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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended September 30, 2010

 

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

 

For the transition period from                     to

 

Commission file number 1-14762

 

 

THE SERVICEMASTER COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware		36-3858106
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

860 Ridge Lake Boulevard, Memphis, Tennessee 38120

(Address of principal executive offices) (Zip Code)

 

901-597-1400

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o		Accelerated filer  o
Non-accelerated filer x		Smaller reporting company  o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

 

The registrant is a privately held corporation and its equity shares are not publicly traded. At November 15, 2010, 1,000 shares of the registrant’s common stock were outstanding, all of which were owned by CDRSVM Holding, Inc.

 

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

 

 

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TABLE OF CONTENTS

 

	Page No.
Part I. Financial Information	3
Item 1. Financial Statements	3
Condensed Consolidated Statements of Operations for the three months ended September 30, 2010 and September 30, 2009	3
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2010 and September 30, 2009	4
Condensed Consolidated Statements of Financial Position as of September 30, 2010 and December 31, 2009	5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 30, 2009	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	53
Item 4. Controls and Procedures	53
Part II. Other Information	53
Item 1. Legal Proceedings	53
Item 6. Exhibits	54
Signature	55

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands)

 

		Three months ended September 30,
		2010			2009
Operating Revenue		$	977,260		$	920,514
Operating Costs and Expenses:
Cost of services rendered and products sold		561,236			527,445
Selling and administrative expenses		266,794			249,302
Amortization expense		30,868			40,429
Restructuring and Merger related charges		1,690			8,498
Total operating costs and expenses		860,588			825,674
Operating Income		116,672			94,840
Non-operating Expense (Income):
Interest expense		71,267			74,216
Interest and net investment income		(3,989		)	(4,558		)
Other expense		209			176
Income from Continuing Operations before Income Taxes		49,185			25,006
Provision for income taxes		43,790			4,102
Income from Continuing Operations		5,395			20,904
Loss from discontinued operations, net of income taxes		(105		)	(396		)
Net Income		$	5,290		$	20,508

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands)

 

		Nine months ended September 30,
		2010			2009
Operating Revenue		$	2,619,730		$	2,523,733
Operating Costs and Expenses:
Cost of services rendered and products sold		1,537,337			1,475,218
Selling and administrative expenses		714,132			662,994
Amortization expense		111,761			121,139
Goodwill and trade name impairment		46,884			—
Restructuring and Merger related charges		9,781			22,859
Total operating costs and expenses		2,419,895			2,282,210
Operating Income		199,835			241,523
Non-operating Expense (Income):
Interest expense		217,117			225,538
Interest and net investment income		(7,487		)	(3,192		)
Gain on extinguishment of debt		—			(46,106		)
Other expense		556			555
(Loss) Income from Continuing Operations before Income Taxes		(10,351		)	64,728
Provision for income taxes		3,888			20,720
(Loss) Income from Continuing Operations		(14,239		)	44,008
Loss from discontinued operations, net of income taxes		(687		)	(666		)
Net (Loss) Income		$	(14,926	)	$	43,342

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Financial Position

(In thousands, except share data)

 

		As of September 30, 2010			As of December 31, 2009
		(Unaudited)			(Audited)
Assets
Current Assets:
Cash and cash equivalents		$	197,040		$	253,463
Marketable securities		28,127			21,120
Receivables, less allowance of $21,335 and $20,314, respectively		442,093			348,655
Inventories		77,812			76,592
Prepaid expenses and other assets		46,020			36,564
Deferred customer acquisition costs		43,121			36,070
Deferred taxes		16,757			21,595
Assets of discontinued operations		10			42
Total Current Assets		850,980			794,101
Property and Equipment:
At cost		448,982			345,100
Less: accumulated depreciation		(180,122		)	(132,965		)
Net property and equipment		268,860			212,135
Other Assets:
Goodwill		3,119,484			3,119,754
Intangible assets, primarily trade names, service marks and trademarks, net		2,689,260			2,787,237
Notes receivable		23,880			23,490
Long-term marketable securities		111,518			111,066
Other assets		7,094			31,799
Debt issuance costs		55,909			66,807
Total Assets		$	7,126,985		$	7,146,389
Liabilities and Shareholder’s Equity
Current Liabilities:
Accounts payable		$	99,005		$	73,471
Accrued liabilities:
Payroll and related expenses		102,711			74,385
Self-insured claims and related expenses		86,037			87,332
Other		139,590			156,649
Deferred revenue		452,751			449,746
Liabilities of discontinued operations		656			2,806
Current portion of long-term debt		50,316			64,395
Total Current Liabilities		931,066			908,784
Long-Term Debt		3,906,902			3,910,549
Other Long-Term Liabilities:
Deferred taxes		932,656			957,077
Liabilities of discontinued operations		4,078			4,145
Other long-term obligations		178,719			179,503
Total Other Long-Term Liabilities		1,115,453			1,140,725
Commitments and Contingencies (See Note 4)
Shareholder’s Equity:
Common stock $0.01 par value, authorized 1,000 shares; issued 1,000 shares		—			—
Additional paid-in capital		1,453,393			1,446,529
Retained deficit		(251,350		)	(236,424		)
Accumulated other comprehensive loss		(28,479		)	(23,774		)
Total Shareholder’s Equity		1,173,564			1,186,331
Total Liabilities and Shareholder’s Equity		$	7,126,985		$	7,146,389

