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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019
or
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-36507
________________________________________________
ServiceMaster Global Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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20-8738320 |
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
150 Peabody Place, Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
901-597-1400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes x No o |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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Yes x No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer x |
Accelerated Filer o |
Non-Accelerated Filer o |
Smaller Reporting Company o |
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Emerging Growth Company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes o No x |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common, par value $0.01 |
SERV |
NYSE |
The number of shares of the registrant’s common stock outstanding as of July 31, 2019: 135,868,513 shares of common stock, par value $0.01 per share.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In millions, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Revenue |
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$ |
560 |
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$ |
520 |
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$ |
1,042 |
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$ |
947 |
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Cost of services rendered and products sold |
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303 |
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272 |
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564 |
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498 |
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Selling and administrative expenses |
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151 |
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146 |
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287 |
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272 |
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Amortization expense |
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6 |
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5 |
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12 |
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8 |
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Acquisition-related costs |
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3 |
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1 |
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4 |
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1 |
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Fumigation related matters |
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(1) |
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— |
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— |
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— |
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Restructuring charges |
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3 |
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— |
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10 |
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12 |
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Realized (gain) on investment in frontdoor, inc. |
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— |
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— |
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(40) |
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— |
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Interest expense |
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18 |
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37 |
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45 |
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75 |
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Interest and net investment income |
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(3) |
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(1) |
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(4) |
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(1) |
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Loss on extinguishment of debt |
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— |
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— |
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6 |
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— |
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Income from Continuing Operations before Income Taxes |
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80 |
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59 |
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159 |
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82 |
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Provision for income taxes |
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21 |
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19 |
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30 |
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26 |
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Income from Continuing Operations |
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59 |
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40 |
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129 |
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56 |
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Gain (loss) from discontinued operations, net of income taxes |
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— |
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56 |
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(1) |
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80 |
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Net Income |
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$ |
59 |
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$ |
96 |
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$ |
129 |
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$ |
136 |
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Total Comprehensive Income |
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$ |
55 |
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$ |
99 |
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$ |
123 |
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$ |
149 |
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Weighted-average common shares outstanding - Basic |
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136.0 |
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135.5 |
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135.9 |
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135.4 |
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Weighted-average common shares outstanding - Diluted |
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136.5 |
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135.8 |
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136.4 |
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135.7 |
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Basic Earnings Per Share: |
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Income from Continuing Operations |
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$ |
0.44 |
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$ |
0.29 |
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$ |
0.95 |
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$ |
0.42 |
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Gain (loss) from discontinued operations, net of income taxes |
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— |
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0.42 |
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— |
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0.59 |
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Net Income |
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0.43 |
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0.71 |
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0.95 |
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1.01 |
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Diluted Earnings Per Share: |
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Income from Continuing Operations |
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$ |
0.43 |
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$ |
0.29 |
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$ |
0.95 |
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$ |
0.42 |
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Gain (loss) from discontinued operations, net of income taxes |
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— |
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0.42 |
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— |
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0.59 |
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Net Income |
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0.43 |
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0.71 |
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0.94 |
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1.00 |
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Position (Unaudited)
(In millions, except share data)
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As of |
