TERMINIX GLOBAL HOLDINGS, INC. The following information should be read in conjunction with Item 6 "Selected Financial Data" and the consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in "-Information Regarding Forward-Looking Statements" and "Risk Factors." This discussion and analysis does not address certain items in respect of 2017 in reliance on amendments to disclosure requirements adopted by theSEC in 2019. A discussion of changes in our results of operations from fiscal 2017 to fiscal 2018 has been omitted from this Annual Report on Form 10-K, but may be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onMarch 1, 2019 .
Overview
Our core services include residential and commercial termite and pest control, restoration, commercial and residential cleaning, cabinet and furniture repair and home inspection under the following leading brands:AmeriSpec , Copesan, Furniture Medic, McCloud Services, Merry Maids, Nomor, ServiceMaster Clean, ServiceMaster Restore, Terminix and Terminix Commercial. Our operations for the periods presented in this report are organized into two reportable segments: Terminix and ServiceMaster Brands.
During 2019, we entered the European pest management market with our
acquisitions of Nomor, which operates in
OnJanuary 21, 2020 , we announced we are exploring strategic alternatives relating to ServiceMaster Brands, including the potential sale of the business. The ServiceMaster Brands segment is reported in this Annual Report on Form 10-K in continuing operations. Beginning with our quarterly report on Form 10-Q for the period endingMarch 31, 2020 , the ServiceMaster Brands segment will be classified as held for sale and reported in discontinued operations. Our financial statements will include non-recurring costs incurred to evaluate, plan and execute the exploration of strategic alternatives related to ServiceMaster Brands, including the potential sale of the business. Costs will primarily be related to third-party consulting and other incremental costs directly associated with the strategic alternatives process. Our results for the year endedDecember 31, 2019 included charges of less than$1 million related to the initiative. We expect to incur charges, which may be significant, in 2020 related to the initiative. In addition, we expect incremental capital expenditures will be required to effect the initiative, which may be significant, principally reflecting costs to replicate information technology systems historically shared by our business units. OnJanuary 21, 2020 ,Nikhil M. Varty resigned from his position as Chief Executive Officer and as a member of our board of directors. Our board of directors appointed our current Chairman of the Board,Naren K. Gursahaney , as interim Chief Executive Officer until a replacement Chief Executive Officer is identified. Key Business Metrics We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our businesses. These metrics include: ?revenue, ?operating expenses, ?net income (loss), ?earnings (loss) per share, ?Adjusted EBITDA, and ?organic revenue growth. To the extent applicable, these measures are evaluated with and without impairment, acquisition-related costs, restructuring and other charges that management believes are not indicative of the earnings capabilities of our businesses. We also focus on measures designed to monitor cash flow, including net cash provided from operating activities from continuing operations and free cash flow. Revenue. Our revenue results are primarily a function of the volume and pricing of the services and products provided to our customers by our businesses as well as the mix of services and products provided across our businesses. The volume of our revenue in Terminix is impacted by new unit sales, the retention of our existing customers and acquisitions. Revenue results in the ServiceMaster Brands are driven principally by royalty fees earned from our franchisees. We serve both residential and commercial customers, principally inthe United States . In 2019, approximately 97 percent of our revenue was generated by sales inthe United States . We expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions inthe United States and internationally. 29
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Operating Expenses. In addition to the impact of changes in our revenue results, our profitability (Net Income (Loss) and Adjusted EBITDA) are affected by, among other things, the level of our operating expenses. A number of our operating expenses are subject to inflationary pressures, such as fuel, chemicals, wages and salaries, employee benefits and health care, vehicles, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs. We have historically hedged a significant portion of our annual fuel consumption. Fuel costs for 2019, after the impact of the hedges and after adjusting for the impact of year-over-year changes in the number of gallons used, increased$2 million compared to 2018, and fuel costs for 2018 increased$4 million compared to 2017. Based on currentDepartment of Energy fuel price forecasts, as well as hedges we have executed to date for 2019, we project that fuel prices for 2020 will increase our fuel costs by approximately$4 million compared to 2019.
After adjusting for the impact of year-over-year changes in the number of
covered employees, health care and related costs for 2019 decreased
approximately
Net Income (Loss) and Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and RSUs are reflected in diluted earnings per share by applying the treasury stock method. Adjusted EBITDA. We evaluate performance and allocate resources based primarily on Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before: depreciation and amortization expense; acquisition-related costs; termite damage claims reserve adjustment; fumigation related matters; non-cash stock-based compensation expense; restructuring and other charges; non-cash impairment of software and other costs; (gain) loss on investment in frontdoor, inc.; (gain) loss from discontinued operations, net of income taxes; provision (benefit) for income taxes; loss on extinguishment of debt; interest expense; and other non-operating expenses. We believe Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, consulting agreements, acquisition activities and equity-based, long-term incentive plans. Organic Revenue Growth. We evaluate organic revenue growth to track performance of Terminix, including the impacts of sales, pricing, new service offerings and other growth initiatives. Organic revenue growth excludes revenue from acquired customers for 12 months following the acquisition date.
Seasonality
We have seasonality in our business, which drives fluctuations in revenue and Adjusted EBITDA for interim periods. In 2019, approximately 23 percent, 27 percent, 26 percent and 24 percent of our revenue and approximately 26 percent, 32 percent, 23 percent and 19 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.
Effect of Weather Conditions
The demand for our services and our results of operations are also affected by weather conditions, including increasing pest populations driven by the increasing temperatures of climate change and the seasonal nature of our termite and pest control services and restoration services. Weather conditions which have a potentially unfavorable impact to our business include cooler temperatures or droughts which can impede the development of termite swarms and lead to lower demand for our termite control services.