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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THE SERVICEMASTER COMPANY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Nine months ended September 30,
		2010			2009
Cash and Cash Equivalents at Beginning of Period		$	253,463		$	405,587
Cash Flows from Operating Activities from Continuing Operations:
Net (Loss) Income		(14,926		)	43,342
Adjustments to reconcile net income to net cash provided from operating activities:
Loss from discontinued operations		687			666
Depreciation expense		50,699			48,781
Amortization expense		111,761			121,139
Amortization of debt issuance costs		10,933			10,989
Gain on extinguishment of debt		—			(46,106		)
Deferred income tax (benefit) provision		(13,516		)	6,887
Stock-based compensation expense		6,864			5,992
Goodwill and trade name impairment		46,884			—
Restructuring and Merger related charges		9,781			22,859
Cash payments related to restructuring charges		(10,249		)	(19,805		)
Change in working capital, net of acquisitions:
Current income taxes		3,827			12,933
Receivables		(95,207		)	(56,039		)
Inventories and other current assets		(21,260		)	(16,533		)
Accounts payable		27,929			(9,214		)
Deferred revenue		1,042			(2,919		)
Accrued liabilities		(1,416		)	(63,185		)
Other, net		5,406			9,417
Net Cash Provided from Operating Activities from Continuing Operations		119,239			69,204
Cash Flows from Investing Activities from Continuing Operations:
Property additions		(105,292		)	(50,470		)
Sale of equipment and other assets		1,558			2,756
Acquisition of The ServiceMaster Company		(2,219		)	(1,482		)
Other business acquisitions, net of cash acquired		(52,488		)	(20,730		)
Notes receivable, financial investments and securities, net		20,954			8,032
Net Cash Used for Investing Activities from Continuing Operations		(137,487		)	(61,894		)
Cash Flows from Financing Activities from Continuing Operations:
Borrowings of debt		15,000			—
Payments of debt		(49,797		)	(201,371		)
Debt issuance costs paid		(30		)	(410		)
Net Cash Used for Financing Activities from Continuing Operations		(34,827		)	(201,781		)
Cash Flows from Discontinued Operations:
Cash used for operating activities		(3,348		)	(2,329		)
Cash used for investing activities		—			(914		)
Net Cash Used for Discontinued Operations		(3,348		)	(3,243		)
Cash Decrease During the Period		(56,423		)	(197,714		)
Cash and Cash Equivalents at End of Period		$	197,040		$	207,873

 

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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THE SERVICEMASTER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Basis of Presentation

 

The ServiceMaster Company is a national company serving both residential and commercial customers. Its products and services include lawn care, landscape maintenance, termite and pest control, home service contracts, cleaning and disaster restoration, house cleaning, furniture repair and home inspection. ServiceMaster provides these services through a network of company-owned locations and franchise licenses operating under the following leading brands: TruGreen, TruGreen LandCare, Terminix, American Home Shield, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec. ServiceMaster is organized into six principal reportable segments: TruGreen LawnCare, TruGreen LandCare, Terminix, American Home Shield, ServiceMaster Clean and Other Operations and Headquarters.

 

The condensed consolidated financial statements include the accounts of The ServiceMaster Company and its majority owned subsidiary partnerships, limited liability companies and corporations, collectively referred to as “ServiceMaster”, the “Company”, “we”, “us” or “our”.

 

The condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company recommends that the quarterly condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2009. The condensed consolidated financial statements reflect all adjustments which 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. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results which might be achieved for a full year.

 

On March 18, 2007, ServiceMaster entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ServiceMaster Global Holdings, Inc. (formerly CDRSVM Topco, Inc.) (“Holdings”) and CDRSVM Acquisition Co., Inc., an indirect wholly owned subsidiary of Holdings (“Acquisition Co.”). The Merger Agreement provided that, upon the terms and subject to the conditions set forth in the Merger Agreement, Acquisition Co. would merge with and into ServiceMaster, with ServiceMaster as the surviving corporation (the “Merger”).

 

On July 24, 2007 (the “Closing Date”), the Merger was completed, and, immediately following the completion of the Merger, all of the outstanding capital stock of Holdings, the ultimate parent company of ServiceMaster, was owned by investment funds sponsored by, or affiliated with, Clayton, Dubilier & Rice, Inc. (now operated as Clayton, Dubilier & Rice, LLC, “CD&R”), Citigroup Private Equity LP (together with its affiliate, Citigroup Alternative Investments LLC, “Citigroup”), BAS Capital Funding Corporation (“BAS”) and J.P. Morgan Ventures Corporation (“JP Morgan”) (collectively, the “Equity Sponsors”).

 

Equity contributions totaling $1,431.1 million from the Equity Sponsors, together with (i) borrowings under a new $1,150.0 million senior unsecured interim loan facility (“Interim Loan Facility”), (ii) borrowings under a new $2,650.0 million senior secured term loan facility and (iii) cash on hand at ServiceMaster, were used, among other things, to finance the aggregate merger consideration, to make payments in satisfaction of other equity-based interests in ServiceMaster under the Merger Agreement, to settle existing interest rate swaps, to redeem or provide for the repayment of certain of the Company’s existing indebtedness and to pay related transaction fees and expenses. In addition, letters of credit issued under a new $150.0 million pre-funded letter of credit facility (together with the senior secured term loan facility, the “Term Facilities”) were used to replace and/or secure letters of credit previously issued under a ServiceMaster credit facility that was terminated as of the Closing Date. On the Closing Date, the Company also entered into, but did not then draw under, a new $500.0 million senior secured revolving credit facility (the “Revolving Credit Facility”).

 

The Interim Loan Facility matured on July 24, 2008. On the maturity date, outstanding amounts under the Interim Loan Facility were converted on a one-to-one basis into 10.75%/11.50% senior toggle notes maturing in 2015 (the “Permanent Notes”). The Permanent Notes were issued pursuant to a refinancing indenture. In connection with the issuance of the Permanent Notes, ServiceMaster entered into a registration rights agreement (the “Registration Rights Agreement”), pursuant to which ServiceMaster filed with the Securities and Exchange Commission (“SEC”) a registration statement with respect to the resale of the Permanent Notes, which was declared effective on January 16, 2009. ServiceMaster deregistered the Permanent Notes in accordance with the terms of the Registration Rights Agreement, and the effectiveness of the registration statement was terminated, on November 19, 2009.

 

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Note 2. Significant Accounting Policies

 

The Company’s significant accounting policies are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following selected accounting policies should be read in conjunction with that Annual Report on Form 10-K.