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As of |
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June 30, |
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December 31, |
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2019 |
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2018 |
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Assets: |
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Current Assets: |
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Cash and cash equivalents |
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$ |
228 |
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$ |
224 |
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Investment in frontdoor, inc. |
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— |
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445 |
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Receivables, less allowances of $24 and $21, respectively |
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210 |
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186 |
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Inventories |
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41 |
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45 |
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Prepaid expenses and other assets |
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76 |
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61 |
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Total Current Assets |
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555 |
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962 |
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Other Assets: |
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Property and equipment, net |
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198 |
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201 |
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Operating lease right-of-use assets |
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101 |
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— |
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Goodwill |
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2,038 |
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1,956 |
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Intangible assets, primarily trade names, service marks and trademarks, net |
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1,625 |
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1,588 |
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Restricted cash |
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89 |
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89 |
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Notes receivable |
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47 |
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43 |
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Long-term marketable securities |
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19 |
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21 |
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Deferred customer acquisition costs |
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92 |
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77 |
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Other assets |
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43 |
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87 |
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Total Assets |
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$ |
4,806 |
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$ |
5,023 |
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Liabilities and Stockholders' Equity: |
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Current Liabilities: |
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Accounts payable |
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$ |
115 |
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$ |
89 |
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Accrued liabilities: |
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Payroll and related expenses |
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56 |
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60 |
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Self-insured claims and related expenses |
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57 |
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58 |
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Accrued interest payable |
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15 |
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14 |
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Other |
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59 |
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61 |
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Deferred revenue |
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101 |
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95 |
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Current portion of lease liability |
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17 |
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— |
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Current portion of long-term debt |
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53 |
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49 |
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Total Current Liabilities |
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473 |
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425 |
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Long-Term Debt |
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1,252 |
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1,727 |
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Other Long-Term Liabilities: |
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Deferred taxes |
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485 |
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484 |
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Other long-term obligations, primarily self-insured claims |
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152 |
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182 |
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Long-term lease liability |
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116 |
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— |
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Total Other Long-Term Liabilities |
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752 |
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666 |
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Commitments and Contingencies (Note 6) |
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Stockholders' Equity: |
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Common stock $0.01 par value (authorized 2,000,000,000 shares with 147,798,557 shares issued and 135,953,492 outstanding at June 30, 2019 and 147,209,928 shares issued and 135,687,558 outstanding at December 31, 2018) |
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2 |
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2 |
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Additional paid-in capital |
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2,326 |
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2,309 |
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Retained Earnings |
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285 |
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156 |
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Accumulated other comprehensive (loss) income |
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(1) |
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5 |
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Less common stock held in treasury, at cost (11,845,065 shares at June 30, 2019 and 11,552,370 shares at December 31, 2018) |
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(283) |
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(267) |
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Total Stockholders' Equity |
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2,329 |
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2,204 |
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Total Liabilities and Stockholders' Equity |
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$ |
4,806 |
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$ |
5,023 |
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(In millions)
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Retained |
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Accumulated |
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Additional |
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Earnings |
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Other |
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Common |
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Paid-in |
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(Accumulated |
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Comprehensive |
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Treasury |
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Total |
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Shares |
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Stock |
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Capital |
