NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

(UNAUDITED)

Note 1. Basis of Presentation  

ServiceMaster Global Holdings, Inc. and its majority-owned subsidiary partnerships, limited liability companies and corporations (collectively, “ServiceMaster,” the “ Company,” “we,” “us, and “our”) is a leading provider of essential residential and commercial services. The Company’s services include termite and pest control, home warranties, disaster restoration, janitorial, residential cleaning, cabinet and wood furniture repair and home inspection. The Company provides these services through an extensive service network of company-owned, franchised and licensed locations operating primarily under the following leading brands: Terminix, American Home Shield, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec.   All consolidated Company subsidiaries are wholly-owned. Intercompany transactions and balances have been eliminated.

The unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The Company recommends that the quarterly unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 201 6 , as filed with the SEC (the “201 6 Form 10-K”). The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not indicative of the results that might be achieved for a full year.

American Home Shield Spin-off

On July 26, 2017, the Company announced that it intends to separate its American Home Shield business from the Company’s Terminix and Franchise Services Group businesses by means of a s pinoff of the American Home Shield business to Company shareholders, resulting in two public ly traded companies. The spin-off would create two independent companies , each with an enhanced strategic focus, simplified operating structure, distinct investment identity and strong financial profile. The transaction is expected to be completed in the third quarter of 2018, subject to satisfaction of customary conditions, including the effectiveness of a Registration Statement on Form 10 to be filed with the SEC ,   receipt of a favorable ruling from the IRS concerning certain tax matters and final approval by the Company’s board of directors, and it is intended to qualify as a tax-free distribution to the Company’s shareholders for U.S. federal income tax purposes.



Note 2. Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s 2016 Form 10-K. There have been no material changes to the significant accounting policies for the three and nine months ended September 30, 2017.

Newly Issued Accounting Standards

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU simplifies certain aspects of hedge accounting and improves disclosures of hedging arrangements through the elimination of the requirement to separately measure and report hedge ineffectiveness. The ASU generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item in order to align financial reporting of hedge relationships with economic results. Entities must apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements must be applied prospectively. It is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods with early adoption permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” to provide a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This model supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” Entities have the option of using either a full retrospective or modified approach to adopt the guidance. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company will adopt the new revenue guidance effective January 1, 2018 using the modified retrospective transition method. While the Company is finalizing its assessment of the impacts of the new standard, the Company currently believes the most significant impact relates to the Company’s accounting for customer acquisition costs, including the amortization period for such costs, and advertising costs, specifically as it relates to direct response advertising, which under ASU 2014-09 the Company will no longer defer. The Company is also finalizing its assessment of the impacts related to the accounting for contract assets separate from accounts receivable. Currently, when a customer elects to pay

for their home warranty contract on a monthly basis, accounts receivable and deferred revenue are recorded based on the total amount due from the customer. The accounts receivable balance is reduced as amounts are paid, and the deferred revenue is amortized over the life of the contract. Under the new revenue guidance, we expect only the portion of the contract that is due in the current month to be recorded within accounts receivable.  The remaining portion of the contract will be separately recorded as a contract asset.  In addition, under the new guidance, the contract asset will be presented net of the contract liability currently recorded as deferred revenue. The Company does not expect adoption of the new revenue standard to have a material impact on its co nsolidated financial statements except for the aforementioned reclassification of contract liabilities currently recorded as deferred revenue.  

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” to change how entities measure certain equity investments, to require the disclosure of changes in the fair value of financial liabilities measured under the fair value option that are attributable to a company’s own credit, and to change certain other disclosure requirements. The changes in ASU 2016-01 specifically require that the changes in fair value of all investments in equity securities be recognized in net income. The amendments in ASU 2016-01 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and will be adopted prospectively. Upon adoption, changes in fair value of the Company’s available-for-sale securities, which are currently recognized in other comprehensive income, will be recognized in net income.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which is the final standard on accounting for leases. While both lessees and lessors are affected by the new guidance, the effects on lessees are much more significant. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. Entities are required to use a modified retrospective approach to adopt the guidance. The amendments in ASU 2016-02 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on the Company’s consolidated financial statements and currently expects that most of the operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption of ASU 2016-02, which will increase the amount of total assets and total liabilities that is reported relative to such amounts prior to adoption.