 

Revenues from lawn care and pest control services, as well as liquid and fumigation termite applications, are recognized as the services are provided. Revenues from landscaping services are recognized as they are earned based upon contractual arrangements or when services are performed for non-contractual arrangements. The Company eradicates termites through the use of non-baiting methods (e.g., fumigation or liquid treatments) and baiting systems. Termite services using baiting systems, termite inspection and protection contracts, as well as home service contracts, are frequently sold through annual contracts for a one-time, upfront payment. Direct costs of these contracts (service costs for termite contracts and claim costs for home service 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 and home service contracts and adjusts the estimates when appropriate. Revenue from trade name licensing arrangements is recognized when earned.

 

The Company has franchise agreements in its TruGreen LawnCare, Terminix, ServiceMaster Clean, AmeriSpec, Furniture Medic and Merry Maids businesses. Franchise revenue (which in the aggregate represents approximately four percent of consolidated revenue from continuing operations) consists principally of continuing monthly fees based upon the franchisee’s customer level revenue. Monthly fee revenue is recognized when the related customer level revenue is reported by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial fees resulting from the sale of a franchise. These fees are fixed and are recognized as revenue when collectability is reasonably assured and all material services or conditions relating to the sale have been substantially performed. Total profits from the franchised operations were $17.3 million and $51.9 million for the three and nine months ended September 30, 2010, respectively, and $20.3 million and $49.9 million for the three and nine months ended September 30, 2009, respectively. Consolidated operating income from continuing operations was $116.7 million and $199.8 million for the three and nine months ended September 30, 2010, respectively, and $94.8 million and $241.5 million for the three and nine months ended September 30, 2009, respectively. The Company evaluates the performance of its franchise businesses based primarily on operating profit before corporate general and administrative expenses, interest expense and amortization of intangible assets. The portion of total franchise fee income related to initial fees received from the sale of franchises was immaterial to the Company’s condensed consolidated financial statements for all periods.

 

The Company had $452.8 million and $449.7 million of deferred revenue at September 30, 2010 and December 31, 2009, respectively. Deferred revenue consists primarily of payments received for annual contracts relating to home service contracts, termite baiting, termite inspection, pest control and lawn care services.

 

Customer acquisition costs, which are incremental and direct costs of obtaining a customer, are deferred and amortized over the life of the related contract in proportion to revenue recognized. These costs include sales commissions and direct selling costs which can be shown to have resulted in a successful sale.

 

TruGreen LawnCare has significant seasonality in its business. In the winter and spring, this business sells a series of lawn applications to customers which are rendered primarily in March through October (the production season). This business incurs incremental selling expenses at the beginning of the year that directly relate to successful sales for which the revenues are recognized in later quarters. On an interim basis, TruGreen LawnCare defers these incremental selling expenses, pre-season advertising costs and annual repairs and maintenance procedures that are performed primarily in the first quarter. These costs are deferred and recognized in proportion to the contract revenue over the production season and are not deferred beyond the calendar year-end. Other business segments of the Company also defer, on an interim basis, advertising costs incurred early in the year. These pre-season costs are deferred and recognized approximately in proportion to revenue over the balance of the year and are not deferred beyond the fiscal year-end.

 

The cost of direct-response advertising at Terminix and TruGreen LawnCare, consisting primarily of direct-mail promotions, is capitalized and amortized over its expected period of future benefits.

 

The preparation of the condensed consolidated financial statements requires management to make certain estimates and assumptions required under GAAP which may differ from actual results. Disclosures in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 presented the significant areas that require the use of management’s estimates and discussed how management formed its judgments. The areas discussed included revenue recognition; the allowance for uncollectible receivables; accruals for self-insured retention limits related to medical, workers’ compensation, auto and general liability insurance

 

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claims; accruals for home service contracts and termite damage claims; the possible outcome of outstanding litigation; accruals for income tax liabilities, as well as deferred tax accounts; the deferral and amortization of customer acquisition costs; useful lives for depreciation and amortization expense; the valuation of marketable securities; and the valuation of tangible and intangible assets.

 

Note 3. Restructuring and Merger Related Charges

 

The Company incurred restructuring and Merger related charges of $1.7 million ($1.0 million, net of tax) and $9.8 million ($6.0 million, net of tax) for the three and nine months ended September 30, 2010, respectively, and $8.5 million ($5.6 million, net of tax) and $22.9 million ($14.4 million, net of tax) for the three and nine months ended September 30, 2009, respectively. Restructuring and Merger related charges were comprised of the following:

 

		Three months ended						Nine months ended
		September 30,						September 30,
(In thousands)		2010			2009			2010			2009
TruGreen LawnCare reorganization and restructuring(1)		$	695		$	5,951		$	6,657		$	5,951
Information technology outsourcing(2)		—			—			—			9,461
Terminix branch optimization(3)		—			—			—			3,219
Merger related charges(4)		44			786			1,180			2,234
Other(5)		951			1,761			1,944			1,994
Total restructuring and Merger related charges		$	1,690		$	8,498		$	9,781		$	22,859

 

(1)                                   Represents restructuring charges related to a reorganization of field leadership and a restructuring of branch operations. For the three months ended September 30, 2010, these costs included consulting fees of $0.7 million. For the nine months ended September 30, 2010, these costs included consulting fees of $4.5 million and severance, lease termination and other costs of $2.2 million. For the three and nine months ended September 30, 2009, these costs included consulting fees of $4.1 million and severance, lease termination and other costs of $1.9 million.

 

(2)                                   On December 11, 2008, the Company entered into an agreement with International Business Machines Corporation (“IBM”) pursuant to which IBM provides information technology operations and applications development services to the Company. These services were phased in during the first half of 2009. For the nine months ended September 30, 2009, these costs included transition fees paid to IBM of $7.2 million, employee retention and severance costs of $1.3 million and consulting and other costs of $1.0 million.

 

(3)                                   Represents restructuring charges related to a branch optimization project. For the nine months ended September 30, 2009, these costs included lease termination costs of $2.8 million and severance costs of $0.4 million.

 

(4)                                   Includes severance, retention, legal fees and other costs associated with the Merger.