Refinancing of Indebtedness
OnNovember 5, 2019 , we entered into a$600 million Term Loan B due 2026 and a$400 million revolving credit agreement due 2024. The proceeds of the transaction were used to repay approximately$171 million of debt outstanding under our previous Term Loan B due 2023,$120 million outstanding under our previous revolving credit agreement due 2021, and$150 million from a short-term borrowing entered onOctober 4, 2019 . In connection with the repayment, we recorded a loss on extinguishment of debt of$1 million in the year endedDecember 31, 2019 , which includes the write-off of less than$1 million of original issue discount and$1 million of debt issuance costs. In conjunction with the debt refinancing, we entered into a seven year interest rate swap agreement with a notional amount of$550 million . During the term of the agreement, the effective interest rate on$550 million of the new Term Loan B is fixed at a rate of 3.365%. 30
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Table of Contents Results of Operations ? ?The following table shows the results of operations for continuing operations for the years endedDecember 31, 2019 and 2018, which reflects the results of acquired businesses from the relevant acquisition dates. Increase Year Ended December 31, (Decrease) % of Revenue (In millions) 2019 2018 2019 vs. 2018 2019 2018 Revenue$ 2,077 $ 1,900 9 % 100 % 100 % Cost of services rendered and products sold 1,178 1,041 13 57 55 Selling and administrative expenses 578 555 4 28 29 Amortization expense 29 18 61 1 1 Acquisition-related costs 17 5 * 1 - Termite damage claims reserve adjustment 53 - * 3 - Fumigation related matters - 3 * - - (Gain) loss on investment in frontdoor, inc. (40) 249 * (2) 13 Restructuring and other charges 17 17 * 1 1 Interest expense 87 133 (35) 4 7 Interest and net investment income (6) (5) 20 - - Loss on extinguishment of debt 8 10 * - 1 Income (Loss) from Continuing Operations before Income Taxes 156 (126) * 8 (7) Provision for income taxes 27 37 * 1 2 Income (Loss) from Continuing Operations $ 129$ (163) * 6 % (9) %
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*not meaningful
Revenue
We reported revenue of$2,077 million and$1,900 million for the years endedDecember 31, 2019 and 2018, respectively. A summary of changes in revenue for each of our reportable segments and Corporate and Other Operations is included in the table below. See "-Segment Review" for a discussion of the drivers of the year-over-year changes. ServiceMaster Corporate and (In millions) Terminix Brands Other Operations Total Year Ended December 31, 2018$ 1,655 $ 244 $ 1$ 1,900 Residential Pest Control(1) 59 - - 59 Commercial Pest Control(2) 72 - - 72 Termite and Home Services(3) 18 - - 18 Royalty Fees - 1 - 1 Commercial Cleaning and other National Accounts - 8 - 8 Sale of Products and Other(4) 4 3 - 7 Fumigation (10) - - (10) European Pest Control - - 21 21 Year Ended December 31, 2019$ 1,798 $ 257 $ 22$ 2,077
___________________________________
(1)Includes growth from acquisitions of approximately
(2)Includes growth from acquisitions of approximately
(3)Includes wildlife exclusion, crawl space encapsulation and attic insulation products that are managed as a component of our termite line of business. Includes growth from acquisitions of approximately$8 million for the year endedDecember 31, 2019 .
(4)For Terminix, includes growth from acquisitions of approximately
?
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Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of$1,178 million and$1,041 million for the years endedDecember 31, 2019 and 2018, respectively. The following table provides a summary of changes in cost of services rendered and products sold for each of our reportable segments and Corporate and Other Operations: ServiceMaster Corporate and (In millions) Terminix Brands Other Operations Total Year Ended December 31, 2018$ 955 $ 96 $ (10)$ 1,041 Impact of change in revenue(1) 91 11 16 118 Production labor 5 - - 5 Chemicals and materials (5) - - (5) Damage claims 7 - - 7 Insurance program - - 3 3 Fumigation services 10 - - 10 Other (3) 1 1 (1) Year Ended December 31, 2019$ 1,059 $ 109 $ 10$ 1,178
___________________________________
(1)For Terminix, includes approximately
At Terminix, the increase in production labor was driven by accelerated hiring in the fourth quarter in advance of the 2020 peak season. The decrease in chemicals and materials was driven by sourcing productivity. The increase in damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the MobileBay Area . Termite damage claims cases can take years to resolve and costs and timing can be difficult to predict. Assuming the continuation of recent trends, we expect elevated claims costs to continue in the short-term due to Formosan termite activity in the MobileBay Area . Fumigation services represents the reduced fumigation margin driven by the outsourcing of fumigation completion services. For Corporate and Other Operations, includes$16 million for the year endedDecember 31, 2019 from Nomor and TerminixUK . In addition, we realized favorable claims results in our automobile, general liability and workers' compensation program at a lesser extent than generated in the prior year.
Selling and Administrative Expenses
For the years endedDecember 31, 2019 and 2018, we reported selling and administrative expenses of$578 million and$555 million , respectively, which comprised general and administrative expenses of$304 million and$290 million , respectively, and selling and marketing expenses of$275 million and$265 million , respectively. The following table provides a summary of changes in selling and administrative expenses for each of our reportable segments and Corporate and Other Operations: ServiceMaster Corporate and (In millions) Terminix Brands Other Operations Total Year Ended December 31, 2018$ 413 $ 62 $ 80$ 555 Acquisition selling and administrative expenses 18 - 7 25 Marketing costs 9 (2) - 7 Selling and administrative expenses 2 (1) - 1 Investments in training 2 - - 2 Executive recruiting 2 - - 2 Incentive compensation (7) - - (7) Investments in growth 17 - - 17 Depreciation - - (4) (4) Spin-off dis-synergies 11 1 - 12 Stock-based compensation expense - - (1) (1) Costs historically allocated to American Home Shield - - (33) (33) Other 5 (1) (2) 3 Year Ended December 31, 2019$ 471 $ 60 $ 47$ 578 Terminix incurred incremental selling and administrative expenses as a result of acquisitions. The increase in marketing costs reflects higher marketing spend to drive sales growth. The increase in selling and administrative expenses is driven by higher sales commissions related to our summer sales program. Executive recruiting includes onboarding and relocation costs related to the hiring of members of ServiceMaster's executive leadership team. The reduction in incentive compensation payments reflects lower charges related to our annual incentive plans driven by 2019 financial performance. The increase in investments in growth primarily includes 32
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our contract with Salesforce to replace legacy operating systems, investments to optimize our commercial pest business and investments to transform our operating model.
Corporate and Other Operations incurred elevated selling and administrative
expenses from the Nomor and Terminix
At ServiceMaster Brands, the decrease in marketing costs was primarily driven by lower national media spending. The decrease in selling and administrative expenses reflects the impact of temporary staffing reductions as a result of the 2019 reorganization of ServiceMaster Brands.
Amortization Expense
Amortization expense was
Acquisition-Related Costs
We recognized
Termite Damage Claims Reserve Adjustment
We recorded a charge of$53 million in the year endedDecember 31, 2019 for an adjustment of our reserves for termite damage claims. The adjustment is the result of a change in our estimation technique based on our detailed statistical assessment of recent claims history and case results. See Note 10 to the consolidated financial statements for more details.
Fumigation Related Matters
We recorded charges of$3 million in the year endedDecember 31, 2018 , for fumigation related matters. No similar charge was recorded in the year endedDecember 31, 2019 . See Note 10 to the consolidated financial statements for more details.
(Gain) Loss on Investment in frontdoor, inc.