Note 3. Restructuring Charges

The Company incurred restructuring charges of $21 million ( $14 million, net of tax) and $8 million ( $5 million, net of tax) in the three months ended September 30, 2017 and 2016, respectively, and $24 million ( $16 million, net of tax) and $13 million ( $8 million, net of tax) in the nine months ended September 30, 2017 and 2016, respectively. Restructuring charges were comprised of the following:





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For the three months ended September 30, 2016, includes professional fees of $2 million, and for the nine months ended September 30, 2016, includes professional fees of $2 million and accelerated depreciation of $1 million related to the early termination of a long-term human resources outsourcing agreement. Additionally, the nine months ended September 30, 2016 includes severance and other costs of $1 million related to an initiative to enhance capabilities and reduce costs in the Company’s headquarters functions that provide Company-wide administrative services for our operations.







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

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







The company expects substantially all of its accrued restructuring charges to be paid within one year.

Note 4 . Commitments and Contingencies

The Company carries insurance policies on insurable risks at levels that it believes to be appropriate, including workers’ compensation, automobile 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, exceed our coverage limits or are otherwise not covered by our insurance policies. In determining the Company’s accrual for self-insured claims, the Company uses historical claims experience to establish both the current year accrual and the underlying provision for future losses. This actuarially determined provision and related accrual include known claims, as well as incurred but not reported claims. The Company adjusts its estimate of accrued self-insured claims when required to reflect changes based on factors such as changes in health care costs, accident frequency and claim severity.

A reconciliation of beginning and ending accrued self-insured claims, which are included in Accrued liabilities—Self-insured claims and related expenses and Other long-term obligations, primarily self-insured claims on the condensed consolidated statements of financial position, net of insurance recoverables, which are included in Prepaid expenses and other assets and Other assets on the condensed consolidated statements of financial position, is presented as follows:



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

In 2008, the Company amended its Profit Sharing and Retirement Plan, a tax qualified 401(k) defined contribution plan available to substantially all of its employees (the “401(k) Plan”), to implement a qualified automatic contribution arrangement (“QACA”) under the safe harbor provisions of the Internal Revenue Code of 1986, as amended (the “Code”). QACA plans, in general, require automatic enrollment of employees into the retirement plan absent an affirmative election that such employees do not wish to participate. Although the Company implemented processes to auto-enroll new hires after adopting the QACA plan in 2008, it discovered that it did not auto-enroll then existing employees who were not participating in the 401(k) Plan. In response, the Company

implemented an auto-enrollment process for affected active employees and submitted to the Internal Revenue Service (the “IRS”) a voluntary correction proposal (the “VCP”) to remedy the issue for prior years. Through December 31, 2016, the Company had recorded charges of $25 million in the consolidated statement of operations and comprehensive income. On October 3, 2017, the Company and the IRS agreed on the terms of the VCP submitted by the Company. The VCP will require the Company to contribute approximately $22 million to 401(k) accounts for impacted current and former employees.  The Company expects the cash contribution to occur before December 31, 2017. In the third quarter of 2017, the Company recorded an adjustment within the condensed consolidated statement of operations and comprehensive income to reflect the final settlement.

In addition to the matter discussed above and the fumigation related matters discussed below, in the ordinary course of conducting business activities, the Company and its subsidiaries become involved in judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. These proceedings include insured and uninsured matters that are brought on an individual, collective, representative and class action basis, or other proceedings involving regulatory, employment, general and commercial liability, automobile liability, wage and hour, environmental and other matters. The Company has entered into settlement agreements in certain cases, including with respect to putative collective and class actions, which are subject to court or other approvals. If one or more of the Company’s settlements are not finally approved, the Company could have additional or different exposure, which could be material. Subject to the paragraphs below, the Company does not expect any of these proceedings to have a material effect on its reputation, business, financial position, results of operations or cash flows; however, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial position, results of operations and cash flows . 

F umigation Related Matters

On July 21, 2016, Terminix International USVI, LLC (“TMX USVI”) and The Terminix International Company Limited Partnership (“TMX LP”), each an indirect, wholly-owned subsidiary of the Company, entered into a superseding Plea Agreement (the “Superseding Plea Agreement”) in connection with the investigation initiated by the United States Department of Justice Environmental Crimes Section (the “DOJ”) into allegations that a local Terminix branch used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands. The Superseding Plea Agreement was intended to resolve  four  misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act related to improper applications of methyl bromide. Those charges were set forth in an Information, dated March 29, 2016, in the matter styled  United States of America v. The Terminix International Company Limited Partnership and   Terminix International USVI, LLC.   At a hearing held on August 25, 2016, the United States District Court of the U.S. Virgin Islands (the “District Court”) rejected the Superseding Plea Agreement.  On August 31, 2016, the DOJ requested that the charges be dismissed, reserving its right to re-file the charges, in light of ongoing discussions to resolve the matter. The District Court granted that request, and the March 29, 2016 Information was dismissed. 

