 

(111)

 

 

417 

Inventories

 

 

 —

 

 

39 

 

 

 

 

 —

 

 

40 

Prepaid expenses and other assets

 

 

25 

 

 

20 

 

 

16 

 

 

(20)

 

 

40 

Deferred customer acquisition costs

 

 

 —

 

 

14 

 

 

17 

 

 

 —

 

 

31 

Deferred taxes

 

 

68 

 

 

34 

 

 

 —

 

 

(2)

 

 

100 

Total Current Assets

 

 

194 

 

 

211 

 

 

613 

 

 

(133)

 

 

885 

Property and Equipment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At cost

 

 

 —

 

 

220 

 

 

155 

 

 

 —

 

 

375 

Less: accumulated depreciation

 

 

 —

 

 

(142)

 

 

(101)

 

 

 —

 

 

(243)

Net Property and Equipment

 

 

 —

 

 

79 

 

 

53 

 

 

 —

 

 

132 

Other Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 —

 

 

1,671 

 

 

405 

 

 

 —

 

 

2,076 

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

 

 

 —

 

 

929 

 

 

758 

 

 

 —

 

 

1,687 

Notes receivable

 

 

 

 

 —

 

 

28 

 

 

(6)

 

 

28 

Long-term marketable securities

 

 

 

 

 —

 

 

76 

 

 

 —

 

 

85 

Investments in and advances to subsidiaries

 

 

3,447 

 

 

1,247 

 

 

 —

 

 

(4,693)

 

 

 —

Other assets

 

 

36 

 

 

19 

 

 

 

 

(20)

 

 

39 

Debt issuance costs

 

 

30 

 

 

 —

 

 

 —

 

 

 —

 

 

30 

Total Assets

 

$

3,721 

 

$

4,156 

 

$

1,937 

 

$

(4,852)

 

$

4,962 

Liabilities and Shareholder’s Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 —

 

$

47 

 

$

39 

 

$

 —

 

$

87 

Accrued liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related expenses

 

 

 

 

23 

 

 

27 

 

 

 —

 

 

51 

Self-insured claims and related expenses

 

 

 

 

25 

 

 

64 

 

 

 —

 

 

94 

Accrued interest payable

 

 

10 

 

 

 —

 

 

 —

 

 

(1)

 

 

Other

 

 

 

 

16 

 

 

47 

 

 

(21)

 

 

47 

Deferred revenue

 

 

 —

 

 

100 

 

 

431 

 

 

 —

 

 

531 

Liabilities of discontinued operations

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

Current portion of long-term debt

 

 

128 

 

 

20 

 

 

 

 

(111)

 

 

39 

Total Current Liabilities

 

 

155 

 

 

231 

 

 

609 

 

 

(133)

 

 

861 

Long-Term Debt

 

 

2,769 

 

 

35 

 

 

27 

 

 

(6)

 

 

2,826 

Other Long-Term Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes

 

 

 —

 

 

464 

 

 

271 

 

 

(20)

 

 

715 

Intercompany payable

 

 

341 

 

 

 —

 

 

487 

 

 

(828)

 

 

 —

Other long-term obligations, primarily self-insured claims

 

 

42 

 

 

21 

 

 

84 

 

 

 —

 

 

146 

Total Other Long-Term Liabilities

 

 

383 

 

 

484 

 

 

841 

 

 

(847)

 

 

861 

Shareholder’s Equity

 

 

414 

 

 

3,406 

 

 

459 

 

 

(3,866)

 

 

414 

Total Liabilities and Shareholder’s Equity

 

$

3,721 

 

$

4,156 

 

$

1,937 

 

$

(4,852)

 

$

4,962 

 

 

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THE SERVICEMASTER COMPANY, LLC AND SUBSIDIARIES

Condensed Consolidating Statement of Financial Position (Unaudited)

As of December 31, 2014

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

 

 

Non-

 

 

 

 

SvM

 

 

Issuer

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

232 

 

$

 

$

129 

 

$

 —

 

$

368 

Marketable securities

 

 

 —

 

 

 —

 

 

19 

 

 

 —

 

 

19 

Receivables

 

 

 

 

102 

 

 

434 

 

 

(97)

 

 

441 

Inventories

 

 

 —

 

 

40 

 

 

 

 

 —

 

 

42 

Prepaid expenses and other assets

 

 

21 

 

 

18 

 

 

20 

 

 

(15)

 

 

44 

Deferred customer acquisition costs

 

 

 —

 

 

18 

 

 

16 

 

 

 —

 

 

35 

Deferred taxes

 

 

65 

 

 

33 

 

 

 —

 

 

 —

 

 

97 

Total Current Assets

 

 

319 

 

 

218 

 

 

620 

 

 

(112)

 

 

1,045 

Property and Equipment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At cost

 

 

 —

 

 

217 

 

 

152 

 

 

 —

 

 

369 

Less: accumulated depreciation

 

 

 —

 

 

(135)

 

 

(98)

 

 

 —

 

 

(233)

Net Property and Equipment

 

 

 —

 

 

82 

 

 

54 

 

 

 —

 

 

136 

Other Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 —

 

 

1,664 

 

 

405 

 

 

 —

 

 

2,069 

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

 

 

 —

 

 

937 

 

 

760 

 

 

 —

 

 

1,696 

Notes receivable

 

 

 

 

 —

 

 

26 

 

 

(6)

 

 

26 

Long-term marketable securities

 

 

 

 

 —

 

 

80 

 

 

 —

 

 

88 

Investments in and advances to subsidiaries

 

 

3,403 

 

 

1,199 

 

 

 —

 

 

(4,602)

 

 

 —

Other assets

 

 

37 

 

 

20 

 

 

 

 

(19)

 

 

41 

Debt issuance costs

 

 

34 

 

 

 —

 

 

 —

 

 

 —

 

 

34 

Total Assets

 

$

3,807 

 

$

4,120 

 

$

1,947 

 

$

(4,740)

 

$

5,135 

Liabilities and Shareholder’s Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 —

 

$

42 

 

$

41 

 

$

 —

 

$

84 

Accrued liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payroll and related expenses

 

 

 

 

37 

 

 

41 

 

 

 —

 

 

80 

Self-insured claims and related expenses

 

 

 

 

26 

 

 

60 

 

 

 —

 

 

92 

Accrued interest payable

 

 

34 

 

 

 —

 

 

 —

 

 

(1)

 

 

34 

Other

 

 

 

 

18 

 

 

41 

 

 

(14)

 

 

51 

Deferred revenue

 

 

 —

 

 

98 

 

 

415 

 

 

 —

 

 

514 

Liabilities of discontinued operations

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

Current portion of long-term debt

 

 

114 

 

 

21 

 

 

 

 

(97)

 

 

39 

Total Current Liabilities

 

 

172 

 

 

242 

 

 

600 

 

 

(112)

 

 

902 

Long-Term Debt

 

 

2,962 

 

 

36 

 

 

25 

 

 

(6)

 

 

3,017 

Other Long-Term Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes

 

 

 —

 

 

463 

 

 

271 

 

 

(19)

 

 

715 

Intercompany payable

 

 

279 

 

 

 —

 

 

498 

 

 

(777)

 

 

 —

Other long-term obligations, primarily self-insured claims

 

 

31 

 

 

22 

 

 

84 

 

 

 —

 

 

138 

Total Other Long-Term Liabilities

 

 

310 

 

 

486 

 

 

853 

 

 

(796)

 

 

853 

Shareholder’s Equity

 

 

362 

 

 

3,356 

 

 

469 

 

 

(3,826)

 

 

362 

Total Liabilities and Shareholder’s Equity

 

$

3,807 

 

$

4,120 

 

$

1,947 

 

$

(4,740)

 

$

5,135 

 

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THE SERVICEMASTER COMPANY, LLC AND SUBSIDIARIES

Condensed Consolidating Statement of Cash Flows (Unaudited)

For the Three Months Ended March 31, 2015

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

 

 

Non-

 

 

 

 