 

(5)                                   For the three and nine months ended September 30, 2010, these costs included adjustments to lease termination reserves related to previous restructuring initiatives of $1.2 million and $1.7 million, respectively, and consulting and other (credits) costs of ($0.2) million and $0.2 million, respectively. For the three and nine months ended September 30, 2009, these costs included adjustments to lease termination reserves related to previous restructuring initiatives of $0.4 million and consulting and other costs of $1.4 million and $1.6 million, respectively.

 

The pretax charges discussed above are reported in the “Restructuring and Merger related charges” line in the condensed consolidated statement of operations.

 

A reconciliation of the beginning and ending balances of accrued restructuring and Merger related charges, which are included in Accrued Liabilities — Other on the condensed consolidated statements of financial position, is presented as follows:

 

(In thousands)		Accrued Restructuring and Merger Related Charges
Balance at December 31, 2009		$	12,083
Costs incurred		9,781
Costs paid or otherwise settled		(17,085		)
Balance at September 30, 2010		$	4,779

 

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Note 4. Commitments and Contingencies

 

A portion of the Company’s vehicle fleet and some equipment are leased through operating leases. The lease terms are non-cancelable for the first twelve-month term, and then are month-to-month, cancelable at the Company’s option. There are residual value guarantees by the Company (ranging from 70 percent to 84 percent of the estimated terminal value at the inception of the lease depending on the agreement) relative to these vehicles and equipment, which historically have not resulted in significant net payments to the lessors. The fair value of the assets under all of the fleet and equipment leases is expected to substantially mitigate the Company’s guarantee obligations under the agreements. At September 30, 2010, the Company’s residual value guarantees related to the leased assets totaled $59.2 million for which the Company has recorded a liability for the estimated fair value of these guarantees of approximately $1.3 million in the condensed consolidated statement of financial position.

 

Prior to the Merger, the Company maintained lease facilities with banks totaling $65.2 million, which provided for the financing of branch properties to be leased by the Company. In connection with the closing of the Merger, the Company amended these leases effective July 24, 2007. Among the modifications, the Company extended the lease terms through July 24, 2010 and made a $22.0 million investment in the lease facilities. In July 2010, the Company purchased the properties for $65.2 million. The Company’s $22.0 million investment in the lease facilities was returned to the Company upon purchase, resulting in a net cash payment of $43.2 million. In the third quarter of 2009, the Company determined that it was probable that the fair value of the real properties under operating leases would be below the total amount funded under the lease facilities at the end of the lease term. The Company’s estimate of this shortfall was $15.9 million, which was expensed over the remainder of the lease term. The Company recorded charges of $1.4 million and $10.4 million in the three and nine months ended September 30, 2010, respectively, and $2.7 million for the three and nine months ended September 30, 2009 related to this shortfall.

 

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. As of September 30, 2010 and December 31, 2009, the Company had accrued self-insured claims of $128.3 million and $131.3 million, respectively, which are included in Accrued Liabilities — Self-insured claims and related expenses and Other long-term obligations on the condensed consolidated statements of financial position. During the nine months ended September 30, 2010 and 2009, the Company recorded provisions for uninsured claims totaling $26.2 million and $27.2 million, respectively, and the Company paid claims totaling $29.2 million and $34.7 million, respectively. In determining the Company’s accrual for self-insured claims, the Company uses historical claims experience to establish both the current year accrual and the underlying provision for future losses. This actuarially determined provision and related accrual includes known claims, as well as incurred but not reported claims. The Company adjusts its estimate of accrued self-insured claims when required to reflect changes based on factors such as changes in health care costs, accident frequency and claim severity.

 

Accruals for home service contract claims in the American Home Shield business are made based on the Company’s claims experience and actuarial projections. Termite damage claim accruals are recorded based on both the historical rates of claims incurred within a contract year and the cost per claim. Current activity could differ causing a change in estimates. The Company has certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. The Company accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified.

 

As part of the American Residential Services and American Mechanical Services sale agreements in 2006, the Company continues to be obligated to third parties with respect to operating leases for which the Company has been released as being the primary obligor, as well as certain real estate leased and operated by the buyers. The Company’s obligations under these agreements may be limited in terms of time and or amount, and in some cases, the Company may have recourse against the buyers for potential future payments made by the Company. At the present time, the Company does not believe it is probable that the buyers will default on their obligations subject to guarantee. The fair value of the Company’s obligations related to these guarantees is not significant and no liability has been recorded.

 

In the ordinary course of conducting business activities, the Company and its subsidiaries become involved in judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. These proceedings include, on an individual, collective and class action basis, regulatory, insured and uninsured employment, general, and commercial liability actions and environmental proceedings. Additionally, the Company has entered into settlement agreements in certain cases, including putative class actions, which are subject to court approval. If one or more of these settlements are not finally approved, the Company could have additional or different exposure. The enactment of new federal or state legislation or the promulgation of new regulation or interpretation at any level of government may also expose the Company to potential new liabilities or costs, or may require the Company to modify its business model or business practices. At this time, the Company does not expect any of these proceedings or changes in law to have a material effect on its financial position, results of operations or cash flows; however, the Company can give

 

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no assurance that the results of any such proceedings may not be material to its financial position, results of operations and cash flows for any period in which costs, if any, are recognized.

 

Note 5. Goodwill and Intangible Assets

 

In accordance with applicable accounting standards, goodwill and intangible assets that are not amortized are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. The Company’s annual assessment date is October 1. There were no goodwill or trade name impairment charges in the three months ended September 30, 2010. The results for the nine months ended September 30, 2010 include a non-cash impairment charge of $46.9 million to reduce the carrying value of goodwill and trade names as a result of the Company’s interim impairment testing of goodwill and indefinite-lived intangible assets. There were no goodwill or trade name impairment charges in the three and nine months ended September 30, 2009.