We recorded a realized gain of$40 million related to the sale of our retained investment in Frontdoor in the year endedDecember 31, 2019 . We recorded a mark-to-market loss on our retained investment in Frontdoor of$249 million in the year endedDecember 31, 2018 , as a result of the stock price of Frontdoor dropping fromOctober 1, 2018 toDecember 31, 2018 .
Restructuring and Other Charges
We incurred restructuring charges of$15 million and$17 million for the years endedDecember 31, 2019 and 2018, respectively. Restructuring charges are comprised of the following: Year Ended December 31, (In millions) 2019 2018 Terminix(1) $ 5$ 2 ServiceMaster Brands(2) 2 1 Corporate and Other Operations(3) 6 7 Global Service Center relocation(4) 1 8 Total restructuring and other charges $ 15 $
17
___________________________________
(1)For the years ended
(2)Represents severance and other costs related to the reorganization of ServiceMaster Brands.
(3)We have historically made changes on an ongoing basis to enhance capabilities and reduce costs in our corporate functions that provide company-wide administrative services to support operations. For the year endedDecember 31, 2019 , these charges included$3 million of accelerated depreciation on systems we are replacing with the implementation of Salesforce and$2 million of professional fees and other costs to enhance capabilities and align corporate functions with those required to support our strategic needs after theAmerican Home Shield spin-off. For the years endedDecember 31, 2019 and 2018, these charges also included$1 million and$3 million , respectively, of severance and other costs. For the year endedDecember 31, 2018 , these charges also included$4 million of costs incurred due to the Separation that were not directly attributable toAmerican Home Shield and therefore were not included in discontinued operations.
(4)For the year ended
Other charges represent professional fees incurred that are not closely associated with our ongoing operations. Other charges were$2 million for the year endedDecember 31, 2019 . We incurred no such other charges for the year endedDecember 31, 2018 . 33
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Table of Contents Interest Expense Interest expense was$87 million and$133 million for the years endedDecember 31, 2019 and 2018, respectively. The decrease in interest expense was driven by the repayment of approximately$1 billion of our senior secured term loan facility in connection with the spin-off ofAmerican Home Shield , as well as the repayment of approximately$484 million in debt in connection with the monetization of our shares of Frontdoor. See Note 12 to the consolidated financial statements for more details.
Interest and Net Investment Income
Interest and net investment income was$6 million and$5 million for the years endedDecember 31, 2019 and 2018, respectively, and comprised interest income on cash balances.
Loss on Extinguishment of Debt
A loss on extinguishment of debt of$8 million was recorded in the year endedDecember 31, 2019 related to the refinancing of our old Term Loan Facility onNovember 5, 2019 . A loss on extinguishment of debt of$10 million was recorded in the year endedDecember 31, 2018 , related to the prepayment of$982 million aggregate principal amount of term loans outstanding under our senior secured term loan facility onAugust 1, 2018 . See Note 12 to the consolidated financial statements for more details.
Income (loss) from Continuing Operations before Income Taxes
Income (loss) from continuing operations before income taxes was$156 million and$(126) million for the years endedDecember 31, 2019 and 2018, respectively. The change in income (loss) from continuing operations before income taxes primarily reflects the net effect of year-over-year changes in the following items: (In millions) Loss from continuing operations before income taxes,December 31, 2018 $ (126) Reportable segments and Corporate and Other Operations(1) 19 Depreciation expense(2) (2) Amortization expense(3) (11) Acquisition-related costs(4)
(12)
Termite damage claims reserve adjustment(5)
(53)
Fumigation related matters(6)
3
Interest expense(7)
46
Loss on extinguishment of debt(8)
2
(Gain) loss on investment in frontdoor, inc.(9)
289
Income from continuing operations before income taxes,
156
___________________________________
(1)Represents the net change in Adjusted EBITDA as described in "-Segment Review."
(2)Represents the net change in depreciation expense, driven by investments in vehicles and technology.
(3)Represents the net change in amortization expense as described in "-Amortization Expense."
(4)Represents the net change in acquisition-related costs as described in "-Acquisition-Related Costs."
(5)Represents the$53 million termite damage claims adjustment recorded in the year endedDecember 31, 2019 as described in "-Termite Damage Claims Reserve Adjustment."
(6)Represents the,
(7)Represents the net change in interest expense as described in "-Interest Expense."
(8)Represents the
(9)Represents the$40 million realized gain on our investment in Frontdoor in the year endedDecember 31, 2019 , and the$249 million mark-to-market loss on our investment in Frontdoor in the year endedDecember 31, 2018 , as described in "-(Gain) loss on investment in frontdoor, inc."
Provision for Income Taxes
OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Act" or "U.S. Tax Reform") was signed into law. The Act includes numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from 35 percent to 21 percent. The rate reduction took effect onJanuary 1, 2018 , however, the Act was signed in 2017 and had an immediate one-time effect of an income tax benefit of$271 million for us for the year endedDecember 31, 2017 and additional income tax expense of$3 million for the year endedDecember 31, 2018 . See Note 6 to the consolidated financial statements for more details. 34
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The effective tax rate on income from continuing operations was 17.1 percent and (29.1) percent for the years endedDecember 31, 2019 and 2018, respectively. The effective tax rate on income from continuing operations for the year endedDecember 31, 2018 was primarily unfavorably impacted by the loss recognized on our retained investment in Frontdoor which is not deductible for income tax purposes. The effective tax rate on income from continuing operations for the year endedDecember 31, 2019 was primarily favorably impacted by the gain recognized on our retained investment in Frontdoor, which is not taxable for income tax purposes. Additional information on income taxes, including our effective tax rate reconciliation and liabilities for uncertain tax positions, can be found in Note 6 to the consolidated financial statements.
Income (Loss) from Continuing Operations
Income (loss) from continuing operations was$129 million and$(163) million for the years endedDecember 31, 2019 and 2018, respectively. The$292 million increase for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 was primarily driven by a$249 million mark to market loss on our retained investment in Frontdoor in the year endedDecember 31, 2018 and our realized gain of$40 million on the investment in Frontdoor in the year endedDecember 31, 2019 , as well as a$53 million termite damage claims reserve adjustment, offset by a decrease in interest expense, as described above.
(Loss) Gain from Discontinued Operations, Net of Income Taxes
(Loss) gain from discontinued operations, net of income taxes, was$(1) million and$122 million for the years endedDecember 31, 2019 and 2018, respectively. For the year endedDecember 31, 2018 , included the results ofAmerican Home Shield throughOctober 1, 2018 .