SvM

 

 

Issuer

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

Cash and Cash Equivalents at Beginning of Period

 

$

232 

 

$

 

$

129 

 

$

 —

 

$

368 

Net Cash (Used for) Provided from Operating Activities from Continuing Operations

 

 

(25)

 

 

62 

 

 

36 

 

 

(13)

 

 

61 

Cash Flows from Investing Activities from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

 

 —

 

 

(3)

 

 

(5)

 

 

 —

 

 

(8)

Sale of equipment and other assets

 

 

 —

 

 

 

 

 —

 

 

(1)

 

 

Other business acquisitions, net of cash acquired

 

 

 —

 

 

(10)

 

 

(2)

 

 

 —

 

 

(12)

Notes receivable, financial investments and securities, net

 

 

 —

 

 

 —

 

 

 

 

 

 

Net Cash Used for Investing Activities from Continuing Operations

 

 

 —

 

 

(11)

 

 

(3)

 

 

 —

 

 

(14)

Cash Flows from Financing Activities from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings of debt

 

 

 —

 

 

 —

 

 

 

 

 —

 

 

Payments of debt

 

 

(195)

 

 

(5)

 

 

(1)

 

 

 —

 

 

(200)

Contribution from Holdings

 

 

20 

 

 

 —

 

 

 —

 

 

 —

 

 

20 

Shareholders’ dividends

 

 

 —

 

 

(6)

 

 

(6)

 

 

13 

 

 

 —

Excess tax benefits from stock-based compensation

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

Net intercompany advances

 

 

74 

 

 

(45)

 

 

(29)

 

 

 —

 

 

 —

Net Cash (Used for) Provided from Financing Activities from Continuing Operations

 

 

(101)

 

 

(49)

 

 

(33)

 

 

13 

 

 

(170)

Cash Flows from Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for operating activities

 

 

(5)

 

 

 —

 

 

 —

 

 

 —

 

 

(5)

Net Cash Used for Discontinued Operations

 

 

(5)

 

 

 —

 

 

 —

 

 

 —

 

 

(5)

Cash (Decrease) Increase During the Period

 

 

(131)

 

 

 

 

 

 

 —

 

 

(128)

Cash and Cash Equivalents at End of Period

 

$

101 

 

$

 

$

129 

 

$

 —

 

$

239 

 

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THE SERVICEMASTER COMPANY, LLC AND SUBSIDIARIES

Condensed Consolidating Statement of Cash Flows (Unaudited)

For the Three Months Ended March 31, 2014

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

 

 

 

Non-

 

 

 

 

SvM

 

 

Issuer

 

Guarantors

 

Guarantors

 

Eliminations

 

Consolidated

Cash and Cash Equivalents at Beginning of Period

 

$

401 

 

$

 

$

68 

 

$

 —

 

$

476 

Net Cash (Used for) Provided from Operating Activities from Continuing Operations

 

 

(131)

 

 

141 

 

 

29 

 

 

(18)

 

 

22 

Cash Flows from Investing Activities from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

 

 

 —

 

 

(3)

 

 

(11)

 

 

 —

 

 

(14)

Other business acquisitions, net of cash acquired

 

 

 —

 

 

(9)

 

 

(32)

 

 

 —

 

 

(41)

Notes receivable, financial investments and securities, net

 

 

 —

 

 

 —

 

 

38 

 

 

 —

 

 

38 

Net Cash Used for Investing Activities from Continuing Operations

 

 

 —

 

 

(12)

 

 

(5)

 

 

 —

 

 

(17)

Cash Flows from Financing Activities from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments of debt

 

 

(6)

 

 

(4)

 

 

(1)

 

 

 —

 

 

(11)

Contribution to TruGreen Holding Corporation

 

 

(35)

 

 

 —

 

 

 —

 

 

 —

 

 

(35)

Shareholders’ dividends

 

 

 —

 

 

(9)

 

 

(9)

 

 

18 

 

 

 —

Net intercompany advances

 

 

30 

 

 

(115)

 

 

85 

 

 

 —

 

 

 —

Net Cash (Used for) Provided from Financing Activities from Continuing Operations

 

 

(11)

 

 

(128)

 

 

75 

 

 

18 

 

 

(46)

Cash Flows from Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used for operating activities

 

 

(8)

 

 

 —

 

 

 —

 

 

 —

 

 

(8)

Cash used for investing activities

 

 

 —

 

 

 —

 

 

(2)

 

 

 —

 

 

(2)

Cash used for financing activities

 

 

 —

 

 

 —

 

 

(3)

 

 

 —

 

 

(3)

Net Cash Used for Discontinued Operations

 

 

(8)

 

 

 —

 

 

(5)

 

 

 —

 

 

(13)

Cash (Decrease) Increase During the Period

 

 

(150)

 

 

 

 

94 

 

 

 —

 

 

(55)

Cash and Cash Equivalents at End of Period

 

$

251 

 

$

 

$

162 

 

$

 —

 

$

421 

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in —Information Regarding Forward-Looking Statements and “Risk Factors,” and the section entitled Risk Factors in the 2014 Form 10-K.

Overview

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is combined for two registrants: ServiceMaster Global Holdings, Inc. and The ServiceMaster Company, LLC. Unless the context indicates otherwise, any reference in this discussion and analysis to Holdings refers to ServiceMaster Global Holdings, Inc., any reference to SvM refers to The ServiceMaster Company, LLC, the indirect wholly-owned subsidiary of Holdings, and any references to ServiceMaster, the Company, we, us, and our refer to ServiceMaster Global Holdings, Inc. together with its direct and indirect subsidiaries, including SvM.

Our core services include termite and pest control, home warranties, disaster restoration, janitorial, residential cleaning, furniture repair and home inspection under the following leading brands: Terminix, American Home Shield, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec. Our operations for the periods presented in this report are organized into three reportable segments:  Terminix, American Home Shield and Franchise Services Group.

Key Business Metrics

We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our businesses. These metrics include:

·

revenue,

·

operating expenses,

·

Adjusted EBITDA,

·

net income (loss),

·

earnings (loss) per share,

·

customer retention rates, and

·

customer counts growth.

To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges that management believes are not indicative of the earnings capabilities of our businesses. We also focus on measures designed to optimize cash flow, including the management of working capital and capital expenditures.

Revenue.  Our revenue results are primarily a function of the volume and pricing of the services and products provided to our customers by our businesses as well as the mix of services and products provided across our businesses. The volume of our revenue in Terminix and American Home Shield, and in our company-owned branches in the Franchise Services Group, is impacted by new unit sales, the retention of our existing customers and tuck-in acquisitions. We expect to continue our tuck-in acquisition program at Terminix at levels consistent with prior periods. Revenue results in the remainder of our Franchise Services Group are driven principally by royalty fees earned from our franchisees. We serve both residential and commercial customers, principally in the United States. In 2014, approximately 98 percent of our revenue was generated by sales in the United States.

Operating Expenses.  In addition to the impact of changes in our revenue results, our operating results are affected by, among other things, the level of our operating expenses. A number of our operating expenses are subject to inflationary pressures, such as fuel, chemicals, raw materials, wages and salaries, employee benefits and health care, vehicles, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs.

Adjusted EBITDA.  We evaluate performance and allocate resources based primarily on Adjusted EBITDA. We define Adjusted EBITDA 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 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; consulting agreement termination fees; and other non-operating expenses. We believe Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, consulting agreements and equity-based, long-term incentive plans.

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Table of Contents

 

Net Income (Loss) and Earnings (Loss) Per Share.  Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and RSUs are reflected in diluted net income (loss) per share by applying the treasury stock method. The presentation of net income (loss) and earnings (loss) per share provides GAAP measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons.