 

Based on the results of operations at TruGreen LandCare in the first six months of 2010 and the revised outlook for the remainder of 2010, the Company concluded there was an impairment indicator requiring the performance of an interim goodwill impairment test for the TruGreen LandCare reporting unit as of June 30, 2010. The first step of the goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to its carrying amount, including goodwill. In performing the first step, the Company determined the fair value of the TruGreen LandCare reporting unit using a combination of a discounted cash flow analysis, a market-based comparable approach and a market-based transaction approach. Based on the results of the step one analysis, the Company determined that the carrying value of the TruGreen LandCare reporting unit exceeded its fair value, indicating that goodwill was potentially impaired. As a result, the Company completed the second step of the goodwill impairment test which involves calculating the implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all assets and liabilities other than goodwill and comparing it to the carrying amount of goodwill. The Company determined that the implied fair value of goodwill was less than the carrying value for TruGreen LandCare by $43.0 million, which was recorded as a goodwill impairment charge in the second quarter of 2010. As of June 30 and September 30, 2010, there was no remaining goodwill at TruGreen LandCare.

 

As a result of the aforementioned goodwill impairment indicators and in accordance with applicable accounting standards, the Company performed an impairment analysis on its indefinite lived intangible asset related to TruGreen LandCare’s trade name to determine its fair value as of June 30, 2010. Based on the lower projected cash flows for TruGreen LandCare as discussed above, the Company determined the fair value attributable to the indefinite lived intangible asset was less than the carrying value for TruGreen LandCare by $3.9 million, which was recorded as a trade name impairment in the second quarter of 2010.

 

The Company determined that there were no additional impairment indicators for goodwill or other indefinite lived intangible assets as of September 30, 2010.

 

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

 

(In thousands)		TruGreen LawnCare			TruGreen LandCare			Terminix			American Home Shield			ServiceMaster Clean			Other Operations & Headquarters			Total
Balance at Dec. 31, 2009		$	1,178,436		$	43,901		$	1,361,698		$	348,010		$	135,713		$	51,996		$	3,119,754
Impairment charge		—			(42,984		)	—			—			—			—			(42,984		)
Acquisitions		11,786			—			31,762			—			—			1,214			44,762
Other(1)		(393		)	(917		)	(483		)	(190		)	11			(76		)	(2,048		)
Balance at Sept. 30, 2010		$	1,189,829		$	—		$	1,392,977		$	347,820		$	135,724		$	53,134		$	3,119,484

 

(1)                                  Reflects the impact of the amortization of tax deductible goodwill and foreign exchange rate changes.

 

The accumulated impairment losses as of September 30, 2010 were $43.0 million associated with our TruGreen LandCare segment. There were no accumulated impairment losses as of December 31, 2009.

 

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

 

		As of September 30, 2010									As of December 31, 2009
(In thousands)		Gross			Accumulated Amortization			Net			Gross			Accumulated Amortization			Net
Trade names(1)		$	2,375,787		$	—		$	2,375,787		$	2,380,100		$	—		$	2,380,100
Customer relationships		682,618			(451,487		)	231,131			669,581			(352,605		)	316,976
Franchise agreements		88,000			(33,058		)	54,942			88,000			(26,418		)	61,582
Other		54,690			(27,290		)	27,400			49,630			(21,051		)	28,579
Total		$	3,201,095		$	(511,835	)	$	2,689,260		$	3,187,311		$	(400,074	)	$	2,787,237

 

(1)           Not subject to amortization. Reflects the $3.9 million trade name impairment at TruGreen LandCare discussed above and the impact of the amortization of tax deductible goodwill at TruGreen LandCare, which is applied to the trade name balance beginning July 1, 2010.

 

Note 6. Stock-Based Compensation

 

For the three and nine months ended September 30, 2010, the Company recognized stock-based compensation expense of $2.5 million ($1.5 million, net of tax) and $6.9 million ($4.3 million, net of tax), respectively. For the three and nine months ended September 30, 2009, the Company recognized stock-based compensation expense of $2.1 million ($1.7 million, net of tax) and $6.0 million ($4.1 million, net of tax), respectively. As of September 30, 2010, there was $21.1 million of total unrecognized compensation cost related to non-vested stock options and restricted share units (“RSUs”) granted by Holdings under the ServiceMaster Global Holdings, Inc. Stock Incentive Plan (the “MSIP”). These remaining costs are expected to be recognized over a weighted-average period of 2.2 years.

 

As of September 24, 2010, the board of directors and stockholders of Holdings approved an amendment to the MSIP. The amendment to the MSIP increased by 800,000 the maximum number of shares of Holdings’ common stock available for issuance thereunder, to 13,845,000, and provides for the award of RSUs under the MSIP.

 

In addition, on September 24, 2010, the compensation committee of the Holdings board of directors approved an employee restricted stock unit agreement to be used when awards of RSUs are made under the MSIP and granted 735,000 RSU awards to certain senior executives of ServiceMaster. The RSUs had a grant-date fair value of $10 per unit and will vest in three equal annual installments, subject to an employee’s continued employment. Upon vesting, each RSU will be converted into one share of Holdings’ common stock.

 

On September 7, 2010, ServiceMaster announced the retirement of its Chief Executive Officer (“CEO”) with a targeted retirement date of December 31, 2010, or such earlier or later date as a successor CEO is appointed. On September 8, 2010, in connection with the CEO’s retirement, Holdings extended the option period on the CEO’s vested standalone options to three years following his departure date. This extension of the option period is considered a stock option modification resulting in additional stock compensation expense of $0.5 million, of which $0.3 million was recorded in the third quarter of 2010.

 

Note 7. Supplemental Cash Flow Information

 

Supplemental information relating to the condensed consolidated statement of cash flows for the nine months ended September 30, 2010 and 2009 is presented in the following table:

		Nine months ended
		September 30,
(In thousands)		2010			2009
Cash paid for or (received from):
Interest expense		$	238,727		$	266,943
Interest and dividend income		(3,997		)	(5,193		)
Income taxes, net of refunds		12,139			1,457

 

 

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Note 8. Comprehensive Income

 

Total comprehensive income (loss) was $6.7 million and ($19.6) million for the three and nine months ended September 30, 2010 and $24.5 million and $66.2 million for the three and nine months ended September 30, 2009, respectively. Total comprehensive income primarily includes net income (loss), unrealized gain (loss) on marketable securities, unrealized gain (loss) on derivative instruments and the effect of foreign currency translation.