Net Income (Loss)
Net income (loss) was$128 million and$(41) million for the years endedDecember 31, 2019 and 2018, respectively. The$169 million increase for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 was primarily driven by a$282 million increase in income from continuing operations before income taxes and a$123 million decrease in the loss from discontinued operations, net of income taxes. 35
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Table of Contents Segment Review
The following business segment reviews should be read in conjunction with the required footnote disclosures presented in the notes to the consolidated financial statements included in this report.
Revenue and Adjusted EBITDA by reportable segment and for Corporate and Other
Operations are as follows:
Increase
Year Ended December 31, (Decrease)
(In millions) 2019 2018 2019 vs. 2018
Revenue:
Terminix $ 1,798 $ 1,655 9 %
ServiceMaster Brands 257 244 5 %
Corporate and Other Operations(1) 22 1 * %
Total Revenue: $ 2,077 $ 1,900 9 %
Adjusted EBITDA:(2)
Terminix $ 319 $ 333 (4) %
ServiceMaster Brands 92 89 3 %
Reportable Segment Adjusted EBITDA $ 410 $ 422 (3) %
Corporate and Other Operations(1) 7 9 (22) %
Costs historically allocated to American
Home Shield(3) - (33) * %
Total Adjusted EBITDA $ 417 $ 398 5 %
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*not meaningful
(1)Represents results from our European pest control operations and, for Adjusted EBITDA, unallocated corporate gains, net of expenses.
(2)For our definition of Adjusted EBITDA and a reconciliation to net income (loss) see "-Selected Historical Financial Data."
(3)Includes amounts historically allocated to the
Terminix Segment
The Terminix segment, which provides termite and pest control services to
residential and commercial customers and distributes pest control products,
reported a nine percent increase in revenue and a four percent decrease in
Adjusted EBITDA for the year ended
OnApril 1, 2019 , we divested the assets associated with our fumigation service line and now provide fumigation services to our customers through arrangements with independent third parties. Revenue related to the Fumigation Services is shown in Fumigation below and prior period amounts related to the Fumigation Services have been reclassified from Termite and Home Services to Fumigation to conform to the current period presentation. Additionally, prior period revenue for Residential Pest Control and Commercial Pest Control has been reclassified to conform to the current period presentation.
Revenue
Revenue by service line is as follows:
Year Ended
December 31,
(In millions) 2019 2018 Growth Acquired Organic
Residential Pest Control $ 704 $ 645 $ 59 9 % $ 34 5 % $ 26 4 %
Commercial Pest Control 399 327 72 22 % 67 21 % 4 1 %
Termite and Home Services 567 549 18 3 % 8 1 % 10 2 %
Other 88 84 4 5 % 2 3 % 2 2 %
$ 1,758 $ 1,605 $ 153 10 % $ 112 7 % $ 41 3 %
Fumigation 40 50 (10) (20) % - - % (10) (20) %
Total Revenue $ 1,798 $ 1,655 $ 143 9 % $ 112 7 % $ 32 2 %
Residential pest control revenue increased nine percent. Residential pest
control organic revenue growth was four percent, primarily reflecting improved
price realization as well as unit growth in mosquito and non-recurring services.
Residential pest control revenue also increased five percent from acquisitions
completed during the year.
Commercial pest control revenue increased 22 percent. Commercial organic pest control revenue growth was one percent, primarily reflecting improved price realization and improved retention. Commercial pest control revenue also increased 21 percent
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from acquisitions completed during the last 12 months, including the impact of
our acquisition of Copesan for the three months ended
Termite revenue, including the wildlife exclusion, crawl space encapsulation and attic insulation products that are managed as a component of our termite line of business, increased three percent, primarily reflecting new unit growth in home services and improved price realization, offset in part by a reduction in termite renewals driven by price increases in the MobileBay Area . In 2019, termite renewal revenue comprised 48 percent of total termite revenue, while the remainder consisted of termite new unit revenue. During the first half of 2019, revenue growth was negatively impacted by approximately$6 million due to wet weather conditions and flooding that affected low margin product sales and branch operations and lead flow, primarily in termite completion revenue. Fourth quarter 2019 termite revenue growth was negatively impacted by approximately$2 million from a one-time acceleration of revenue in the fourth quarter of 2018 to conform our accounting method for a small sub-set of our customers to those adopted under ASC 606. Termite activity is unpredictable in its nature. Factors that can impact termite activity include conducive weather conditions and consumer awareness of termite swarms. Adjusted EBITDA
The following table provides a summary of changes in the segment's Adjusted EBITDA:
(In millions) Year EndedDecember 31, 2018 $ 333 Impact of organic revenue growth 18 Damage claims (7) Production labor (5) Chemicals and materials 5 Sales and marketing costs (11) Investments in growth (17) Investments in training (2) Executive recruiting (2) Incentive compensation 7 Spin-off dis-synergies (11) Fumigation services (10) Impact of acquisitions 20
Year Ended
The increase in damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the MobileBay Area . The increase in production labor was driven by accelerated hiring in the fourth quarter in advance of the 2020 peak season. The decrease in chemicals and materials was driven by sourcing productivity. The increase in sales and marketing costs reflects higher marketing spend to drive sales growth and higher sales commissions related to our summer sales program. The increase in investments in growth primarily includes our contract with Salesforce to replace legacy operating systems, investments to optimize our commercial pest business and investments to transform our operating model. Executive recruiting includes onboarding and relocation costs related to the hiring of members of ServiceMaster's executive leadership team. The reduction in incentive compensation payments reflects lower charges related to our annual incentive plans driven by 2019 financial performance. The decrease in fumigation services represents margin compression driven by the impact of outsourcing our fumigation services. ? 37
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Table of Contents ServiceMaster Brands Segment
The ServiceMaster Brands segment, which consists of the ServiceMaster Restore
(restoration), ServiceMaster Clean (commercial cleaning), Merry Maids
(residential cleaning), Furniture Medic (cabinet and furniture repair) and
Revenue
Revenue by service line is as follows:
Year Ended December 31, % of Revenue
(In millions) 2019 2018 2019 2018
Royalty Fees $ 133 $ 132 52 % 54 %
Commercial Cleaning and other National Accounts 73 65 28 % 26 %
Sales of Products 14 16 6 % 6 %
Other 36 32 14 % 13 %
Total Revenue $ 257 $ 244 100 % 100 %
The increase in royalty fees was driven by higher disaster restoration services
due to focused sales efforts to commercial segment customers. The increase in
revenue from commercial cleaning and other national accounts was driven by
significantly higher national account sales activity.