On January 20, 2017, TMX USVI and TMX LP entered into a new Plea Agreement (the “New Plea Agreement”) with the DOJ, which has been filed with the District Court, and replaces the Superseding Plea Agreement. At a hearing on March 23, 2017, TMX USVI and TMX LP pled guilty to four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act related to improper applications of methyl bromide, as set forth in a new Information filed on January 20, 2017 with the District Court that is substantially similar to the March 29, 2016 Information. Under the terms of the New Plea Agreement, the parties agreed and jointly recommended to the District Court that (i) TMX USVI and TMX LP each pay a fine of $4 million (total of $8 million); (ii) TMX USVI pay  $1  million to the EPA for costs incurred by the EPA for the response and clean-up of the affected units at the resort in St. John; (iii) TMX USVI make a community service payment of $1 million to the National Fish and Wildlife Foundation for the purpose of engaging a third party to provide training to pesticide applicators in the U.S. Virgin Islands; and (iv) both TMX USVI and TMX LP serve a  three -year probation period, subject to the special conditions of probation under the New Plea Agreement. The total financial terms of the recommended sentence under the New Plea Agreement are equivalent in total amount to the financial terms under the Superseding Plea Agreement. Unlike the Superseding Plea Agreement, however, the New Plea Agreement is non-binding on the District Court. The sentencing hearing before the District Court previously scheduled for September 21 , 2017 , has been rescheduled for November 20, 2017, due to hurricane activity in the Caribbean . It is possible that at that hearing the District Court could use its discretion to impose fines or other terms different than those in the New Plea Agreement. If approved by the District Court, and upon compliance with the terms and conditions of the New Plea Agreement, the New Plea Agreement will resolve the federal criminal consequences associated with the DOJ investigation. The New Plea Agreement does not bind any other federal, state or local authority; however, the EPA has indicated that it does not intend to initiate any administrative enforcement action or refer the matter to the DOJ for any civil enforcement action if the New Plea Agreement is approved by the District Court.  

The Company has previously recorded within Fumigation related matters in the condensed consolidated statement of operations and comprehensive income total charges of  $10  million in connection with the aforementioned criminal matter.  On December 16, 2016, the U.S. Virgin Islands Department of Justice filed a civil complaint in the Superior Court of the Virgin Islands related to the aforementioned fumigation incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster Company, LLC, The Terminix International Company Limited Partnership, and Terminix International USVI, LLC. The amount and extent of any further potential penalties, fines, sanctions, costs and damages that the federal or other governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of any additional civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S. Virgin Islands matter, which could be material, is not currently known, and any such further penalties, fines, sanctions, costs or damages would not be covered under the Company’s general liability insurance policies.  

Note  5 . Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. The Company’s annual assessment date is October 1. There were no goodwill or trade name impairment charges recorded in the thre e and nine months ended   September 30, 2017 and 2016 . There were no accumulated impairment losses recorded as of September 30, 2017 .   The table below summarizes the goodwill balances for continuing operations by reportable segment:



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



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For the existing intangible assets, the Company anticipates amortization expense for the remainder of 2017 and each of the next five years of $ 6  m illion, $ 21   million, $ 16 million, $12 million, $9 million and $ 6   million, respectively .



Note 6 . Stock-Based Compensation  

For the three months ended September 30, 2017 and 2016 , the Company recognized stock-based compensation expense o f   $1  million ( $1  million, net of tax) and $ 3  million ( $2  million, net of tax), respectively. For the nine months ended   September 30, 2017 and 2016 , the Company recognized stock-based compensation expense o f   $10  million ( $6  million, net of tax) and $ 10  million ( $ 6 million, net of tax), respectively. These charges are recorded within Selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Additionally, for the three and nine months ended September 30, 2017, the Company recognized $5 million of stock-based compensation expense due to the modification of non-vested stock options as part of the severance agreement with the former Chief Executive Officer of the Company, which has been included in Restructuring charges in the condensed consolidated statements of operations and comprehensive income. 