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Deficit) |
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(Loss) Income |
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Shares |
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Amount |
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Equity |
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Balance December 31, 2017 |
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147 |
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$ |
2 |
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$ |
2,321 |
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$ |
(895) |
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$ |
5 |
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(12) |
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$ |
(267) |
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$ |
1,167 |
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Net income |
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— |
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— |
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— |
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40 |
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— |
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— |
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— |
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40 |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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10 |
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— |
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— |
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10 |
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Total comprehensive income |
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— |
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— |
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— |
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40 |
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10 |
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— |
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— |
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50 |
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Cumulative effect of accounting changes |
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— |
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— |
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— |
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14 |
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2 |
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— |
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— |
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16 |
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Exercise of stock options |
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— |
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— |
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2 |
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— |
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— |
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— |
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— |
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2 |
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Stock-based employee compensation |
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— |
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— |
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4 |
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— |
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— |
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— |
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— |
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4 |
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Balance March 31, 2018 |
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147 |
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$ |
2 |
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$ |
2,328 |
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$ |
(841) |
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$ |
17 |
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(12) |
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$ |
(267) |
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$ |
1,239 |
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Net income |
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— |
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— |
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— |
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|
96 |
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— |
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— |
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— |
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|
96 |
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Other comprehensive income, net of tax |
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|
— |
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— |
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— |
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— |
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3 |
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|
— |
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— |
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3 |
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Total comprehensive income |
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— |
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— |
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— |
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96 |
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3 |
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— |
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— |
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|
99 |
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Exercise of stock options |
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— |
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— |
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4 |
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— |
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— |
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|
— |
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— |
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|
4 |
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Stock-based employee compensation |
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— |
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|
— |
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|
4 |
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|
— |
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— |
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— |
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— |
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4 |
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Balance June 30, 2018 |
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147 |
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$ |
2 |
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$ |
2,336 |
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$ |
(745) |
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$ |
20 |
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(12) |
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$ |
(267) |
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$ |
1,346 |
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Balance December 31, 2018 |
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147 |
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$ |
2 |
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$ |
2,309 |
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$ |
156 |
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$ |
5 |
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(12) |
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$ |
(267) |
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$ |
2,204 |
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Net income |
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|
— |
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|
— |
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|
— |
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|
70 |
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|
— |
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|
— |
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|
— |
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|
70 |
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Other comprehensive loss, net of tax |
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|
— |
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|
— |
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|
— |
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— |
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(2) |
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|
— |
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|
— |
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(2) |
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Total comprehensive income (loss) |
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|
— |
|
|
— |
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|
— |
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|
70 |
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(2) |
