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EX-31.1 - EX-31.1 - SERVICEMASTER GLOBAL HOLDINGS INCserv-20150331xex311.htm

 

 

 

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)

 

 

 

 


 

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. 

 

 

 

 


 

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. 

 

 

2


 

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


 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4


 

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

5


 

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

 

6


 

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

7


 

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.

8


 

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.

9


 

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.

 

10


 

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

11


 

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.

12


 

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.

13


 

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