Servicemaster Co. Reports Operating Results (10-Q)

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May 13, 2010
Servicemaster

Co. (SVM, Financial) filed Quarterly Report for the period ended 2010-03-31.

Servicemaster

Co. has a market cap of $1.47 billion; its shares were traded at around $8.96 with a P/E ratio of 39 and P/S ratio of 17.6. The dividend yield of Servicemaster

Co. stocks is 0.8%.SVM is in the portfolios of Chuck Royce of Royce& Associates, Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

Operating income was $8.6 million for the first quarter of 2010 compared to $28.7 million for the first quarter of 2009. Loss from continuing operations before income taxes was $61.7 million for the first quarter of 2010 compared to $6.8 million for the first quarter of 2009. The increase in loss from continuing operations before income taxes of $54.9 million reflects the net effect of:

(5) Represents an increase in management and consulting fees payable to certain related parties. A management fee is payable to CD&R pursuant to a consulting agreement under which CD&R provides the Company with on-going consulting and management advisory services in exchange for an annual management fee of $6.25 million, which is payable quarterly. On July 30, 2009, 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 the fee structure with current market rates. Under this agreement, the Company recorded a management fee of $1.6 million for the three months ended March 31, 2010 and $0.5 million for the three months ended March 31, 2009. The full year management fee was applied in 2009, and the incremental fees relating to the first three quarters of 2009 were paid to CD&R in the third quarter of 2009.

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 will provide the Company with on-going consulting and management advisory services until June 30, 2016 or the earlier termination of the existing consulting agreement between the Company and CD&R. The Company will pay 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 for the three months ended March 31, 2010. The full year management fee was applied in 2009, and the incremental fees relating to the first three quarters of 2009 were paid to Citigroup, BAS and JPMorgan in the third quarter of 2009.

(6) Represents residual value guarantee charges related to a synthetic lease for operating properties that do not result in additional cash payments to exit the facility at the end of the lease term. In the third quarter of 2009, the Company determined that it was probable that the fair value of certain properties under operating leases would be below the guaranteed residual value at the end of the lease term. The Companys current estimate of this shortfall is $15.8 million, which will be expensed over the remainder of the lease term. The Company recorded charges of $5.5 million in 2009 and $5.1 million in the first quarter of 2010 related to this shortfall. The remaining $5.2 million will be recorded over the remainder of the lease term, which expires July 24, 2010.

Non-operating expense totaled $70.4 million for the first quarter of 2010 compared to $35.5 million for the first quarter of 2009. This change is primarily due to a $46.1 million gain on extinguishment of debt recorded in the first quarter of 2009, offset, in part, by a $4.0 million decrease in interest expense primarily resulting from decreases in our weighted average long-term debt

(1) Represents restructuring charges related to a reorganization of field leadership and a restructuring of branch operations. For the three months ended March 31, 2010, these costs included consulting fees of $1.9 million and severance, lease termination and other costs of $1.1 million. In connection with the restructuring of branch operations, we expect to incur cash charges through the fourth quarter of 2010 related to, among other things, employee retention, severance costs and consulting fees. Such charges are expected to amount to an additional $6.8 million, pre-tax, and will be recorded as restructuring charges in the condensed consolidated statement of operations as incurred.

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