As of September 30 , 2017 there was $ 31 million of total unrecognized co mpensation costs related to non- vested stock options , restricted stock units (“RSUs”) and performance shares granted under the Amended and Restated ServiceMaster Global Holdings , Inc. Stock Incentive Plan (“MSIP”) and the Amended and Restated ServiceMaster Global Holdings, Inc. 2014 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) and discounts associated with the ServiceMaster Global Holdings, Inc. Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”). These remaining costs are expected to be recognized over a weighted-average period o f   2. 10 years.

N ote 7 . Comprehensive Income (Loss)

Comprehensive income , which primarily includes net income (loss), unrealized gain (loss) on marketable securities, unrealized gain (loss) on derivative instruments and the effect of foreign currency translation gain (loss), is disclosed in the condensed consolidated statements of operations and comprehensive income.

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



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

As of September 30, 2017, December 31, 2016 and September 30, 2016, Cash and cash equivalents of $456 million, $291 million and $230 million, respectively, and Restricted cash of $89 million, $95 million and $95 million, respectively, as presented on the condensed consolidated statements of financial position represent the amounts comprising Cash and cash equivalents and restricted cash of $545 million, $386 million, and $325 million, respectively, on the condensed consolidated statement of cash flows. There was no restricted cash balance as of December 31, 2015.

The Company acquired $30 million and $ 50 million of property and equipment through capital leases and other non-cash  financing transactions in the nine months ended   September 30, 2017 and 2016 , respectively, which have been excluded from the condensed consolidated statements of cash flows as non-cash investing and financing activities. 

In the nine months ended   September 30, 2016 , the Company converted certain company-owned Merry Maids branches to franchises for a total purchase price of $9 million. In the nine months ended   September 30, 2016 , the Company received cash of $6 million and provided financing of $2 million. These financed amounts have been excluded from the condensed consolidated statements of cash flows as non-cash investing activities.



Note 9 . Cash and Marketable Securities

Cash, money market funds and certificates of deposits with maturities of three months or less when purchased are included in Cash and cash equivalents on the condensed consolidated statements of financial position. As of September 30, 2017 and December 31, 2016 , the Company’s investments consisted primarily of treasury bills (“ Debt securities”) and common equity securities (“Equity securities”). The amortized cost, fair value and gross unrealized gains and losses of the Company’s short- and long-term investments in Debt and Equity securities are as follows:



There were no unrealized losses which had been in a loss position for more than one year as of September 30, 2017 and December 31, 2016.  

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 proceeds, gross realized gains and gross realized losses resulting from sales of available-for-sale securities. There were no impairment charges due to other than temporary declines in the value of certain investments for the three and nine months ended September 30, 2017 and 2016.

Repurchase of Notes

On September 18, 2017, the Company purchased $13 million in aggregate principal amount of its 7.25% notes maturing in 2038 at a price of 105% of the principal amount using available cash.  On May 11, 2017, the Company purchased $17 million in aggregate principal amount of its 7.25% notes maturing in 2038 at a price of 97% of the principal amount using available cash. The repurchased notes were delivered to the trustee for cancellation.  In connection with these partial repurchases, the Company recorded a loss on extinguishment of debt of $ 3 million and $6 million in the three and nine months ended September 30, 2017 , respectively .

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



Note  11 . Acquisitions

Acquisitions have been accounted for using the acquisition method and, accordingly, the results of operations of the acquired businesses have been included in the condensed consolidated financial statements since their dates of acquisition. The assets and liabilities of these businesses were recorded in the financial statements at their estimated fair values as of the acquisition dates. 

During the nine months ended   September 30, 2017, the Company completed two pest control acquisitions and purchased a ServiceMaster Clean master distributor within the Franchise Services Group. The total purchase price for these acquisitions was $ 15 million. The Company recorded goodwill of $1 million and other intangibles, primarily reacquired rights, of $13 million related to these acquisitions. 

On November 30, 2016 , the Company acquired Landmark Home Warranty, LLC (“Landmark”) for a total purchase price of $39 million. The Company recorded goodwill of $37 million and other intangibles, primarily customer relationships, of $13 million related to this acquisition. During the nine months ended   September 30, 2017, the Company finalized its assessment of the fair value

of the assets acquired and liabilities assumed.  The Company updated its preliminary allocation and reclassified $4 million from other intangibles, primarily customer relationships, to goodwill.