 

Note 9. Receivable Sales

 

The Company has entered into an accounts receivable securitization arrangement under which TruGreen LawnCare and Terminix may sell certain eligible trade accounts receivable to ServiceMaster Funding Company LLC (“Funding”), the Company’s wholly owned, bankruptcy-remote subsidiary, which is consolidated for financial reporting purposes. Funding, in turn, may transfer, on a revolving basis, an undivided percentage ownership interest of up to $50.0 million in the pool of accounts receivable to one or both of the unrelated purchasers who are parties to the accounts receivable securitization arrangement (“Purchasers”). The amount of the eligible receivables varies during the year based on seasonality of the businesses and could, at times, limit the amount available to the Company from the sale of these interests.

 

During the nine months ended September 30, 2010, there were no transfers of interests in the pool of trade accounts receivables to Purchasers under this arrangement. As of September 30, 2010 and December 31, 2009, the Company had $10.0 million outstanding under the arrangement and, as of September 30, 2010, had $40.0 million of remaining capacity available under the trade accounts receivable securitization arrangement.

 

The accounts receivable securitization arrangement is a 364-day facility that is renewable annually at the option of Funding, with a final termination date of July 17, 2012. Only one of the Purchasers is required to purchase interests under the arrangement. If this Purchaser were to exercise its right to terminate its participation in the arrangement, which it may do in the third quarter of each year, the amount of cash available to the Company under this agreement may be reduced or eliminated. As part of the annual renewal of the facility, which last occurred on July 20, 2010, this Purchaser agreed to continue its participation in the arrangement at least through July 19, 2011.

 

The Company has recorded its obligation to repay the third party for its interest in the pool of receivables as long-term debt in the condensed consolidated financial statements. The interest rates applicable to the Company’s obligation are based on a fluctuating rate of interest based on the third party Purchaser’s pooled commercial paper rate (0.36% at September 30, 2010). In addition, the Company pays usage fees on its obligations and commitment fees on undrawn amounts committed by the Purchasers. All obligations under the accounts receivable securitization arrangement must be repaid by July 17, 2012, the final termination date of the arrangement.

 

Note 10. Cash and Marketable Securities

 

Cash, money market funds and certificates of deposits, with maturities of three months or less when purchased, are included in the condensed consolidated statement of financial position caption “Cash and cash equivalents”. As of September 30, 2010 and December 31, 2009, the Company’s investments consist primarily of domestic publicly traded debt and certificates of deposit totaling $102.0 million and $93.9 million, respectively, and common equity securities of $37.7 million and $38.3 million, respectively.

 

The aggregate market value of the Company’s short-term and long-term investments in debt and equity securities was $139.7 million and $132.2 million, and the aggregate cost basis was $131.4 million and $126.7 million at September 30, 2010 and December 31, 2009, respectively.

 

As of September 30, 2010 and December 31, 2009, $296.0 million and $256.5 million, respectively, of the cash and short- and long-term marketable securities balance are associated with regulatory requirements at American Home Shield and for other purposes. American Home Shield’s investment portfolio has been invested in a combination of high quality, short duration fixed income securities and equities.

 

Gains and losses on sales of investments, as determined on a specific identification basis, are included in investment income in the period they are realized. The Company periodically reviews its portfolio of investments to determine whether there has been an other than temporary decline in the value of the investments from factors such as deterioration in the financial condition of the issuer or the market(s) in which the issuer competes. The table below summarizes gross realized gains and gross realized losses, each resulting from sales of available-for-sale securities, and impairment charges due to other than temporary declines in the value of certain investments.

 

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		Three months ended September 30,						Nine months ended September 30,
(In thousands)		2010			2009			2010			2009
Gross realized gains, pre-tax		$	988		$	1,250		$	2,089		$	2,812
Gross realized gains, net of tax		605			770			1,279			1,732
Gross realized losses, pre-tax		(52		)	(137		)	(178		)	(1,490		)
Gross realized losses, net of tax		(32		)	(84		)	(109		)	(918		)
Impairment charges, pre-tax		—			—			—			(5,854		)
Impairment charges, net of tax		—			—			—			(3,606		)

 

The table below summarizes unrealized gains and losses in the investment portfolio.

 

(In thousands)		As of September 30, 2010			As of December 31, 2009
Unrealized gains		$	10,363		$	7,674
Unrealized losses		(2,099		)	(2,226		)
Portion of unrealized losses which had been in a loss position for more than one year		(189		)	(739		)
Aggregate fair value of the investments with unrealized losses		4,290			26,837

 

Note 11. Long-Term Debt

 

Long-term debt at September 30, 2010 and December 31, 2009 is summarized in the following table:

 

(In thousands)		As of September 30, 2010			As of December 31, 2009
Senior secured term loan facility maturing in 2014		$	2,563,875		$	2,583,750
10.75% /11.50% senior toggle notes maturing in 2015		1,061,000			1,061,000
Revolving credit facility maturing in 2013		—			—
7.10% notes maturing in 2018(1)		65,068			63,624
7.45% notes maturing in 2027(1)		149,887			147,885
7.25% notes maturing in 2038(1)		60,431			59,824
Other		56,957			58,861
Less current portion		(50,316		)	(64,395		)
Total long-term debt		$	3,906,902		$	3,910,549

 

(1)           The increase in the balance from December 31, 2009 to September 30, 2010 reflects the amortization of fair value adjustments related to purchase accounting, which effectively increases the stated coupon interest rates.

 

The Company had $34.5 million and $70.2 million of accrued interest at September 30, 2010 and December 31, 2009, respectively. Accrued interest is included in Accrued Liabilities — Other on the condensed consolidated statements of financial position.