Customer Retention Rates and Customer Counts Growth.  We report our customer retention rates and growth in customer counts for our two largest revenue generating businesses in order to track the performance of those businesses. Customer counts represent our recurring customer base, which includes customers with active contracts for recurring services and excludes customers who purchased a service we consider non-recurring. At Terminix, recurring services are primarily delivered on an annual, quarterly or monthly frequency. Retention rates are calculated as the ratio of ending customer counts to the sum of beginning customer counts, new sales and acquired accounts for the applicable period. These measures are presented on a rolling, 12-month basis in order to avoid seasonal anomalies. See —Segment Review.

Seasonality

We have seasonality in our business, which drives fluctuations in revenue and Adjusted EBITDA for interim periods. In 2014, approximately 22 percent, 28 percent, 27 percent and 23 percent of our revenue and approximately 21 percent, 31 percent, 28 percent and 20 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

Effect of Weather Conditions

The demand for our services and our results of operations are also affected by weather conditions, including the seasonal nature of our termite and pest control services, home inspection services and disaster restoration services. Weather conditions which have a potentially unfavorable impact to our business include cooler temperatures or droughts which can impede the development of termite swarms and lead to lower demand for our termite control services; severe winter storms which can impact our residential cleaning business if we cannot travel to service locations due to hazardous road conditions; and extreme temperatures which can lead to an increase in service requests related to household systems, resulting in higher claim frequency and costs. Weather conditions which have a potentially favorable impact to our business include mild winters which can lead to higher demand for termite and pest control services; mild winters or summers which can lead to lower household systems claim frequency; and severe storms which can lead to an increase in demand for disaster restoration services.

Secondary Public Offering

On February 4, 2015, Holdings’ registration statement on Form S-1 was declared effective by the SEC for a secondary offering of its common stock. Holdings registered on behalf of certain stockholders the offering and sale of 25,000,000 shares of common stock and an additional 3,750,000 shares of common stock sold to the underwriters pursuant to an option to purchase additional shares. On February 10, 2015, the selling stockholders completed the offering of 25,000,000 shares of common stock at a price of $29.50 per share. On February 13, 2015, the selling stockholders completed the offering of an additional 3,750,000 shares of common stock at a price of $29.50 per share pursuant to the underwriters’ option to purchase additional shares. Holdings did not receive any of the proceeds from the aggregate 28,750,000 shares of common stock sold by the selling stockholders.

On March 20, 2015, Holdings’ filed a registration statement on Form S-1 for a secondary offering of its common stock. The selling stockholders have not commenced this offering. Holdings will not receive any of the proceeds from any shares of common stock proposed to be sold by the selling stockholders.

Refinancing of Indebtedness

On February 17, 2015, SvM redeemed $190 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount using available cash. In connection with the partial redemption, we recorded a loss on extinguishment of debt of $13 million in the three months ended March 31, 2015, which includes a pre-payment premium of $11 million and the write-off of $2 million of debt issuance costs. 

On April 1, 2015, SvM entered into the First Term Loan Amendment, which provides for Incremental Term Loans in an aggregate principal amount of $175 million. On April 1, 2015, SvM used the net proceeds from the Incremental Term Loans, together with cash on hand, to redeem the remaining outstanding $200 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount. In connection with the redemption, we expect to record a loss on extinguishment of debt of approximately $14 million in the second quarter of 2015, which includes a pre‑payment premium of $12 million and the write‑off of approximately $2 million of debt issuance costs.

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Table of Contents

 

 Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Increase

 

 

 

 

 

 

 

 

March 31,

 

(Decrease)

 

% of Revenue

(In millions)

 

2015

 

2014

 

2015 vs. 2014

 

2015

 

2014

Revenue

 

$

571 

 

$

533 

 

%

 

100 

%

 

100 

%

Cost of services rendered and products sold

 

 

303 

 

 

288 

 

 

 

53 

 

 

54 

 

Selling and administrative expenses

 

 

151 

 

 

151 

 

 —

 

 

26 

 

 

28 

 

Amortization expense

 

 

12 

 

 

13 

 

(4)

 

 

 

 

 

Impairment of software and other related costs

 

 

 —

 

 

48 

 

*

 

 

 —

 

 

 

Restructuring charges

 

 

 

 

 

(48)

 

 

 —

 

 

 

Interest expense

 

 

46 

 

 

61 

 

(25)

 

 

 

 

11 

 

Interest and net investment income

 

 

(1)

 

 

(6)

 

(87)

 

 

 —

 

 

(1)

 

Loss on extinguishment of debt

 

 

13 

 

 

 —

 

*

 

 

 

 

 —

 

Income (Loss) from Continuing Operations before Income Taxes

 

 

45 

 

 

(27)

 

*

 

 

 

 

(5)

 

Provision (Benefit) for income taxes

 

 

17 

 

 

(9)

 

*

 

 

 

 

(2)

 

Income (Loss) from Continuing Operations

 

 

28 

 

 

(18)

 

*

 

 

 

 

(3)

 

Loss from discontinued operations, net of income taxes

 

 

 —

 

 

(95)

 

*

 

 

 —

 

 

(18)

 

Net Income (Loss)

 

$

28 

 

$

(113)

 

*

%

 

%

 

(21)

%

___________________________________

*     not meaningful

Revenue

We reported revenue of $571 million and $533 million for the three months ended March 31, 2015 and 2014, respectively. A summary of changes in revenue for each of our reportable segments and Corporate is included in the tables below. See —Segment Review for a discussion of the drivers of the year-over-year changes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American

 

Franchise

 

 

 

 

 

 

 

 

 

 

Home

 

Services

 

 

 

 

 

(In millions)

 

Terminix

 

Shield

 

Group

 

Corporate

 

Total

Three Months Ended March 31, 2014

 

$

320 

 

$

151 

 

$

60 

 

$

 

$

533 

Pest Control

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

Termite and Other Services(1)

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

Home Warranties(2)

 

 

 —

 

 

24 

 

 

 —

 

 

 —

 

 

24 

Franchise-Related Revenue(3)

 

 

 —

 

 

 —

 

 

(1)

 

 

 —

 

 

(1)

Other

 

 

(1)

 

 

 —

 

 

 —

 

 

(1)

 

 

(2)

Three Months Ended March 31, 2015

 

$

336 

 

$

175 

 

$

59 

 

$

 

$

571 

___________________________________

(1)

Includes wildlife exclusion, crawl space encapsulation and attic insulation products which are managed as a component of our termite line of business.

(2)

Includes an approximate $10 million increase, from $5 million in the three months ended March 31, 2014 to $15 million in the three months ended March 31, 2015, as a result of the acquisition of HSA on February 28, 2014.

(3)

Represents a $1 million decline attributable to the conversion of certain Merry Maids branch locations to franchises in 2014 and 2015.

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Cost of Services Rendered and Products Sold

We reported cost of services rendered and products sold of $303 million and $288 million for the three months ended March 31, 2015 and 2014, respectively. The following tables provide a summary of changes in cost of services rendered and products sold for each of our reportable segments and Corporate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American

 

Franchise

 

 

 

 

 

 

 

 

 

 

Home

 

Services

 

 

 

 

 

(In millions)

 

Terminix

 

Shield

 

Group

 

Corporate

 

Total

Three Months Ended March 31, 2014

 

$

176 

 

$

78 

 

$

29 

 

$

 

$

288 

Impact of change in revenue(1)

 

 

 

 

12 

 

 

 —

 

 

 —

 

 

17 

Cost reduction initiatives

 

 

(1)

 

 

 —

 

 

 —

 

 

 —

 

 

(1)

Other

 

 

 —

 

 

 —

 

 

(1)

 

 

 —

 

 

(1)

Three Months Ended March 31, 2015

 

$

181 

 

$

91 

 

$

28 

 

$

 

$

303 

(1)

For American Home Shield, includes approximately $5 million as a result of the acquisition of HSA.