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|
— |
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|
— |
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|
68 |
|
Exercise of stock options |
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|
— |
|
|
— |
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5 |
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|
— |
|
|
— |
|
|
— |
|
|
— |
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|
5 |
|
Stock-based employee compensation |
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|
— |
|
|
— |
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|
4 |
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|
— |
|
|
— |
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|
— |
|
|
— |
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|
4 |
|
Repurchase of common stock |
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|
— |
|
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— |
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— |
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|
— |
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|
— |
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|
— |
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(2) |
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|
(2) |
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Balance March 31, 2019 |
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|
148 |
|
$ |
2 |
|
$ |
2,318 |
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$ |
226 |
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$ |
3 |
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|
(12) |
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$ |
(269) |
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$ |
2,280 |
|
Net income |
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|
— |
|
|
— |
|
|
— |
|
|
59 |
|
|
— |
|
|
— |
|
|
— |
|
|
59 |
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
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(4) |
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|
— |
|
|
— |
|
|
(4) |
|
Total comprehensive income (loss) |
|
|
— |
|
|
— |
|
|
— |
|
|
59 |
|
|
(4) |
|
|
— |
|
|
— |
|
|
55 |
|
Exercise of stock options |
|
|
— |
|
|
— |
|
|
4 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4 |
|
Stock-based employee compensation |
|
|
— |
|
|
— |
|
|
4 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4 |
|
Repurchase of common stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(15) |
|
|
(15) |
|
Balance June 30, 2019 |
|
|
148 |
|
$ |
2 |
|
$ |
2,326 |
|
$ |
285 |
|
$ |
(1) |
|
|
(12) |
|
$ |
(283) |
|
$ |
2,329 |
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
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Six Months Ended |
||||
|
|
|
June 30, |
||||
|
|
|
2019 |
|
2018 |
||
|
Cash and Cash Equivalents and Restricted Cash at Beginning of Period |
|
$ |
313 |
|
$ |
563 |
|
Cash Flows from Operating Activities from Continuing Operations: |
|
|
|
|
|
|
|
Net Income |
|
|
129 |
|
|
136 |
|
Adjustments to reconcile net income to net cash provided from operating activities: |
|
|
|
|
|
|
|
Loss (gain) from discontinued operations, net of income taxes |
|
|
1 |
|
|
(80) |
|
Depreciation expense |
|
|
37 |
|
|
35 |
|
Amortization expense |
|
|
12 |
|
|
8 |
|
Amortization of debt issuance costs |
|
|
2 |
|
|
3 |
|
Amortization of lease right-of-use assets |
|
|
9 |
|
|
— |
|
Payments on fumigation related matters |
|
|
(1) |
|
|
— |
|
Realized (gain) on investment in frontdoor, inc. |
|
|
(40) |
|
|
— |
|
Loss on extinguishment of debt |
|
|
6 |
|
|
— |
|
Deferred income tax provision |
|
|
8 |
|
|
10 |
|
Stock-based compensation expense |
|
|
8 |
|
|
8 |
|
Gain on sale of marketable securities |
|
|
(1) |
|
|
— |
|
Restructuring charges |
|
|
10 |
|
|
12 |
|
Payments for restructuring charges |
|
|
(11) |
|
|
(8) |
|
Other |
|
|
(8) |
|
|
(4) |
|
Change in working capital, net of acquisitions: |
|
|
|
|
|
|
|
Receivables |
|
|
(18) |
|
|
(4) |
|
Inventories and other current assets |
|
|
(12) |
|
|
(25) |
|
Accounts payable |
|
|
27 |
|
|
25 |
|
Deferred revenue |
|
|
4 |
|
|
6 |
|
Accrued liabilities |
|
|
(7) |
|
|
(6) |
|
Accrued interest payable |
|
|
1 |
|
|
(2) |
|
Current income taxes |
|
|
5 |
|
|
22 |
|
Net Cash Provided from Operating Activities from Continuing Operations |
|
|
158 |
|
|
138 |
|
Cash Flows from Investing Activities from Continuing Operations: |
|
|
|
|
|
|
|
Property additions |
|
|
(15) |
|
|
(35) |
|
Government grant fundings for property additions |
|
|
— |
|
|
7 |
|
Sale of equipment and other assets |
|
|
— |
|
|
1 |
|
Business acquisitions, net of cash acquired |
|
|
(119) |
|
|
(149) |
|
Sales and maturities of available-for-sale securities |
|
|
3 |
|
|
— |
|
Origination of notes receivable |
|
|
(58) |
|
|
(54) |
|
Collections on notes receivable |
|
|
68 |
|
|
49 |
|
Net Cash Used for Investing Activities from Continuing Operations |
|
|
(121) |
|
|
(182) |
|
Cash Flows from Financing Activities from Continuing Operations: |
|
|
|
|
|
|
|
Borrowings of debt |
|
|
600 |
|
|
— |
|
Payments of debt |
|
|
(624) |
|
|
(110) |
|
Repurchase of common stock |
|
|
(17) |
|
|
— |
|
Issuance of common stock |
|
|
9 |
|
|
6 |
|
Net Cash Provided from (Used for) Financing Activities from Continuing Operations |
|
|
(32) |
|
|
(104) |
|
Cash Flows from Discontinued Operations: |
|
|
|
|
|
|
|
Cash (used for) provided from operating activities |
|
|
(2) |
|
|
141 |
|
Cash used for investing activities |
|
|
— |
|
|
(13) |
|
Cash used for financing activities |
|
|
— |
|
|
(6) |
|
Net Cash (Used for) Provided from Discontinued Operations |
|
|
(2) |
|
|
122 |
|
Cash Increase (Decrease) During the Period |
|
|
3 |
|
|
(25) |
|
Cash and Cash Equivalents and Restricted Cash at End of Period |
|
$ |
316 |
|
$ |
538 |
See accompanying Notes to the unaudited Condensed Consolidated Financial Statements
SERVICEMASTER GLOBAL HOLDINGS, INC.
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 services to residential and commercial customers in the termite, pest control, cleaning and restoration markets, operating through an extensive service network of more than 8,000 company‑owned locations and franchise and license agreements. Our mission is to simplify and improve the quality of our customers’ lives by delivering services that help them protect and maintain their homes or businesses, typically their most highly valued assets. Our portfolio of well‑recognized brands includes AmeriSpec (home inspections), Copesan (commercial national accounts pest management), Furniture Medic (cabinet and furniture repair), Merry Maids (residential cleaning), ServiceMaster Clean (commercial cleaning), ServiceMaster Restore (restoration), Terminix (residential termite and pest control) and Terminix Commercial (commercial termite and pest control). All consolidated Company subsidiaries are wholly-owned. Intercompany transactions and balances have been eliminated.
The unaudited condensed consolidated financial statements have been prepared by us 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”). We recommend that the quarterly unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC (the “2018 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 necessarily indicative of the results that might be achieved for any other interim period or for the full year.
American Home Shield Spin-off
On October 1, 2018, we completed the spin-off of our American Home Shield business. The separation was effectuated through a pro rata dividend (the “Distribution”) to our stockholders of approximately 80.2% of the outstanding shares of common stock of frontdoor, inc. (“Frontdoor”), which was formed as a wholly owned subsidiary to hold our American Home Shield business. The Distribution was made to our stockholders of record as of the close of business on September 14, 2018 (the “Record Date”), and such stockholders received one share of Frontdoor common stock for every two shares of ServiceMaster common stock held as of the close of business on the Record Date.
In March 2019, we exchanged all of the 19.8% of the outstanding shares of common stock of Frontdoor we retained for certain of our outstanding indebtedness, which obligations were subsequently cancelled and discharged upon delivery to us. See Note 12 for further discussion regarding this transaction.
The American Home Shield Segment is reported in this Quarterly Report on Form 10-Q in discontinued operations.
Note 2. Significant Accounting Policies
Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2018 Form 10-K. There have been no material changes to the significant accounting policies for the three and six months ended June 30, 2019, other than those described below.
Adoption of New Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (codified within FASB Accounting Standards Codification (“ASC”) 842) which is the final standard on accounting for leases. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, which amend ASU 2016-02 to provide companies an alternative transition method whereby it may elect to recognize and measure leases by applying the cumulative impact of adopting ASU 2016-02 to the opening retained earnings balance in the period of adoption, thereby removing the requirement that the financial statements of prior periods be restated. We utilized this alternative transition method. 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 this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. We adopted the new lease guidance effective January 1, 2019, and elected the available practical expedients upon adoption. See Note 13 for further discussion of our lease assets and liabilities.