Adjusted EBITDA
The following table provides a summary of changes in the segment's Adjusted EBITDA:
(In millions) Year EndedDecember 31, 2018 $ 89 Impact of change in revenue 1 Marketing costs 2 Selling and administrative expenses 1 Spin-off dis-synergies (1)
Year Ended
The impact of the increase in revenue was driven by the increase in royalty fees and relatively low margin revenue from commercial cleaning national accounts. The decrease in marketing costs was primarily driven by lower national media spending. The decrease in selling and administrative expenses reflects the impact of temporary staffing reductions as a result of the 2019 reorganization of ServiceMaster Brands. The increase in spin-off dis-synergies represent increased corporate allocations to ServiceMaster Brands as a result of theAmerican Home Shield spin-off.
Corporate and Other Operations
Corporate and Other Operations, which includes our pest control operations in
Adjusted EBITDA
The following table provides a summary of changes in Corporate and Other Operations' Adjusted EBITDA:
(In millions) Year EndedDecember 31, 2018 $ 9 Insurance program (3) European Pest Control 1
Year Ended
Corporate and Other Operations reported a$2 million decrease in Adjusted EBITDA for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . We realized favorable claims results in our automobile, general liability and workers' compensation program at a lesser extent than generated in the prior year. Corporate and Other Operations also includes Adjusted EBITDA of approximately$3 million from Nomor, partially offset by additional optimization expenses incurred by TerminixUK as part of our efforts to separate it from its former owner's operations and systems. 38
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Costs Historically Allocated to
We have historically incurred the cost of certain corporate-level activities which we performed on behalf of our businesses, includingAmerican Home Shield , such as executive functions, communications, public relations, finance and accounting, tax treasury, internal audit, human resources operations and benefits, risk management and insurance, supply management, real estate management, legal, marketing, facilities, information technology and other general corporate support services. The costs of such activities were historically allocated to our segments, includingAmerican Home Shield . Certain corporate expenses which were historically allocated to theAmerican Home Shield segment are not permitted to be classified as discontinued operations under GAAP ("Historically Allocated Services"). Such Historically Allocated Services amounted to$33 million for the year endedDecember 31, 2018 , and are included in Corporate and Other Operations through the date of the Separation.
On the date of the spin-off, where it was practicable, employees who provided
Historically Allocated Services to the
Liquidity and Capital Resources
Liquidity
A portion of our liquidity needs are due to service requirements on our indebtedness. The Credit Facilities contain covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As ofDecember 31, 2019 , we were in compliance with the covenants under the agreements that were in effect on such date. Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as required, borrowings under the Credit Facilities. We expect that cash provided from operations and available capacity under the Revolving Credit Facility will provide sufficient funds to operate our business, make expected capital expenditures and meet our liquidity requirements for the following 12 months, including payment of interest and principal on our debt. Cash and long-term marketable securities, including our investment in Frontdoor, totaled$292 million as ofDecember 31, 2019 , compared with$690 million as ofDecember 31, 2018 . As ofDecember 31, 2019 , there were$23 million of letters of credit outstanding and$370 million of available borrowing capacity under the Revolving Credit Facility. The letters of credit are posted to satisfy collateral requirements under our automobile, general liability and workers' compensation insurance program and fuel swap contracts. OnFebruary 19, 2019 , our board of directors approved a three-year extension of a previously authorized share repurchase plan allowing for$150 million of repurchases of our common stock throughFebruary 19, 2022 . Under the share repurchase program, we may repurchase shares in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which we repurchase our shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by us. The repurchase program may be suspended or discontinued at any time. We expect to fund the share repurchases from net cash provided from operating activities. The share repurchase program is part of our capital allocation strategy that focuses on sustainable growth and maximizing stockholder value. As ofDecember 31, 2019 , we had$103 million of authority remaining under this program. As ofDecember 31, 2019 , we had posted$21 million in letters of credit, which were issued under the Revolving Credit Facility, and$89 million of cash, which is included in Restricted cash on the Consolidated Statements of Financial Position, as collateral under our automobile, general liability and workers' compensation insurance program. We may from time to time change the amount of cash or marketable securities used to satisfy collateral requirements under our automobile, general liability and workers' compensation insurance program. The amount of cash or marketable securities utilized to satisfy these collateral requirements will depend on the relative cost of the issuance of letters of credit under the Revolving Credit Facility and our cash position. Any change in cash or marketable securities used as collateral would result in a corresponding change in our available borrowing capacity under the Revolving Credit Facility. Additionally, under the terms of our fuel swap contracts, we are required to post collateral in the event the fair value of the contracts exceeds a certain agreed upon liability level and in other circumstances required by the agreement with the counterparty. As ofDecember 31, 2019 , the estimated fair value of our fuel swap contracts was a net asset of$1 million , and we had posted$2 million in letters of credit as collateral under our fuel hedging program, which were also issued under the Revolving Credit Facility. The continued use of letters of credit for this purpose in the future could limit our ability to post letters of credit for other purposes and could limit our borrowing availability under the Revolving Credit Facility. However, we do not expect the fair value of the outstanding fuel swap contracts to materially impact our financial position or liquidity. We may from time to time repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position, results of operations or cash flows. These actions may include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. 39
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Table of Contents Long-Term Debt
On
Long term debt is summarized in the following table:
As of December 31 ,
(In millions) 2019 2018
Senior secured term loan facility maturing in 2023 $ -
-
Revolving credit facility maturing 2021 -
-
Revolving credit facility maturing 2024 - - 5.125% notes maturing in 2024 742 740 7.45% notes maturing in 2027 167 172 7.25% notes maturing in 2038 40 42 Vehicle finance leases 95 90 Other 100 94 Less current portion (70) (49) Total long-term debt$ 1,668 $ 1,727 The amounts above are net of unamortized debt issuance costs and unamortized original issue discounts. For further information on our indebtedness, see Note 12 to the consolidated financial statements.
Fleet and Equipment Financing Arrangements
We have entered into a fleet management services agreement (the "Fleet Agreement") which, among other things, allows us to obtain fleet vehicles through a leasing program. We expect to fulfill substantially all of our vehicle fleet needs through the leasing program under the Fleet Agreement. For the year endedDecember 31, 2019 , we acquired$43 million of vehicles through the leasing program under the Fleet Agreement. All leases under the Fleet Agreement are finance leases for accounting purposes. The lease rental payments include an interest component calculated using a variable rate based on one-month LIBOR plus other contractual adjustments and a borrowing margin totaling 2.45%. We have no minimum commitment for the number of vehicles to be obtained under the Fleet Agreement. We anticipate new lease financings for the full year 2020 will range from approximately$50 million to$60 million .