Selling and Administrative Expenses

We reported selling and administrative expenses of $151 million for each of the three month periods ended March 31, 2015 and 2014, which comprised general and administrative expenses of $65 million and $70 million, respectively, and selling and marketing expenses of $86 million and $81 million, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American

 

Franchise

 

 

 

 

 

 

 

 

 

 

Home

 

Services

 

 

 

 

 

(In millions)

 

Terminix

 

Shield

 

Group

 

Corporate

 

Total

Three Months Ended March 31, 2014

 

$

73 

 

$

57 

 

$

15 

 

$

 

$

151 

Sales and marketing costs

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

HSA selling and administrative expenses

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

Cost reduction initiatives

 

 

(2)

 

 

 —

 

 

 —

 

 

 —

 

 

(2)

Lower technology costs

 

 

 —

 

 

(2)

 

 

 —

 

 

 —

 

 

(2)

Management and consulting fees

 

 

 —

 

 

 —

 

 

 —

 

 

(2)

 

 

(2)

Stock-based compensation expense

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

Secondary offering expenses

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

Other

 

 

 —

 

 

(1)

 

 

(2)

 

 

 —

 

 

(4)

Three Months Ended March 31, 2015

 

$

75 

 

$

57 

 

$

12 

 

$

 

$

151 

The increase in selling and administrative expenses at Terminix was primarily driven by higher sales costs, offset, in part, by overhead cost reductions achieved in the quarter.

At American Home Shield, the addition of selling and administrative expenses as a result of the HSA acquisition were offset, in part, by lower technology costs driven by the decision in the first quarter of 2014 to abandon its efforts to deploy a new operating system.

The decrease in selling and administrative expenses at Corporate primarily included cost reductions pursuant to the termination of consulting agreements with our equity sponsors, offset, in part, by higher stock-based compensation expense and expenses related to the secondary public offering.

Amortization Expense

During the three months ended March 31, 2015, our portfolio of intangible assets has remained relatively stable, and, as a result, amortization expense was $12 million and $13 million in the three months ended March 31, 2015 and 2014, respectively.

Impairment of Software and Other Related Costs

We recorded an impairment charge of $48 million in the three months ended March 31, 2014 relating to our decision in the first quarter of 2014 to abandon our 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.

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Restructuring Charges

We incurred restructuring charges of $2 million and $5 million for the three months ended March 31, 2015 and 2014, respectively. Restructuring charges were comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Terminix branch optimization(1)

 

$

 

$

Corporate(2)

 

 

 

 

Total restructuring charges

 

$

 

$

___________________________________

(1)

For the three months ended March 31, 2015 and 2014, these charges included severance costs.

(2)

Represents restructuring charges related to an initiative to enhance capabilities and reduce costs in our headquarters functions that provide Company-wide administrative services for our operations. For the three months ended March 31, 2015, these charges primarily included severance costs. For the three months ended March 31, 2014, these charges included professional fees of $1 million and severance and other costs of $3 million. 

Interest Expense

Interest expense was $46 million and $61 million for the three months ended March 31, 2015 and 2014, respectively. The decrease in interest expense in the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was driven by the refinancing of the then-existing term loan facility on July 1, 2014 and the partial redemptions of the 2020 Notes on July 16, 2014 and February 17, 2015. See Note 10 to the condensed consolidated financial statements for more details.

Interest and Net Investment Income

Interest and net investment income was $1 million and $6 million for the three months ended March 31, 2015 and 2014, respectively, and was comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Realized gains(1)

 

$

 —

 

$

Other(2)

 

 

 —

 

 

Total interest and net investment income

 

$

 

$

___________________________________

(1)

Represents the net investment gains and the interest and dividend income realized on the American Home Shield investment portfolio.

(2)

Includes interest income on other cash balances.

Loss on Extinguishment of Debt

A loss on extinguishment of debt of $13 million was recorded in the three months ended March 31, 2015 related to the partial redemption of the 8% 2020 Notes on February 17, 2015. There were no debt extinguishments by us in the three months ended March 31, 2014. See Note 10 to the condensed consolidated financial statements for more details.

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Income (Loss) from Continuing Operations before Income Taxes

Income from continuing operations before income taxes was $45 million for the three months ended March 31, 2015, and loss from continuing operations before income taxes was $27 million for the three months ended March 31, 2014. The change in income from continuing operations before income taxes primarily reflects the net effect of year-over-year changes in the following items:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015 vs. 2014

Reportable segments and Corporate(1)

 

$

18 

Impairment of software and other related costs(2)

 

 

48 

Interest expense(3)

 

 

15 

Restructuring charges(4)

 

 

Loss on extinguishment of debt(5)

 

 

(13)

Other(6)

 

 

Increase in income from continuing operations before income taxes

 

$

72 

___________________________________

(1)

Represents the net change in Adjusted EBITDA as described in —Segment Review.

(2)

Represents a $48 million impairment of software and other related costs at American Home Shield recorded in the three months ended March 31, 2014 as described in —Impairment of Software and Other Related Costs.

(3)

Represents the net change in interest expense as described in —Interest Expense.

(4)

Represents the net change in restructuring charges as described in —Restructuring Charges.

(5)

Represents the $13 million loss on extinguishment of debt recorded in the three months ended March 31, 2015 as described in —Loss on Extinguishment of Debt.

(6)

Primarily represents the net change in management and consulting fees, stock-based compensation, depreciation and amortization.

Provision (Benefit) for Income Taxes

The effective tax rate on income (loss) from continuing operations was 37.0 percent for the three months ended March 31, 2015 compared to 33.3 percent for the three months ended March 31, 2014. The effective tax rate on income from continuing operations for the three months ended March 31, 2015 was primarily affected by a reduction of the state valuation allowance on net operating losses during the quarter. 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 TruGreen spin-off on January 14, 2014. 

Net Income (Loss)

Net income was $28 million for the three months ended March 31, 2015 compared to net loss of $113 million for the three months ended March 31, 2014. The $141 million improvement was driven by a $72 million increase in income from continuing operations before income taxes and a $95 million reduction in loss from discontinued operations, net of tax, offset, in part, by a $26 million increase in provision for income taxes.

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Segment Review

The following business segment reviews should be read in conjunction with the required footnote disclosures presented in the notes to the condensed consolidated financial statements included in this report.

Revenue and Adjusted EBITDA by reportable segment and for Corporate are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

Increase

(In millions)

 

2015

 

2014

 

(Decrease)

Revenue:

 

 

 

 

 

 

 

 

 

Terminix

 

$

336 

 

$

320 

 

%

American Home Shield

 

 

175 

 

 

151 

 

16 

%

Franchise Services Group

 

 

59 

 

 

60 

 

(2)

%

Corporate

 

 

 

 

 

(59)

%

Total Revenue:

 

$

571 

 

$

533 

 

%

Adjusted EBITDA:(1)

 

 

 

 

 

 

 

 

 

Terminix

 

$

89 

 

$

78 

 

14 

%

American Home Shield

 

 

29 

 

 

23 

 

28 

%

Franchise Services Group

 

 

19 

 

 

18 

 

%

Reportable Segment Adjusted EBITDA

 

$

137 

 

$

119 

 

15 

%

Corporate(2)

 

 

(4)

 

 

(4)

 

(10)

%

Total Adjusted EBITDA

 

$

133 

 

$

115 

 

16 

%

___________________________________

(1)

See Note 14 for our definition of Adjusted EBITDA and a reconciliation thereof to net income (loss).

 

(2)

Represents unallocated corporate expenses.

The table below presents selected operating metrics related to renewable customer counts and customer retention for our Terminix and American Home Shield segments. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31,

 

 

2015

 

2014

Terminix

 

 

 

 

 

 

Reduction in Pest Control Customers

 

(0.4)

%

 

(1.8)

%

Pest Control Customer Retention Rate

 

79.2 

%

 

79.1 

%

Reduction in Termite Customers and Other Services Customers

 

(2.0)

%

 

(2.6)

%

Termite and Other Services Customer Retention Rate

 

84.7 

%

 

84.9 

%

American Home Shield 

 

 

 

 

 

 

Growth in Home Warranties(1)

 

6.2 

%

 

10.3 

%

Customer Retention Rate(1)

 

74.9 

%

 

75.9 

%

___________________________________

(1)

As of March 31, 2014, excluding the HSA accounts acquired on February 28, 2014, the growth in home warranties was one percent, and, excluding all HSA accounts, the customer retention rate for our American Home Shield segment was 74 percent. 