The impacts of the adoption of this ASU on our condensed consolidated statements of financial position are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously reported, |
|
Impact of adopting |
|
|
|
||
|
(In millions) |
|
December 31, 2018 |
|
ASC 842 |
|
January 1, 2019 |
|||
|
Operating lease right-of-use assets |
|
$ |
— |
|
$ |
107 |
|
$ |
107 |
|
Finance lease assets, within Property and equipment, net |
|
|
89 |
|
|
— |
|
|
89 |
|
Total right-of-use assets |
|
$ |
89 |
|
$ |
107 |
|
$ |
195 |
|
Other assets |
|
|
87 |
|
|
— |
|
|
86 |
|
Total assets |
|
$ |
5,023 |
|
$ |
106 |
|
$ |
5,129 |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term lease liability |
|
$ |
— |
|
$ |
15 |
|
$ |
15 |
|
Long-term lease liability |
|
|
— |
|
|
120 |
|
|
120 |
|
Current finance lease liability, within Current portion of long-term debt |
|
|
31 |
|
|
— |
|
|
31 |
|
Long-term finance lease liability, within Long-term debt |
|
|
60 |
|
|
— |
|
|
60 |
|
Total lease liabilities |
|
$ |
90 |
|
$ |
135 |
|
$ |
225 |
|
Accrued liabilities, Other |
|
|
61 |
|
|
(1) |
|
|
60 |
|
Other long-term obligations, primarily self-insured claims |
|
|
182 |
|
|
(28) |
|
|
155 |
|
Total liabilities |
|
$ |
2,818 |
|
$ |
106 |
|
$ |
2,925 |
In August 2017, the FASB issued ASU 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 hedging 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. We adopted this ASU on January 1, 2019, and it did not have a significant impact on our financial condition or the results of our operations.
In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” This ASU does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. We adopted this ASU on January 1, 2019, and it did not have a significant impact on our financial condition or the results of our operations.
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The amendments in ASU 2018-15 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We early adopted this ASU on January 1, 2019, resulting in the capitalization of certain development costs, primarily related to our implementation of Salesforce to replace legacy operating systems.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018, with relief provided for filings made shortly after the final rule’s effective date in SEC Question 105.09 of the Exchange Act Forms C&DIs. We adopted this final rule on November 5, 2018, and modified our disclosures as necessary, which included the presentation of a condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 2019 and 2018.
In October 2018, the FASB issued ASU No. 2018-16, “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes,” which amends ASC 815, Derivatives and Hedging. This ASU adds the OIS rate based on SOFR to the list of permissible benchmark rates for hedge accounting purposes. We adopted the ASU on January 1, 2019, and it did not have a significant impact on our financial condition or the results of our operations.
Accounting Standards Issued But Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions and reasonable and supportable forecasts. This ASU will also require enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as the credit quality. The amendments in ASU 2016-13 will be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments — Credit Losses.” This ASU does not change the core principle of the guidance in ASU 2016-13; instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses standard. This ASU will have the same effective date and transition requirements as ASU 2016-13. We are currently evaluating the impact the adoption of ASU 2016-13 and ASU 2018-19 will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement.” This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in ASU 2018-13 will be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for the removed disclosures and delayed adoption is permitted until fiscal 2021 for the new disclosures. We are currently evaluating the disclosure changes necessary to our consolidated financial statements.
We have reviewed all other recently issued, but not yet effective, accounting pronouncements and do not expect the future adoption of any such pronouncements will have a material impact on our financial condition or the results of our operations.
Note 3. Revenues
Effective January 1, 2018, we adopted ASC 606, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.
The following table presents our reportable segment revenues, disaggregated by revenue source. We disaggregate revenue from contracts with customers into major product lines. We have determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. On April 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 fumigation completion services and the related renewals (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.