 

In June 2010, the Company entered into two, two-year interest rate swap agreements effective March 3, 2011. The total notional amount of the agreements was $250.0 million. Under the terms of the agreements, the Company will pay a weighted average fixed rate of interest of 1.70% on the $250.0 million notional amount and the Company will receive a floating rate of interest (based on the one month LIBOR) on the notional amount. Therefore, during the term of the swap agreements, the effective interest rate for $250.0 million of the term loans will be fixed at a rate of 1.70% plus the incremental borrowing margin described in Note 14 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

In June 2010, the Company entered into two, two-year interest rate swap agreements effective September 1, 2011. The total notional amount of the agreements was $200.0 million. Under the terms of the agreements, the Company will pay a weighted average fixed rate of interest of 2.22% on the $200.0 million notional amount and the Company will receive a floating rate of interest (based on the one month LIBOR) on the notional amount. Therefore, during the term of the swap agreements, the effective interest rate for $200.0 million of the term loans will be fixed at a rate of 2.22% plus the incremental borrowing margin described in Note 14 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

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In accordance with accounting standards for derivative instruments and hedging activities, these interest rate swap agreements are classified as cash flow hedges and, as such, the hedging instruments are recorded on the balance sheet as either an asset or liability at fair value, with the effective portion of the changes in fair value attributable to the hedged risks recorded in other comprehensive income.

 

Note 12. Discontinued Operations

 

Reported “loss from discontinued operations, net of income taxes” for all periods presented includes the operating results of the sold businesses noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The operating results of discontinued operations are as follows:

 

		Three months ended September 30,						Nine months ended September 30,
(In thousands)		2010			2009			2010			2009
Operating Results:
Operating revenue		$	—		$	6		$	—		$	62
Operating loss		(227		)	(609		)	(1,171		)	(1,050		)
Loss from discontinued operations, before income taxes		(227		)	(609		)	(1,171		)	(1,050		)
Benefit from income taxes		(122		)	(213		)	(484		)	(384		)
Loss from discontinued operations, net of income taxes		$	(105	)	$	(396	)	$	(687	)	$	(666	)

 

The table below summarizes the activity for the nine months ended September 30, 2010 for the remaining liabilities from operations that were disposed of in years prior to 2010. The remaining obligations primarily relate to long-term self-insurance claims. The Company believes that the remaining reserves continue to be adequate and reasonable.

 

(In thousands)		As of December 31, 2009			Cash Payments or Other			Expense			As of September 30, 2010
Remaining liabilities of discontinued operations:
ARS/AMS		$	2,921		$	(2,459	)	$	639		$	1,101
LandCare Construction		722			(85		)	11			648
LandCare utility line clearing business		911			(102		)	—			809
Certified Systems, Inc. and other		2,149			(207		)	1			1,943
InStar		248			(51		)	36			233
Total liabilities of discontinued operations		$	6,951		$	(2,904	)	$	687		$	4,734

 

Note 13. Income Taxes

 

The effective tax rates for the three and nine months ending September 30, 2010 are 89.0 percent and (37.6) percent, respectively. As required by ASC 740, we compute 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. Our estimated tax rate is adjusted each quarter in accordance with ASC 740. The computed effective rate for the three months ending September 30, 2010 is higher than the customary relationship between income tax expense and income from continuing operations before income taxes due to a change in our forecasted annual rate. The computed effective rate for the nine months ending September 30, 2010 is lower than the customary relationship between income tax expense and loss from continuing operations before income taxes primarily due to the Company incurring foreign and state tax expense despite anticipating a full year loss from continuing operations before income taxes.

 

At September 30, 2010 and December 31, 2009, the Company had $14.9 million and $15.4 million, respectively, of tax benefits primarily reflected in state tax returns that had 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 $9.3 million during the next 12 months.

 

Note 14. Business Segment Reporting

 

The business of the Company is conducted through six reportable segments: TruGreen LawnCare, TruGreen LandCare, Terminix, American Home Shield, ServiceMaster Clean and Other Operations and Headquarters.

 

In accordance with accounting standards for segments, the Company’s reportable segments are strategic business units that offer different services. The TruGreen LawnCare segment provides residential and commercial lawn care services. The TruGreen LandCare segment provides landscaping services primarily to commercial customers. The Terminix segment provides termite and pest control services to residential and commercial customers. The American Home Shield segment provides home service contracts to consumers that cover heating, ventilation, air conditioning, plumbing and other home systems and appliances. The ServiceMaster Clean segment provides residential and commercial disaster restoration and cleaning services primarily under the ServiceMaster and ServiceMaster Clean brand names, on-site furniture repair and restoration services primarily under the Furniture Medic brand name and home inspection services primarily under the AmeriSpec brand name. The Other Operations and Headquarters segment includes the franchised and Company-owned operations of Merry Maids, which provides house cleaning services. The Other Operations and Headquarters segment also includes The ServiceMaster Acceptance Company Limited Partnership (“SMAC”), our financing subsidiary exclusively dedicated to providing financing to our franchisees and retail customers of our operating units, and the Company’s headquarters operations, which provide various technology, marketing, finance, legal and other support services to the business units.

 

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In the second quarter of 2010, the Company revised its methodology for the allocation of general corporate overhead expenses to each reportable segment. The portion of general corporate support services previously allocated to each reportable segment is now reflected in the Other Operations and Headquarters segment. Under the revised method, allocations are limited to corporate support services incurred directly on behalf of each reportable segment. The operating income presented below for each reportable segment has been revised to reflect the new allocation methodology for all periods presented. The revision to the allocation methodology had no impact on reported operating revenue for each reportable segment or total operating income.

 

Segment information for continuing operations is presented below.