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Terminix Segment

The Terminix segment, which provides termite and pest control services to residential and commercial customers and distributes pest control products, reported a five percent increase in revenue and a 14 percent increase in Adjusted EBITDA for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

Revenue

Revenue by service line is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

% of

 

 

March 31,

 

Revenue

(In millions)

 

2015

 

2014

 

2015

Pest Control

 

$

184 

 

$

176 

 

55 

%

Termite and Other Services

 

 

141 

 

 

132 

 

42 

%

Other

 

 

11 

 

 

12 

 

%

Total revenue

 

$

336 

 

$

320 

 

100 

%

Pest control revenue increased four percent compared to the three months ended March 31, 2014, reflecting improved price realization and a favorable product mix.  

Termite revenue, including the wildlife exclusion, crawl space encapsulation and attic insulation products which are managed as a component of our termite line of business, increased seven percent compared to the three months ended March 31, 2014. Termite renewal revenue comprised 56 percent of total termite revenue, while the remainder consisted of termite new unit revenue. The increase in termite revenue reflects growth of new products (wildlife exclusion and crawlspace encapsulation), increased sales of attic insulation and improved price realization, offset, in part, by a decrease in traditional termite sales. Termite activity is unpredictable in its nature. Factors that can impact termite activity include conducive weather conditions and consumer awareness of termite swarms.

We will continue to make investments to transform our customers’ experiences through a combination of new technology and improved processes to, among other things, maintain or improve our high retention rates in our pest control and termite service lines.

Adjusted EBITDA

The following table provides a summary of changes in the segment’s Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

Three Months Ended March 31, 2014

 

$

78 

Impact of change in revenue

 

 

11 

Sales Costs

 

 

(4)

Cost reduction initiatives

 

 

Other

 

 

Three Months Ended March 31, 2015

 

$

89 

The increase in selling and administrative expenses was primarily driven by higher sales costs, offset, in part, by overhead cost reductions achieved in the quarter.

American Home Shield Segment

The American Home Shield segment, which provides home warranties for household systems and appliances, reported a 16 percent increase in revenue and a 28 percent increase in Adjusted EBITDA for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

Revenue

The revenue results reflect the impact of the HSA acquisition, a favorable product mix, and an increase in new unit sales. The impact of HSA, acquired on February 28, 2014, was an increase of approximately $10 million, from $5 million in the three months ended March 31, 2014 to $15 million in the three months ended March 31, 2015.

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Adjusted EBITDA

The following table provides a summary of changes in the segment’s Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

Three Months Ended March 31, 2014

 

$

23 

Impact of change in revenue 

 

 

12 

Lower technology costs

 

 

HSA selling and administrative expenses

 

 

(4)

Interest and net investment income

 

 

(5)

Other

 

 

Three Months Ended March 31, 2015

 

$

29 

The addition of selling and administrative expenses as a result of the HSA acquisition were offset, in part, by lower technology costs driven by the decision in the first quarter of 2014 to abandon its efforts to deploy a new operating system.

In the three months ended March 31, 2014, the segment’s Adjusted EBITDA included interest and net investment income from the American Home Shield investment portfolio of $5 million for which there was no similar amount recorded in the three months ended March 31, 2015.

Franchise Services Group Segment

The Franchise Services Group segment, which consists of the ServiceMaster Restore (disaster restoration), ServiceMaster Clean (janitorial), Merry Maids (residential cleaning), Furniture Medic (furniture repair) and AmeriSpec (home inspection) businesses, reported a two percent decrease in revenue and a six percent increase in Adjusted EBITDA for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

Revenue

Revenue by service line is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

% of

 

 

March 31,

 

Revenue

(In millions)

 

2015

 

2014

 

2015

Royalty Fees

 

$

28 

 

$

29 

 

47 

%

Company-Owned Merry Maids Branches

 

 

13 

 

 

15 

 

22 

%

Janitorial National Accounts

 

 

10 

 

 

 

16 

%

Sales of Products

 

 

 

 

 

%

Other

 

 

 

 

 

%

Total revenue

 

$

59 

 

$

60 

 

100 

%

Royalty fees decreased three percent, primarily driven by lower disaster restoration services. Revenue from company-owned Merry Maids branches decreased 14 percent with approximately $1 million of the decline attributable to the conversion of certain locations to franchises in 2014 and 2015 and the remainder of the decline attributable to lower customer counts driven by a decline in the customer retention rate. Revenue from janitorial national accounts increased 35 percent, driven by strong sales activity. We intend to continue to focus on expanding our market share in janitorial national accounts. Sales of products decreased 26 percent, driven by lower franchisee demand.

In 2014, we began converting company-owned Merry Maids locations to franchises. We expect the conversions completed through March 31, 2015, as well as further conversions expected during the remainder of 2015, to result in further decreases in revenues from company-owned Merry Maids branches, which we expect will be offset, in part, by modest increases in royalty fees.

Adjusted EBITDA

The following table provides a summary of changes in the segment’s Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

Three Months Ended March 31, 2014

 

$

18 

Impact of change in revenue 

 

 

(1)

Other

 

 

Three Months Ended March 31, 2015

 

$

19 

The impact of the decrease in revenue on Adjusted EBITDA was driven by the decrease in royalty fees, revenue from company-owned Merry Maids branches and sales of products, offset, in part, by the increase in relatively low margin revenue from janitorial national accounts.

 

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Corporate

Corporate reported comparable Adjusted EBITDA for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. Each of the three month periods ended March 31, 2015 and 2014 include increased reserves in our automobile, general liability and workers’ compensation insurance program of $4 million driven by unfavorable claims trends. The unfavorable claims trends for the three months ended March 31, 2015 were driven by a charge of $3 million in connection with unasserted civil claims related to an incident at a resort in St. John in the U.S. Virgin Islands. The charge of $3 million is an amount equal to our insurance deductible under our general liability insurance program.

Discontinued Operations

Loss from discontinued operations, net of income taxes, for all periods presented includes the operating results of the previously sold businesses.

The operating results of discontinued operations are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Revenue

 

$

 —

 

$

Cost of services rendered and products sold

 

 

 —

 

 

12 

Selling and administrative expenses

 

 

 

 

Goodwill and trade name impairment(1)

 

 

 —

 

 

139 

Restructuring charges

 

 

 —

 

 

Loss before income taxes(1)

 

 

(1)

 

 

(155)

Benefit for income taxes(1)

 

 

 —

 

 

(60)

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

 

$

 —

 

$

(95)

___________________________________

(1)

In the three months ended March 31, 2014, the Company recorded a pre-tax non-cash impairment charge of $139 million ($84 million, net of tax) associated with the trade name at its former TruGreen business, which is reported in Loss from discontinued operations, net of income taxes.

 

 

Liquidity and Capital Resources

Liquidity

We are highly leveraged, and a substantial portion of our liquidity needs are due to service requirements on our significant indebtedness. The agreements governing the 2020 Notes and the Credit Facilities contain covenants that limit or restrict the ability of SvM and certain of its subsidiaries to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As of March 31, 2015, SvM was in compliance with the covenants under the agreements that were in effect on such date.

Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as required, borrowings under our credit facilities. We expect that cash provided from operations and available capacity under the Revolving Credit Facility will provide sufficient funds to operate our business, make expected capital expenditures and meet our liquidity requirements for the following 12 months, including payment of interest and principal on our debt. As of March 31, 2015, there were  $135 million of letters of credit outstanding and $165 million of available borrowing capacity under the Revolving Credit Facility. The letters of credit are posted to satisfy collateral requirements under our automobile, general liability and workers’ compensation insurance program and fuel swap contracts.

Cash and short- and long-term marketable securities totaled $352 million as of March 31, 2015, compared with $495 million as of December 31, 2014. As described below, on February 17, 2015, SvM redeemed $190 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount using available cash. On April 1, 2015, SVM redeemed the remaining $200 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount using net proceeds from the Incremental Term Loans, together with cash on hand.