As noted in the business segment reporting information in Note 16, our reportable segments are Terminix and ServiceMaster Brands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
ServiceMaster Brands |
|
Total |
||||||||||||
|
|
|
Three months ended
|
|
Three months ended
|
|
Three months ended
|
||||||||||||
|
|
|
June 30, |
|
June 30, |
|
June 30, |
||||||||||||
|
(In millions) |
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
Major service line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Pest Control |
|
$ |
187 |
|
$ |
166 |
|
$ |
— |
|
$ |
— |
|
$ |
187 |
|
$ |
166 |
|
Commercial Pest Control |
|
|
100 |
|
|
88 |
|
|
— |
|
|
— |
|
|
100 |
|
|
88 |
|
Termite and Home Services |
|
|
171 |
|
|
163 |
|
|
— |
|
|
— |
|
|
171 |
|
|
163 |
|
Royalty Fees |
|
|
— |
|
|
— |
|
|
35 |
|
|
35 |
|
|
35 |
|
|
35 |
|
Commercial Cleaning National Accounts |
|
|
— |
|
|
— |
|
|
19 |
|
|
16 |
|
|
19 |
|
|
16 |
|
Sales of Products and Other |
|
|
25 |
|
|
24 |
|
|
12 |
|
|
12 |
|
|
36 |
|
|
36 |
|
Fumigation |
|
|
12 |
|
|
15 |
|
|
— |
|
|
— |
|
|
12 |
|
|
15 |
|
Total |
|
$ |
495 |
|
$ |
456 |
|
$ |
65 |
|
$ |
64 |
|
$ |
560 |
|
$ |
520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
ServiceMaster Brands |
|
Total |
||||||||||||
|
|
|
Six months ended |
|
Six months ended |
|
Six months ended |
||||||||||||
|
|
|
June 30, |
|
June 30, |
|
June 30, |
||||||||||||
|
(In millions) |
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
Major service line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Pest Control |
|
$ |
346 |
|
$ |
306 |
|
$ |
— |
|
$ |
— |
|
$ |
346 |
|
$ |
306 |
|
Commercial Pest Control |
|
|
188 |
|
|
150 |
|
|
— |
|
|
— |
|
|
188 |
|
|
150 |
|
Termite and Home Services |
|
|
317 |
|
|
303 |
|
|
— |
|
|
— |
|
|
317 |
|
|
303 |
|
Royalty Fees |
|
|
— |
|
|
— |
|
|
69 |
|
|
68 |
|
|
69 |
|
|
68 |
|
Janitorial National Accounts |
|
|
— |
|
|
— |
|
|
36 |
|
|
31 |
|
|
36 |
|
|
31 |
|
Sales of Products and Other |
|
|
41 |
|
|
39 |
|
|
22 |
|
|
24 |
|
|
63 |
|
|
63 |
|
Fumigation |
|
|
22 |
|
|
25 |
|
|
— |
|
|
— |
|
|
22 |
|
|
25 |
|
Corporate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1 |
|
|
1 |
|
Total |
|
$ |
914 |
|
$ |
823 |
|
$ |
128 |
|
$ |
123 |
|
$ |
1,042 |
|
$ |
947 |
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Contracts with customers are generally for a period of one year or less and are generally renewable. We record a receivable related to revenue recognized on services once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivables are recorded within Receivables, less allowances, on the condensed consolidated statements of financial position. The current portion of Notes receivable, which represents amounts financed for customers through our financing subsidiary, are included within Receivables, less allowances, on the condensed consolidated statement of financial position and totaled $45 million and $42 million as of June 30, 2019 and December 31, 2018, respectively.
Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. For Terminix, amounts are recognized as revenue upon completion of services.
Deferred revenue by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
||
|
(In millions) |
|
June 30, 2019 |
|
December 31, 2018 |
||
|
Terminix |
|
$ |
97 |
|
$ |
91 |
|
ServiceMaster Brands(1) |
|
|
10 |
|
|
11 |
|
Total |
|
$ |
107 |
|
$ |
101 |
___________________________________
(1)Includes approximately $6 million and $7 million of ServiceMaster Brands Deferred revenue included within Other long-term obligations, primarily self-insurance claims on the condensed consolidated statement of financial position as of June 30, 2019 and December 31, 2018, respectively.