Limitations on Distributions and Dividends by Subsidiaries
We are a holding company, and as such have no independent operations or material assets other than ownership of equity interests in our subsidiaries. We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements and financial condition and general business conditions, as well as restrictions under the laws of our subsidiaries' jurisdictions. The agreements governing the Credit Facilities may restrict the ability of our subsidiaries to pay dividends, make loans or otherwise transfer assets to us. Further, our subsidiaries are permitted under the terms of the Credit Facilities and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us. Furthermore, there were third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These restrictions were related to a subsidiary borrowing arrangement at our financing subsidiary. As ofDecember 31, 2019 , the total net assets subject to these third-party restrictions was$23 million . OnFebruary 14, 2020 , we repaid all amounts due under this borrowing arrangement. None of our subsidiaries are obligated to make funds available to us through the payment of dividends. We previously considered the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. The Act imposes a one-time tax ("Transition Tax") on undistributed and previously untaxed post-1986 foreign earnings and profits, as determined in accordance withU.S. tax principles, of certain foreign owned corporations owned byU.S. stockholders. While the Transition Tax resulted in all pre-2018 undistributed foreign earnings being subject toU.S. tax, an actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes andU.S. state taxes. Included in ourDecember 31, 2017 U.S. income tax provision is less than$1 million in Transition Tax. The amount of cash associated with indefinitely reinvested foreign earnings was approximately$35 million and$30 million as ofDecember 31, 2019 and 2018, respectively. 40
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Cash Flows
Cash flows from operating, investing and financing activities, as reflected in
the accompanying Consolidated Statements of Cash Flows, are summarized in the
following table.
Year Ended December 31,
(In millions) 2019 2018
Net cash provided from (used for):
Operating activities $ 245 $ 229
Investing activities (516) (250)
Financing activities 327 (350)
Discontinued operations (2) 121
Effect of exchange rate changes on cash 1 (1)
Cash increase (decrease) during the period $ 55$ (250) Operating Activities Net cash provided from operating activities from continuing operations increased$16 million to$245 million for the year endedDecember 31, 2019 compared to$229 million for the year endedDecember 31, 2018 . Net cash provided from operating activities in 2019 comprised$257 million in earnings adjusted for non-cash charges, offset, in part, by$2 million in payments related to fumigation matters,$20 million in payments related to restructuring and other charges,$15 million in payments related to acquisition-related costs and a$29 million increase in cash required for working capital (a$24 million increase excluding the working capital impact of accrued interest and taxes). For the year endedDecember 31, 2019 , working capital requirements were unfavorably impacted by the timing of income tax payments. Net cash provided from operating activities in 2018 comprised$237 million in earnings adjusted for non-cash charges, offset, in part, by$2 million in payments related to fumigation matters,$15 million in payments related to restructuring and other charges,$3 million in payments related to acquisition-related charges and a$12 million decrease in cash required for working capital (a$5 million increase excluding the working capital impact of accrued interest and taxes). For the year endedDecember 31, 2018 , working capital requirements were favorably impacted by the timing of income tax payments. We reclassified the impact of acquisition-related costs to conform to the current period calculation
Investing Activities
Net cash used for investing activities from continuing operations was
Capital expenditures decreased to$28 million in 2019 from$49 million ($41 million , net of government grants) in 2018 and included recurring capital needs, investments in our new Global Service Center and information technology projects. Approximately$21 million of capital expenditures related to our Global Service Center relocation were funded by a tenant improvement allowance. We anticipate capital expenditures for the full year 2020 will range from$40 million to$50 million , reflecting our contract with Salesforce to upgrade our technology platforms and additional recurring capital needs. We expect to fulfill our ongoing vehicle fleet needs through vehicle finance leases. We have no additional material capital commitments at this time.
Proceeds from the sale of equipment and other assets was
Cash payments for acquisitions totaled$513 million in 2019 compared with$191 million in 2018. In 2019, we completed 39 acquisitions, including Nomor (Sweden andNorway pest control),Assured Environments (commercial pest control), McCloud Services (commercial pest control), Gregory Pest Solutions (commercial pest control) and three ServiceMaster Brands franchisees. In 2018, we completed 20 acquisitions, including Copesan, a Terminix franchisee and a ServiceMaster Restore master distributor within ServiceMaster Brands. We expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions inthe United States and internationally. Cash flows received for notes receivable, net, for the year endedDecember 31, 2019 totaled$16 million , reflecting the collection of other long-term financing arrangements. Cash flows used for notes receivable, net, for the year endedDecember 31, 2018 totaled$20 million , reflecting the issuance of other long-term financing arrangements.
Financing Activities
Net cash provided from financing activities from continuing operations was
During 2019, we completed an amended$600 million Term Loan B due 2026, as well as a$400 million revolving credit agreement due 2024. The proceeds of the transaction were used to repay approximately$171 million of debt outstanding under our previous Term Loan B due 2023,$120 million outstanding under our previous revolving credit agreement due 2021, as well as$150 41
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million from a recent short-term borrowing entered on
During 2018, we completed a debt-for-debt exchange with Frontdoor which resulted in$1 billion of borrowings and$1 billion of repayments of long-term debt. In addition, we repaid$114 million of other debt, including$79 million to repay our 2018 Notes upon their maturity. In completing the spin-off, we contributed$242 million to Frontdoor. We also received$7 million from the issuance of common stock upon the exercise of stock options.
Contractual Obligations
The following table presents our contractual obligations and commitments as of
(In millions) Total Less than 1 Yr 1 - 3 Yrs 3 - 5 Yrs More than 5 Yrs Principal repayments*$ 1,685 $ 35$ 74 $ 771 $ 805 Finance leases* 96 35 44 16 1 Estimated interest payments(1) 390 65 121 114 90 Non-cancelable operating leases(2) 121 22 33 19 48 Purchase obligations(3) 60 27 19 14 1 Insurance claims* 188 72 54 23 39 Other, including deferred compensation trust* 9 1 2 2 4 Total amount$ 2,549 $ 257$ 347 $ 958 $ 987
__________________________________
*These items are reported in the Consolidated Statements of Financial Position.
(1)These amounts represent future interest payments related to existing debt obligations based on fixed and variable interest rates and principal maturities specified in the associated debt agreements. As ofDecember 31, 2019 , payments related to variable debt are based on applicable rates atDecember 31, 2019 , plus the specified margin in the associated debt agreements for each period presented. As ofDecember 31, 2019 , the estimated debt balance (including finance leases) as of each fiscal year end from 2020 through 2024 is$1,711 million ,$1,625 million ,$1,592 million ,$1,571 million and$806 million , respectively. The weighted-average interest rate on the estimated debt balances at each fiscal year end from 2020 through 2023 is expected to be 4.7 percent. See Note 12 to the consolidated financial statements for the terms and maturities of existing debt obligations. (2)These amounts primarily represent future payments relating to real estate operating leases. See Note 9 to the consolidated financial statements for additional discussion of our restructuring and other costs. A portion of our vehicle fleet and some equipment are leased through cancelable operating leases and are therefore excluded in the table above. (3)These obligations include commitments for various products and services including, among other things, inventory purchases, telecommunications services, marketing and advertising services and other professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transactions. Most arrangements are cancelable without a significant penalty and with short notice (usually 30-120 days) and amounts reflected above include our minimum contractual obligation (inclusive of applicable cancellation penalties). For obligations with significant penalties associated with termination, the minimum required expenditures over the term of the agreement have been included in the table above. Due to the uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits atDecember 31, 2019 , we are unable to reasonably estimate the period of cash settlement with the respective taxing authority. Accordingly,$14 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See the discussion of income taxes in Note 6 to the consolidated financial statements.