Cash and short- and long-term marketable securities include balances associated with regulatory requirements at American Home Shield. See —Limitations on Distributions and Dividends by Subsidiaries. American Home Shield’s investment portfolio has been invested in a combination of high-quality Debt securities and Equity securities. We closely monitor the performance of the investments. From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any changes to such requirements. These reviews may result in identifying current reserve levels above or below minimum statutory reserve requirements, in which case we may adjust our reserves. The reviews may also identify opportunities to satisfy certain regulatory reserve requirements through alternate financial vehicles.

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As of March 31, 2015, we had posted $129 million in letters of credit as collateral under our automobile, general liability and workers’ compensation insurance program, which were issued under SvM’s Revolving Credit Facility. Additionally, under the terms of our fuel swap contracts, we are 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 when required by the counterparty. As of March 31, 2015, the estimated fair value of our fuel swap contracts was a net liability of $4 million, and we had posted $6 million in letters of credit as collateral under our fuel hedging program, which were also issued under SvM’s Revolving Credit Facility. The continued use of letters of credit for this purpose in the future could limit SvM’s ability to post letters of credit for other purposes and could limit SvM’s borrowing availability under its revolving credit facilities. However, we do not expect the fair value of the outstanding fuel swap contracts to materially impact our financial position or liquidity. We may from time to time repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position, results of operations or cash flows. These actions may include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt or the utilization of cash or marketable securities to satisfy collateral requirements. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Our affiliates may also purchase our debt from time to time, through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of the debt, and we would continue to reflect the debt as outstanding in our condensed consolidated financial statements.

Refinancing of Indebtedness

On February 17, 2015, SvM redeemed $190 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount using available cash. In connection with the partial redemption, we recorded a loss on extinguishment of debt of $13 million in the three months ended March 31, 2015, which includes a pre-payment premium of $11 million and the write-off of $2 million of debt issuance costs. 

On April 1, 2015, SvM entered into the First Term Loan Amendment, which provides for Incremental Term Loans in an aggregate principal amount of $175 million. On April 1, 2015, SvM used the net proceeds from the Incremental Term Loans, together with cash on hand, to redeem the remaining outstanding $200 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount. In connection with the redemption, we expect to record a loss on extinguishment of debt of approximately $14 million in the second quarter of 2015, which includes a pre‑payment premium of $12 million and the write‑off of approximately $2 million of debt issuance costs.

Fleet and Equipment Financing Arrangements

SvM has entered into the Fleet Agreement which, among other things, allows us to obtain fleet vehicles through a leasing program. We expect to fulfill substantially all of our vehicle fleet needs in 2015 through the leasing program under the Fleet Agreement. For the three months ended March 31, 2015, we acquired $2 million of vehicles under the Fleet Agreement 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. We have no minimum commitment for the number of vehicles to be obtained under the Fleet Agreement. We anticipate that new lease financings under the Fleet Agreement for the full year 2015  will range from approximately $15 million to $25 million.

Limitations on Distributions and Dividends by Subsidiaries

Holdings and SvM are each holding companies, and as such have no independent operations or material assets other than ownership of equity interests in their respective subsidiaries. We depend on our respective subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements and financial condition and general business conditions, as well as restrictions under the laws of our subsidiaries’ jurisdictions.

The terms of the indenture governing the 2020 Notes and the agreements governing the Credit Facilities significantly restrict the ability of our subsidiaries, including SvM, to pay dividends, make loans or otherwise transfer assets to us. Further, SvM’s subsidiaries are permitted under the terms of the Credit Facilities and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to SvM and, in turn, to us.

Furthermore, there are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These restrictions are related to regulatory requirements at American Home Shield and to a subsidiary borrowing arrangement at SMAC. The payments of ordinary and extraordinary dividends by our home warranty and similar subsidiaries (through which we conduct our American Home Shield business) are subject to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws and regulations require certain such subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. As of March 31, 2015, the total net assets subject to these third-party restrictions was $166 million. We expect that such limitations will be in effect for the remainder of 2015. None of our subsidiaries are obligated to make funds available to us through the payment of dividends.

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We consider undistributed earnings of our foreign subsidiaries as of March 31, 2015 to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. The amount of cash associated with indefinitely reinvested foreign earnings was approximately $17 million and $20 million as of March 31, 2015 and December 31, 2014, respectively. We have not repatriated, nor do we anticipate the need to repatriate, funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

Cash Flows

Cash flows from operating, investing and financing activities, as reflected in the accompanying condensed consolidated statements of cash flows, are summarized in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In millions)

 

2015

 

2014

Net cash provided from (used for):

 

 

 

 

 

 

Operating activities

 

$

60 

 

$

21 

Investing activities

 

 

(14)

 

 

(17)

Financing activities

 

 

(182)

 

 

(43)

Discontinued operations

 

 

(5)

 

 

(13)

Cash decrease during the period

 

$

(141)

 

$

(52)

Operating Activities

Net cash provided from operating activities from continuing operations increased  $39 million to $60 million for the three months ended March 31, 2015 compared to $21 million for the three months ended March 31, 2014.

Net cash provided from operating activities for the three months ended March 31, 2015 was comprised of $74 million in earnings adjusted for non-cash charges and a $5 million decrease in cash required for working capital (a $21 million decrease excluding the working capital impact of accrued interest, restructuring and taxes), offset, in part, by $11 million in payments for the call premium paid on the retirement of debt and $8 million in excess tax benefits from stock-based compensation expense.  For the three months ended March 31, 2015, working capital requirements were favorably impacted by seasonal activity, offset, in part, by the timing of interest payments on the 2020 Notes and incentive compensation payments related to 2014 performance.

Net cash provided from operating activities for the three months ended March 31, 2014 was comprised of $49 million in earnings adjusted for non-cash charges, offset, in part, by a $28 million increase in cash required for working capital (an $11 million decrease excluding the working capital impact of accrued interest, restructuring and taxes). Working capital requirements for the three months ended March 31, 2014 were adversely impacted by the timing of interest payments on the 2020 Notes and incentive compensation payments related to 2013 performance, offset, in part, by seasonal activity. 

Investing Activities

Net cash used for investing activities from continuing operations was $14 million for the three months ended March 31, 2015 compared to $17 million for the three months ended March 31, 2014.

Capital expenditures decreased to $8 million for the three months ended March 31, 2015 from $14 million in the three months ended March 31, 2014 and included recurring capital needs and information technology projects. We anticipate capital expenditures for the full year 2015 will range from approximately $40 million to $50 million, reflecting recurring capital needs and the continuation of investments in information systems and productivity enhancing technology. We expect to fulfill our ongoing vehicle fleet needs through vehicle capital leases. We have no additional material capital commitments at this time.

Cash payments for acquisitions for the three months ended March 31, 2015 totaled $12 million, compared with $41 million for the three months ended March 31, 2014. On February 28, 2014, we acquired HSA for cash consideration of $32 million. Consideration paid for tuck-in acquisitions consisted of cash payments and debt payable to sellers. We expect to continue our tuck-in acquisition program at levels consistent with prior periods.

Cash flows provided from notes receivable, financial investments and securities, net, for the three months ended March 31, 2015 and 2014, were $5 million and $38 million, respectively, and were primarily driven by the maturity and sale of marketable securities at American Home Shield.

Financing Activities

Net cash used for financing activities from continuing operations was $182 million for the three months ended March 31, 2015 compared to $43 million for the three months ended March 31, 2014.

During the three months ended March 31, 2015, SvM borrowed an incremental $3 million, made scheduled principal payments on long-term debt of $10 million,  redeemed $190 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount using available cash and recognized $8 million in excess tax benefits from the

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exercise of stock options and vesting of RSUs. Additionally, Holdings received $8 million from the issuance of common stock and contributed $20 million to SvM during the three months ended March 31, 2015.