During the nine months ended   September 30, 2016, the Company completed several pest control and termite acquisitions. The total purchase price for these acquisitions was $4 3  million. The Company recorded goodwill of $ 34  million and other intangibles of $ 6  million related to these acquisitions.  On June 27, 2016 , the Company acquired OneGuard Home Warranties (“OneGuard”) for a total purchase price of $6 1 million. The C ompany recorded goodwill of $57 million and other intangibles of $15 million related to the OneGuard acquisition.

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









N ote  12 . Income Taxes  

As of September 30, 2017 and December 31, 2016,   the Company had   $ 14 million   and $13 million, respectively, of tax benefits primarily reflected in state tax returns that have not been recognized for financial reporting purposes (“unrecognized tax benefits”). Based on information currently available, it is reasonably possible that over the next 12 month period unrecognized tax benefits may decrease by $2 million as the result of settlements of ongoing audits, statute of limitation expirations or final settlements of uncertain tax positions in multiple jurisdictions.

As required by Accounting Standard Codification (“ASC”) 740, “Income Taxes,” the Company computes interim period income taxes by applying an anticipated annual effective tax rate to the Company’s year-to-date income or loss from continuing operations before income taxes, except for significant unusual or infrequently occurring items. The Company’s estimated tax rate is adjusted each quarter in accordance with ASC 740.

T he effective tax rate on income from continuing operations was 29.6   percent and 3 9.8   percent for the three months ended September 30, 2017 and 2016, respectively. The effective tax rate on income from continuing operations for the three months ended September 30, 2017 was primarily affected by excess tax benefits for share-based awards.

T he effective tax rate on income from continuing operations was 35.0 percent and 3 7.9 percent for the nine months ended   September 30, 2017 and 2016, respectively. The effective tax rate on income from continuing operations for the nine months ended September 30, 2017 and September 30, 2016 were primarily affected by excess tax benefits for share-based awards.

Note 13 . Business Segment Reporting

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

In accordance with accounting standards for segments, the Company’s reportable segments are strategic business units that offer different services. The Terminix segment provides termite and pest control services to residential and commercial customers and distributes pest control products. The American Home Shield segment provides home warranties for household systems and appliances. The Franchise Services Group segment provides residential and commercial disaster restoration, janitorial and cleaning services through franchises primarily under the ServiceMaster, ServiceMaster Restore and ServiceMaster Clean brand names, home cleaning services through franchises primarily under the Merry Maids brand name, cabinet and wood furniture repair primarily under the Furniture Medic brand name and home inspection services primarily under the AmeriSpec brand name. Corporate includes SMAC , the Company’s financing subsidiary exclusively dedicated to providing financing to its franchisees and retail customers of its operating units, and the Company’s headquarters operations (substantially all of which costs are allocated to the Company’s reportable segments), wh ich provide various technology, marketing , finance, legal and other support services to the reportabl e segments. The composition of the Company’s reportable segments is consistent with that used by the Company’s chief operating decision maker (the “CODM”) to evaluate performance and allocate resources.

Information regarding the accounting policies used by the Company is described in the Company’s 2016 Form 10-K . The Company derives substantially all of its revenue from customers and franchisees in the United States with approximately   two percent generated in foreign markets. Operating expenses of the business units consist primarily of direct costs and indirect costs allocated from Co rporate .

The Company uses Reportable Segment Adjusted EBITDA as its measure of segment profitability. Accordingly, the CODM evaluates performance and allocates resources based primarily on Reportable Segment Adjusted EBITDA. Reportable Segment Adjusted EBITDA is defined as net income before: unalloca ted corporate expenses; income from discontinued operations, net of income taxes; provision for income taxes; interest expense; depreciation and amortization expense; 401(k) Plan corrective contribution; fumigation related matters; insurance reserve adjustment; non-cash stock-based compensation expense; restructuring charges; gain on sale of Merry Maids branches; non-cash impairment of software and other related costs; and loss on extinguishment of debt . The Company’s definition of Reportable Segment Adjusted EBITDA may not be calculated or comparable to similarly titled measures of other companies. The Company believe s Reportable Segment 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, restruct uring initiatives and equity-based, long-term incentive plans.

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