Financial Position-Continuing Operations
The following discussion describes changes in our financial position from
OnDecember 31, 2018 , an investment in Frontdoor was recorded at fair value based on Frontdoor's stock price. OnMarch 27, 2019 , we completed a non-cash debt-for-equity exchange in which we exchanged the 16.7 million retained shares of Frontdoor common stock and proceeds from a short-term credit facility to extinguish$600 million of our indebtedness under the short-term credit facility.
Receivables increased from prior year levels, primarily related to domestic and European acquisitions.
Prepaid expenses and other assets increased as a result of prepaid software primarily related to our implementation of Salesforce, and due to a change in the timing of income tax payments.
Property and equipment increased from prior year levels, reflecting purchases
for recurring capital needs and information technology projects, acquisitions
and the acquisition of vehicles under the Fleet Agreement, partially offset by
depreciation expense.
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Operating lease right-of-use assets, Current portion of lease liability and Long-term lease liability increased and Other long-term obligations, primarily self-insured claims decreased as a result of our adoption of ASC 842 onJanuary 1, 2019 .Goodwill and intangible assets, primarily trade names, service marks and trademarks, net, increased from prior year levels due to several pest control and termite acquisitions, the purchase of Nomor, Gregory Pest Solutions, McCloud Services, and the reacquisition of three ServiceMaster Brands franchisees. See Notes 5 and 7 to the consolidated financial statements for more details.
Restricted cash represents amounts posted as collateral under our automobile, general liability and workers' compensation insurance program.
Deferred customer acquisition costs increased primarily as a result of increased sales activity at Terminix.
Accounts payable increased from prior year levels, primarily related to domestic and European acquisitions.
Accrued liabilities-Other and Other long-term obligations, primarily
self-insured claims increased due to the
Deferred revenue increased from prior year levels, primarily due to domestic and European acquisitions.
Deferred taxes increased from prior year levels, primarily due to the basis differences related to intangible assets. See Note 6 to the consolidated financial statements for more details.
Total stockholders' equity was$2,322 million as ofDecember 31, 2019 compared to$2,204 million as ofDecember 31, 2018 . The increase was primarily driven by increased retained earnings offset by share repurchases. See the Consolidated Statements of Stockholders' Equity for further information.
Off-Balance Sheet Arrangements
As of
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off- balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires management to make certain estimates and assumptions required under GAAP which may differ from actual results. The following are our most critical accounting policies, which are those that require management's most difficult, subjective and complex judgments, requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The following discussion is not intended to represent a comprehensive list of our accounting policies. For a detailed description of the application of these and other accounting policies, see Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K.
Self-insurance Accruals
We carry insurance policies on insurable risks at levels which we believe to be
appropriate, including workers' compensation, auto and general liability risks.
We purchase insurance from third-party insurance carriers. These policies
typically incorporate significant deductibles or self-insured retentions. We are
responsible for all claims that fall within the retention limits. In determining
our accrual for self-insured claims, we use 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 both
known claims, as well as incurred but not reported claims. We adjust our
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. We believe the use of actuarial methods to account for these
liabilities provides a consistent and effective way to measure these highly
judgmental accruals. However, the use of any estimation technique in this area
is inherently sensitive given the magnitude of claims involved and the length of
time until the ultimate cost is known. We believe our recorded obligations for
these expenses are consistently measured. Nevertheless, changes in healthcare
costs, accident frequency and claim severity can materially affect the estimates
for these liabilities.
Income Taxes
We record 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. Based on the evaluation of all
available information, the Company recognizes future tax benefits, such as net
operating loss carryforwards, to the extent that realizing these benefits is
considered more likely than not. We record valuation allowances against our
deferred tax assets, when necessary. Realization of deferred tax assets (such as
net operating loss carry-forwards) is dependent on future taxable earnings and
is therefore uncertain. At least quarterly, we assess the likelihood that our
deferred tax asset balance will be recovered from future taxable income.
Significant judgment is required in evaluating the need for and magnitude of
appropriate valuation allowances against deferred tax assets.
On an interim basis, we estimate what our effective tax rate will be for the
full fiscal year. This estimated annual effective tax rate is then applied to
the year-to-date income before income taxes, excluding infrequently occurring or
unusual items, to determine
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the year-to-date income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. Our current and deferred tax provisions are based on estimates and assumptions that could differ from the final positions reflected in our income tax returns. We adjust our current and deferred tax provisions based on our income tax returns which are generally filed in the third or fourth quarters of the subsequent year. Our income tax returns are audited byU.S. state,U.S. federal and foreign tax authorities, and we are typically engaged in various tax examinations at any given time. Uncertain tax positions often arise due to uncertainty or differing interpretations of the application of tax rules throughout the various jurisdictions in which we operate. On a quarterly basis, we evaluate the probability that a tax position will be effectively sustained, and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. While management believes that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts. We recognize interest and penalties related to income tax matters in income tax expense.
Property and Equipment, Intangible Assets and
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 our 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, our fixed assets and finite-lived intangible assets are tested for recoverability whenever events or changes in circumstances indicate 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 us to adjust its book value or future expense accordingly. As required under accounting standards for goodwill and other intangibles, goodwill is not subject to amortization, and intangible assets with indefinite useful lives are not amortized until their useful lives are determined to no longer be indefinite.Goodwill and intangible assets that are not subject to amortization 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.Goodwill and indefinite-lived intangible assets, primarily our trade names, are assessed annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. Our goodwill is assigned to two reporting units: Terminix and ServiceMaster Brands. TheOctober 1, 2019 estimated fair values for both reporting units were substantially in excess of their respective carrying values, and we do not believe the reporting units were at risk of impairment as ofDecember 31, 2019 . Our 2019 and 2018 annual impairment analyses, which were performed as ofOctober 1 of each year, did not result in any goodwill or trade name impairments to continuing operations.