During the three months ended March 31, 2014, SvM made scheduled principal payments on long-term debt of $11 million and contributed $35 million to New TruGreen in connection with the TruGreen spin-off. Additionally, Holdings paid $3 million for the purchase of common stock and RSUs and received $6 million from the issuance of common stock during the three months ended March 31, 2014.

Contractual Obligations

Our 2014 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2014. We continue to make the contractually required payments, and, therefore, the 2015 obligations and commitments as listed in our 2014 Form 10-K have been reduced by the required payments. On February 17, 2015, SvM redeemed $190 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount using available cash. On April 1, 2015, SvM entered the First Term Loan Amendment, which provides for Incremental Term Loans in an aggregate principal amount of $175 million. On April 1, 2015, SvM used the net proceeds from the Incremental Term Loans, together with cash on hand, to redeem the remaining outstanding $200 million in aggregate principal amount of its 8% 2020 Notes at a redemption price of 106.0% of the principal amount. See —Liquidity—Refinancing of Indebtedness above for more details.

Off-Balance Sheet Arrangements

As of March 31, 2015, we did not have any significant off-balance sheet arrangements.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off- balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.  

 

Regulatory Matters

In April 2014, the Bureau of Consumer Financial Protection (the CFPB) issued a Civil Investigative Demand to American Home Shield seeking documents and information to determine whether home warranty providers or other unnamed persons have engaged or are engaging in unlawful acts and practices in connection with referral arrangements and relationships in violation of the Real Estate Settlement Procedures Act and its implementing regulation (RESPA) and other laws enforceable by the CFPB. American Home Shield believes that it has complied with RESPA and other laws applicable to American Home Shield’s home warranty business. If the CFPB determines to bring an enforcement action, it could include demands for money penalties, changes to certain of American Home Shield’s business practices and customer restitution or disgorgement.

On March 25, 2015, the Company was informed that the United States Department of Justice initiated a criminal investigation into allegations that a local Terminix branch used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands, resulting in serious injuries to four members of a family vacationing there. The U.S. Virgin Islands Department of Planning and Natural Resources is also investigating the matter, as is the EPA. The EPA has also requested information concerning the possible distribution, sale or use of methyl bromide in Puerto Rico. The extent of potential fines and other sanctions that the federal and local governmental authorities may impose, and the impact of any judicial, administrative or regulatory proceedings or other issues resulting from or related to the incident, including claims by third parties, investigation costs and reputational harm, is not currently known. The Company is in the process of investigating this matter and is fully cooperating with all relevant governmental authorities.

 Information Regarding Forward-Looking Statements

This report contains forward-looking statements and cautionary statements. Some of the forward-looking statements can be identified by the use of forward-looking terms such as believes, expects, may, will, shall, should, would, could, seeks, aims, projects, is optimistic, intends, plans, estimates, anticipates or other comparable terms. Forward-looking statements include, without limitation, all matters that are not historical facts. They appear in a number of places throughout this report and include, without limitation, statements regarding our intentions, beliefs, assumptions or current expectations concerning, among other things, financial position; results of operations; cash flows; prospects; growth strategies or expectations; customer retention; the continuation of acquisitions, including the integration of any acquired company and risks relating to any such acquired company; fuel prices; attraction and retention of key personnel; the impact of fuel swaps; the valuation of marketable securities; estimates of accruals for self-insured claims related to workers’ compensation, auto and general liability risks; estimates of accruals for home warranty claims; estimates of future payments under operating and capital leases; the outcome (by judgment or settlement) and costs of legal or administrative proceedings, including, without limitation, collective, representative or class action litigation; and the impact of prevailing economic conditions.

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the market segments in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and cash flows, and the

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development of the market segments in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors, including, without limitation, the risks and uncertainties discussed in Risk Factors in the 2014 Form 10-K, Management’s Discussion and Analysis of Financial Condition and Results of Operations above and Risk Factors below could cause actual results and outcomes to differ from those reflected in the forward-looking statements. Additional factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:

·

lawsuits, enforcement actions and other claims by third parties or governmental authorities;

·

compliance with, or violation of, environmental, health and safety laws and regulations;

·

weakening general economic conditions, especially as they may affect home sales, unemployment and consumer confidence or spending levels;

·

our ability to successfully implement our business strategies;

·

adverse credit and financial markets impeding access, increasing financing costs or causing our customers to incur liquidity issues leading to some of our services not being purchased or cancelled;

·

cyber security breaches, disruptions or failures in our information technology systems and our failure to protect the security of personal information about our customers;

·

our ability to attract and retain key personnel, including our ability to attract, retain and maintain positive relations with trained workers and third-party contractors;

·

increase in prices for fuel and raw materials, and in minimum wage levels;

·

changes in the source and intensity of competition in our market segments;

·

adverse weather conditions;

·

our franchisees and third-party distributors and vendors taking actions that harm our business;

·

changes in our services or products;

·

our ability to protect our intellectual property and other material proprietary rights;

·

negative reputational and financial impacts resulting from future acquisitions or strategic transactions;

·

laws and governmental regulations increasing our legal and regulatory expenses;

·

increases in interest rates increasing the cost of servicing our substantial indebtedness;

·

increased borrowing costs due to lowering or withdrawal of the ratings, outlook or watch assigned to our debt securities;

·

restrictions contained in our debt agreements;

·

our ability to refinance all or a portion of our indebtedness or obtain additional financing; and

·

other factors described in this report and from time to time in documents that we file with the SEC.

You should read this report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The economy and its impact on discretionary consumer spending, labor wages, fuel prices and other material costs, home resales, unemployment rates, insurance costs and medical costs could have a material adverse impact on future results of operations.

We do not hold or issue derivative financial instruments for trading or speculative purposes. We have entered into specific financial arrangements, primarily fuel swap agreements and interest rate swap agreements, in the normal course of business to manage certain market risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of derivative financial instrument transactions could have a material impact on our financial statements.

Interest Rate Risk

We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps. In our opinion, the market risk associated with debt obligations and other significant instruments as of March 31, 2015 has not materially changed from December 31, 2014 (see Item 7A of the 2014 Form 10-K).

Fuel Price Risk

We are exposed to market risk for changes in fuel prices through the consumption of fuel by our vehicle fleet in the delivery of services to our customers. We expect to use approximately 11 million gallons of fuel in 2015. As of March 31, 2015, a ten percent change in fuel prices would result in a change of approximately $3 million in our annual fuel cost before considering the impact of fuel swap contracts.

We use fuel swap contracts to mitigate the financial impact of fluctuations in fuel prices. As of March 31, 2015, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $17 million, maturing through 2015. The estimated fair value of these contracts as of March 31, 2015 was a net liability of $4 million. These fuel swap contracts provide a fixed price for approximately 54 percent of our estimated fuel usage for the remainder of 2015. 

 

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

ServiceMaster Global Holdings, Inc.

Holdings’ Chief Executive Officer, Robert J. Gillette, and Holdings’ Senior Vice President and Chief Financial Officer, Alan J. M. Haughie, have evaluated Holdings’ disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q as required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act. Messrs. Gillette and Haughie have concluded that both the design and operation of Holdings’ disclosure controls and procedures were effective as of March 31, 2015.

The ServiceMaster Company, LLC

SvM’s Chief Executive Officer, Robert J. Gillette, and SvM’s Senior Vice President and Chief Financial Officer, Alan J. M. Haughie, have evaluated SvM’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q as required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act. Messrs. Gillette and Haughie have concluded that both the design and operation of SvM’s disclosure controls and procedures were effective as of March 31, 2015.

(b) Changes in internal control over financial reporting

No changes in Holdings’ or SvM’s internal control over financial reporting, as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act, occurred during the three months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, Holdings’ or SvM’s internal control over financial reporting. 