 

		Three months ended						Nine months ended
		September 30,						September 30,
(In thousands)		2010			2009			2010			2009
Operating Revenue:
TruGreen LawnCare		$	371,298		$	351,830		$	874,022		$	834,899
TruGreen LandCare		58,278			63,244			180,541			199,562
Terminix		295,172			272,598			889,482			843,134
American Home Shield		196,913			179,617			513,910			490,308
ServiceMaster Clean		34,041			32,132			98,337			92,869
Other Operations and Headquarters		21,558			21,093			63,438			62,961
Total Operating Revenue		$	977,260		$	920,514		$	2,619,730		$	2,523,733
Operating Income (Loss):(1),(2),(3)
TruGreen LawnCare		$	66,730		$	51,373		$	80,248		$	75,382
TruGreen LandCare		(5,138		)	27			(52,367		)	8,658
Terminix		44,979			37,490			166,714			152,778
American Home Shield		28,777			24,279			57,245			60,423
ServiceMaster Clean		13,464			12,549			38,708			36,673
Other Operations and Headquarters		(32,140		)	(30,878		)	(90,713		)	(92,391		)
Total Operating Income		$	116,672		$	94,840		$	199,835		$	241,523

 

(1)           Presented below is a reconciliation of segment operating income to income (loss) from continuing operations before income taxes.

 

		Three months ended						Nine months ended
		September 30,						September 30,
(In thousands)		2010			2009			2010			2009
Total Segment Operating Income		$	116,672		$	94,840		$	199,835		$	241,523
Non-operating expense (income):
Interest expense		71,267			74,216			217,117			225,538
Interest and net investment income		(3,989		)	(4,558		)	(7,487		)	(3,192		)
Gain on extinguishment of debt		—			—			—			(46,106		)
Other expense		209			176			556			555
Income (Loss) from Continuing Operations before Income Taxes		$	49,185		$	25,006		$	(10,351	)	$	64,728

 

(2)             As described in Note 5, includes a non-cash impairment charge of $46.9 million recorded in the second quarter of 2010 to reduce the carrying value of goodwill and trade names at TruGreen LandCare as a result of the Company’s interim impairment test of goodwill and indefinite-lived intangible assets.

 

(3)             Includes (i) restructuring charges related to a reorganization of field leadership and a restructuring of branch operations at TruGreen LawnCare, a branch optimization project at Terminix and information technology outsourcing at Other Operations and Headquarters and (ii) Merger related charges. Presented below is a summary of restructuring and Merger related charges (credits) by segment.

 

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		Three months ended						Nine months ended
		September 30,						September 30,
(In thousands)		2010			2009			2010			2009
Restructuring and Merger related charges:
TruGreen LawnCare		$	695		$	5,951		$	6,657		$	5,951
TruGreen LandCare		127			184			785			133
Terminix		1,061			214			1,139			3,365
American Home Shield		—			30			(127		)	105
ServiceMaster Clean		61			—			61			—
Other Operations and Headquarters		(254		)	2,119			1,266			13,305
Total restructuring and Merger related charges		$	1,690		$	8,498		$	9,781		$	22,859

 

Note 15. Related Party Transactions

 

In connection with the Merger and the related transactions, the Company entered into a consulting agreement with CD&R under which CD&R provides the Company with on-going consulting and management advisory services in exchange for an annual management fee of $2.0 million, which is payable quarterly. On July 30, 2009, the consulting agreement was amended and the annual management fee payable under the consulting agreement with CD&R was increased from $2.0 million to $6.25 million in order to align our fee structure with current market rates. Under this agreement, the Company recorded a management fee of $1.6 million and $4.7 million for the three and nine months ended September 30, 2010, respectively, and $3.7 million and $4.7 million for the three and nine months ended September 30, 2009, respectively. The full year management fee was applied in 2009, and the incremental fees relating to the first three quarters of 2009 were recorded and paid to CD&R in the third quarter of 2009. The amended consulting agreement also provides that CD&R may receive additional fees in connection with certain subsequent financing and acquisition or disposition transactions.

 

In addition, in August 2009, the Company entered into consulting agreements with Citigroup, BAS and JPMorgan, each of which is an Equity Sponsor or an affiliate of an Equity Sponsor. Under the consulting agreements, Citigroup, BAS and JPMorgan each provide the Company with on-going consulting and management advisory services through September 30, 2016 or the earlier termination of the existing consulting agreement between the Company and CD&R. The Company pays annual management fees of $0.5 million, $0.5 million and $0.25 million to Citigroup, BAS and JPMorgan, respectively. The Company recorded consulting fees related to these agreements of $0.3 million and $0.9 million for the three and nine months ended September 30, 2010, respectively, and $0.9 million for the three and nine months ended September 30, 2009. The full year management fee was applied in 2009, and the incremental fees relating to the first three quarters of 2009 were recorded and paid to Citigroup, BAS and JPMorgan in the third quarter of 2009. On September 30, 2010, Citigroup transferred the management responsibility for, and its proprietary interests in, certain investment funds that own shares of common stock of Holdings to StepStone Group LLC (“StepStone”) and Lexington Partners Advisors LP. Citigroup also assigned its obligations and rights under the consulting agreement to StepStone, and beginning in the fourth quarter of 2010, the consulting fee otherwise payable to Citigroup will be paid to StepStone.

 

Between the Merger and September 30, 2010, Holdings has completed open market purchases totaling $65.0 million in face value of the Permanent Notes for a cost of $21.4 million. The debt acquired by Holdings has not been retired, and the Company has continued to pay interest in accordance with the terms of the debt. The Company recorded interest expense of $5.2 million for the nine months ended September 30, 2010 and 2009, respectively, related to the Permanent Notes held by Holdings. The Company made cash payments to Holdings of $7.0 million and $6.5 million during the nine months ended September 30, 2010 and 2009, respectively. Interest accrued by the Company and payable to Holdings as of September 30, 2010 and December 31, 2009 amounted to $1.4 million and $3.2 million, respectively.

 

Note 16. Newly Issued Accounting Statements and Positions

 

In September 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-13, “Multiple-Deliverable Revenue Arrangements”, which amends the multiple-element arrangement guidance under ASC 605, “Revenue Recognition”. This standard amends the criteria for separating consideration received for products or services in multiple-deliverable arrangements. This standard establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation, and requires that total arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this standard significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (calendar year 2011). The Company is currently evaluating the effect of this standard on its condensed consolidated financial statements.

 

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