Stock-Based Compensation
Stock-based compensation expense for stock options 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 for future grants may differ materially from that recorded in the current period related to options granted to date. 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 18 to the consolidated financial statements for more details.
Contingent Liabilities
Accruals for contingent liabilities, including legal and environmental matters,
are recorded when it is probable that a liability has been incurred or an asset
impaired and the amount of the loss can be reasonably estimated. Liabilities
accrued for legal matters require judgments regarding projected outcomes and
range of loss based on historical experience and recommendations of legal
counsel. Liabilities for environmental matters require evaluations of relevant
environmental regulations and estimates of future remediation alternatives and
costs.
Termite damage claim accruals for Non-Litigated Claims 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. We have certain liabilities with respect to existing or
potential claims, lawsuits and other proceedings, including litigated termite
damage claims. We accrue 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.
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A summary of Litigated Claims and Non-Litigated Claims activity over the last three years is as follows:
Litigated Claims Non-Litigated Claims
Mobile Bay All Other Mobile All Other
(In millions) Area Regions Total Bay Area Regions Total
Outstanding claims as of January 1, 2017 21 17 38 131 677 808
New claims filed 9 4 13 556 3,126 3,682
Claims resolved (8) (6) (14) (531) (3,137) (3,668)
Outstanding claims as of December 31, 2017 22 15 37 156 666 822
New claims filed 18 9 27 556 2,547 3,103
Claims resolved (9) (7) (16) (448) (2,611) (3,059)
Outstanding claims as of December 31, 2018 31 17 48 264 602 866
New claims filed 40 1 41 735 2,652 3,387
Claims resolved (15) (7) (22) (623) (2,636) (3,259)
Outstanding claims as of December 31, 2019 56 11 67 376 618 994
Litigated claims exclude a number of claims in which the only material issue in
dispute is the actual amount of repair costs, which are simpler to resolve and
less volatile ("Non-Complex Litigated Claims"). The table excludes 4 Non-Complex
Litigated Claims filed in the year ended December 31, 2018 in the Mobile Bay
Area, and 8, 19 and 9 in the years ended December 31, 2019 , 2018 and 2017,
respectively, in our branches outside of the Mobile Bay Area ("All Other
Regions"). There were no new Non-Complex Litigated Claims filed in the Mobile
Bay Area in the years ended December 31, 2019 and 2017. The financial impacts of
these Non-Complex Litigated Claims are included in the Summary of Litigated and
Non-Litigated Reserve Activity below and are not material to our financial
condition or the results of our operations.
A summary of Litigated Claims and Non-Litigated Claims reserve activity over the last three years is as follows:
Litigated Claims Non-Litigated Claims
All Other Mobile Bay All Other
(In millions) Mobile Bay Area Regions Total Area Regions Total
Reserves as of January 1, 2017 $ 2 $ 2 $ 4 $ 6 $ 9 $ 15
Expense 3 4 7 8 20 28
Payments (4) (4) (8) (7) (17) (24)
Reserves as of December 31, 2017 1 2 3 7 12 19
Expense 10 4 14 8 17 25
Payments (7) (2) (9) (8) (16) (24)
Reserves as of December 31, 2018 4 4 8 7 13 20
Expense 8 3 11 11 20 31
Change in reserve estimate 34 11 45 8 - 8
Payments (6) (6) (12) (11) (20) (31)
Reserves as of December 31, 2019 $ 40 $ 12 Our results of operations for the years endedDecember 31, 2019 , 2018 and 2017 include charges for legal fees associated with Litigated Claims of$7 million ,$3 million and$2 million , respectively.
Newly Issued Accounting Standards
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. See Note 2 to the consolidated financial statements for further information on newly issued accounting standards.
Information Regarding Forward-Looking Statements
This report contains forward-looking statements and cautionary statements.
Forward-looking statements can be identified by the use of forward-looking terms
such as "believes," "expects," "may," "will," "shall," "should," "would,"
"could," "seeks," "aims," "projects," "is optimistic," "intends," "plans,"
"estimates," "anticipates" or other comparable terms. These forward-looking
statements also include, but are not limited to statements regarding our
intentions, beliefs, assumptions or current expectations concerning, among other
things, financial position; results of operations; cash flows; prospects; growth
strategies or expectations; the continuation of acquisitions, including the
integration of any acquired company and risks relating to any such acquired
company; fuel prices; attraction and retention of key personnel; the impact of
fuel swaps; the valuation of marketable securities; estimates of accruals for
self-insured claims related to workers' compensation, auto and general liability
risks; expected termite damage claims costs; estimates of future payments under
operating and finance leases; estimates on current and deferred tax provisions;
the outcome (by judgment or
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settlement) and costs of legal or administrative proceedings, including, without limitation, collective, representative or class action litigation; and the impact of prevailing economic conditions.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the segments in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and cash flows, and the development of the segments in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors, including, without limitation, the risks and uncertainties discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" above, could cause actual results and outcomes to differ from those reflected in the forward-looking statements. Additional factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:
?the possibility that the review of strategic alternatives for our ServiceMaster Brands businesses will not result in a transaction or that the anticipated benefits will not be realized;
?the diversion of management time and other business disruption during the review of strategic alternatives for our ServiceMaster Brands businesses;
?the impact of reserves attributable to pending Litigated Claims and Non-Litigated Claims for termite damages;
?lawsuits, enforcement actions and other claims by third parties or governmental authorities;
?compliance with, or violation of, environmental, health and safety laws and regulations;
?cyber security breaches, disruptions or failures in our information technology systems and our failure to protect the security of personal information about our customers;
?our ability to attract and retain key personnel, including our ability to attract, retain and maintain positive relations with trained workers and third-party contractors;
?adverse weather conditions;
?weakening general economic conditions, especially as they may affect home sales, unemployment and consumer confidence or spending levels;
?our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations;
?our ability to successfully implement our business strategies;
?increase in prices for fuel and raw materials, and in minimum wage levels;
?changes in the source and intensity of competition in our segments;
?our franchisees, subcontractors, third-party distributors and vendors taking actions that harm our business;
?changes in our services or products;
?our ability to protect our intellectual property and other material proprietary rights;
?negative reputational and financial impacts resulting from future acquisitions or strategic transactions;
?laws and governmental regulations increasing our legal and regulatory expenses;
?increases in interest rates increasing the cost of servicing our substantial indebtedness;
?increased borrowing costs due to lowering or withdrawal of the ratings, outlook or watch assigned to our debt securities;
?restrictions contained in our debt agreements;
?the effects of our indebtedness and the limitations contained in the agreements governing such indebtedness; and
?other factors described in this report and from time to time in documents that
we file with the
You should read this report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
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