 

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS 

On March 25, 2015, the Company was informed that the United States Department of Justice initiated a criminal investigation into allegations that a local Terminix branch used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands, resulting in serious injuries to four members of a family vacationing there. The U.S. Virgin Islands Department of Planning and Natural Resources is also investigating the matter, as is the EPA. The EPA has also requested information concerning the possible distribution, sale or use of methyl bromide in Puerto Rico. The extent of potential fines and other sanctions that the federal and local governmental authorities may impose, and the impact of any judicial, administrative or regulatory proceedings or other issues resulting from or related to the incident, including claims by third parties, investigation costs and reputational harm, is not currently known. The Company is in the process of investigating this matter and is fully cooperating with all relevant governmental authorities.

In addition to the matter discussed above, 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. Subject to the paragraph above,  the Company does not expect any of these proceedings to have a material effect on its reputation, business, financial position, results of operations or cash flows; however, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial position, results of operations and cash flows.

ITEM 1A. RISK FACTORS 

We discuss in our 2014 Form 10-K and our other filings with the SEC various risks that may materially affect our business. Except as set forth below, there have been no material changes to the risk factors disclosed in the 2014 Form 10-K. The materialization of any risks and uncertainties set forth below or identified in Forward-Looking Statements contained in this report, together with those previously disclosed in the 2014 Form 10-K and our other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Information Regarding Forward-Looking Statements above.

Compliance with, or violation of, environmental, health and safety laws and regulations, including laws pertaining to the use of pesticides could result in significant costs that adversely impact our reputation, business, financial position, results of operations and cash flows.

International, federal, state, provincial and local laws and regulations relating to environmental, health and safety matters affect us in several ways. In the United States, products containing pesticides generally must be registered with the EPA and similar state agencies before they can be sold or applied. The failure to obtain or the cancellation of any such registration, or the withdrawal from the market place of such pesticides, could have an adverse effect on our business, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected. The pesticides we use are manufactured by independent third parties and are evaluated by the EPA as part of its ongoing exposure risk assessment. The EPA may decide that a pesticide we use will be limited or will not be reregistered for use in the United States. We cannot predict the outcome or the severity of the effect of the EPA’s continuing evaluations.

In addition, the use of certain pesticide products is regulated by various international, federal, state, provincial and local environmental and public health agencies. Although we strive to comply with such laws and regulations and have processes in place designed to achieve compliance, given our dispersed locations, distributed operations and numerous associates, we may be unable to prevent violations of these or other laws and regulations from occurring. Even if we are able to comply with all such laws and regulations and obtain all necessary registrations and licenses, the pesticides or other products we apply or use, or the manner in which we apply or use them, could be alleged to cause injury to the environment, to people or to animals, or such products could be banned in certain circumstances. The laws and regulations may also apply to thirdparty vendors who are hired to repair or remediate property and who may fail to comply with environmental laws, health and safety laws and regulations and subject us to risk of legal exposure. The costs of compliance, noncompliance, investigation, remediation, combating reputational harm or defending civil or criminal proceedings, products liability, personal injury or other lawsuits could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

International, federal, state, provincial and local agencies regulate the disposal, handling and storage of waste, discharges from our facilities and the investigation and cleanup of contaminated sites. We could incur significant costs, including investigation and cleanup costs, fines, penalties and civil or criminal sanctions and claims by third parties for property damage and personal injury, as a result of violations of, or liabilities under, these laws and regulations. In addition, potentially significant expenditures could be required to comply with environmental, health and safety laws and regulations, including requirements that may be adopted or imposed in the future.

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On March 25, 2015, the Company was informed that the United States Department of Justice initiated a criminal investigation into allegations that a local Terminix branch used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands, resulting in serious injuries to four members of a family vacationing there. The U.S. Virgin Islands Department of Planning and Natural Resources is also investigating the matter, as is the EPA. The EPA has also requested information concerning the possible distribution, sale or use of methyl bromide in Puerto Rico.  The extent of potential fines and other sanctions that the federal and local governmental authorities may impose, and the impact of any judicial, administrative or regulatory proceedings or other issues resulting from or related to the incident, including claims by third parties, investigation costs and reputational harm, is not currently known. The Company is in the process of investigating this matter and is fully cooperating with all relevant governmental authorities. 

ITEM 2.  UNREGISTERED SALES OF REGISTERED SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum number

 

 

 

 

 

 

 

Total number of

 

(or approximate

 

 

 

 

 

 

 

shares purchased as

 

dollar value) of shares

 

 

 

 

 

 

 

part of publicly

 

that may yet be

 

 

Total number of

 

Average price

 

announced plans or

 

purchased under the

Period

 

shares purchased(1)

 

paid per share

 

programs

 

plans or programs

Jan. 1, 2015 through Jan. 31, 2015

 

2,096 

 

$

26.77 

 

N/A

 

N/A

Feb. 1, 2015 through Feb. 28, 2015

 

 —

 

$

 —

 

N/A

 

N/A

Mar. 1, 2015 through Mar. 31, 2015

 

 —

 

$

 —

 

N/A

 

N/A

Total

 

2,096 

 

$

26.77 

 

N/A

 

N/A

___________________________________

(1)

All shares were acquired from employees upon net settlement of deferred stock units to cover withholding tax obligations. 

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ITEM 6. EXHIBITS

 

 

 

 

Exhibit
Number

 

Description

10.1#

 

First Term Loan Amendment, dated as of April 1, 2015, to the Credit Agreement, dated as of July 1, 2014, among The ServiceMaster Company, LLC and the incremental term lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent for the lenders and the other parties party thereto.

 

 

 

10.2

 

Form of Employee Stock Option Agreement under the ServiceMaster Global Holdings, Inc. 2014 Omnibus Incentive Plan for awards granted on and after February 24, 2015, is incorporated by reference to Exhibit 10.70 to the Annual Report on Form 10-K for the year ended December 31, 2014.

 

 

 

10.3

 

Form of Employee Restricted Stock Unit Agreement under the ServiceMaster Global Holdings, Inc. 2014 Omnibus Incentive Plan for awards granted on and after February 24, 2015, is incorporated by reference to Exhibit 10.71 to the Annual Report on Form 10-K for the year ended December 31, 2014.

 

 

 

31.1#

 

Certification of Chief Executive Officer of ServiceMaster Global Holdings, Inc. Pursuant to Rule 13a — 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2#

 

Certification of Chief Financial Officer of ServiceMaster Global Holdings, Inc. Pursuant to Rule 13a — 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.3#

 

Certification of Chief Executive Officer of The ServiceMaster Company, LLC Pursuant to Rule 15d — 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.4#

 

Certification of Chief Financial Officer of The ServiceMaster Company, LLC Pursuant to Rule 15d — 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1#

 

Certification of Chief Executive Officer of ServiceMaster Global Holdings, Inc. Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2#

 

Certification of Chief Financial Officer of ServiceMaster Global Holdings, Inc. Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.3#

 

Certification of Chief Executive Officer of The ServiceMaster Company, LLC Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.4#

 

Certification of Chief Financial Officer of The ServiceMaster Company, LLC Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS#

 

XBRL Instance Document

 

 

 

101.SCH#

 

XBRL Taxonomy Extension Schema

 

 

 

101.CAL#

 

XBRL Taxonomy Extension Calculation Linkbase

 

 

 

101.DEF#

 

XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB#

 

XBRL Taxonomy Extension Label Linkbase

 

 

 

101.PRE#

 

XBRL Extension Presentation Linkbase

 

___________________________________

 

# Filed herewith. 

 

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 4, 2015

 

 

 

 

 

SERVICEMASTER GLOBAL HOLDINGS, INC.

 

(Registrant)

 

 

 

By:

/s/ Alan J. M. Haughie

 

 

Alan J. M. Haughie

 

 

Senior Vice President and Chief Financial Officer

 

 

 

Date: May 4, 2015

 

 

 

 

 

 

THE SERVICEMASTER COMPANY, LLC

 

(Registrant)

 

 

 

By:

/s/ Alan J. M. Haughie

 

 

Alan J. M. Haughie

 

 

Senior Vice President and Chief Financial Officer

 

 

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