Changes in deferred revenue for the six months ended June 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
(In millions) |
|
Deferred revenue |
|
|
Balance, December 31, 2018 |
|
$ |
101 |
|
Deferral of revenue |
|
|
76 |
|
Recognition of deferred revenue |
|
|
(70) |
|
Balance, June 30, 2019 |
|
$ |
107 |
|
|
|
|
|
|
Balance, January 1, 2018 |
|
$ |
101 |
|
Deferral of revenue |
|
|
83 |
|
Recognition of deferred revenue |
|
|
(76) |
|
Balance, June 30, 2018 |
|
$ |
108 |
There was approximately $20 million and $47 million of revenue recognized in the three and six months ended June 30, 2019, respectively, that was included in the deferred revenue balance as of December 31, 2018. There was approximately $20 million and $49 million of revenue recognized in the three and six months ended June 30, 2018, respectively, that was included in the deferred revenue balance as of January 1, 2018, the date we adopted ASC 606.
Note 4. Restructuring Charges
We incurred restructuring charges of $3 million ($2 million, net of tax) in the three months ended June 30, 2019. We incurred no restructuring charges for the three months ended June 30, 2018. We incurred restructuring charges of $10 million ($7 million, net of tax) and $12 million ($10 million, net of tax) in the six months ended June 30, 2019 and 2018, respectively. Restructuring charges were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Terminix(1) |
|
$ |
1 |
|
$ |
(1) |
|
$ |
3 |
|
$ |
2 |
|
ServiceMaster Brands(2) |
|
|
1 |
|
|
— |
|
|
2 |
|
|
— |
|
Corporate(3) |
|
|
1 |
|
|
— |
|
|
5 |
|
|
3 |
|
Global Service Center relocation(4) |
|
|
— |
|
|
1 |
|
|
1 |
|
|
7 |
|
Total restructuring charges |
|
$ |
3 |
|
$ |
— |
|
$ |
10 |
|
$ |
12 |
___________________________________
(1)For the three and six months ended June 30, 2019, these charges included $1 million and $3 million, respectively, of severance and other costs. Severance and other costs of $1 million were unpaid and accrued as of June 30, 2019, which includes amounts previously accrued as of December 31, 2018. For the three and six months ended June 30, 2018, restructuring charges included a $1 million reserve adjustment associated with previous restructuring initiatives and $2 million of severance and other costs, respectively.
(2)For the three and six months ended June 30, 2019, these charges included $1 million and $2 million, respectively, of severance costs, of which less than $1 million were unpaid as of June 30, 2019.
(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 three and six months ended June 30, 2019, these charges included $1 million and $4 million, respectively, of professional fees, accelerated depreciation and other costs to enhance capabilities and align corporate functions with those required to support our strategic needs after the American Home Shield spin-off. For the six months ended June 30, 2019 and 2018, these charges included $1 million and $3 million of severance and other costs. Corporate restructuring costs of $1 million were unpaid and accrued as of June 30, 2019, which includes amounts previously accrued as of December 31, 2018.
(4)For the three months ended June 30, 2018, these charges included lease termination and other charges of $1 million, related to the relocation of our Global Service Center. For the six months ended June 30, 2019 and 2018, these charges included lease termination and other charges of $1 million and $7 million, respectively, related to the relocation. Global Service Center relocation costs of $2 million were unpaid and accrued as of June 30, 2019, which includes amounts previously accrued as of December 31, 2018.
The pretax charges discussed above are reported in Restructuring charges in the unaudited condensed consolidated statements of operations and comprehensive income.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
Restructuring |
|
|
(In millions) |
|
Charges |
|
|
Balance as of December 31, 2018 |
|
$ |
7 |
|
Costs incurred |
|
|
10 |
|
Costs paid or otherwise settled |
|
|
(13) |
|
Balance as of June 30, 2019 |
|
$ |
4 |
|
|
|
|
|
|
Balance as of December 31, 2017 |
|
$ |
6 |
|
Costs incurred |
|
|
12 |
|
Costs paid or otherwise settled |
|
|
(9) |
|
Balance as of June 30, 2018 |
|
$ |
10 |
We expect substantially all of our accrued restructuring charges to be paid by December 31, 2019.
Note 5. Discontinued Operations
American Home Shield Spin-off
On October 1, 2018, we completed the spin-off of our American Home Shield business. The separation was effectuated through a Distribution to our stockholders of approximately 80.2% of the outstanding shares of common stock of Frontdoor. The Distribution was made to our stockholders of record as of the close of business on September 14, 2018, and such stockholders received one share of Frontdoor common stock for every two shares of ServiceMaster common stock held as of the close of business on the Record Date.
In March 2019, we exchanged all of the 19.8% of the outstanding shares of common stock of Frontdoor we retained for certain of our outstanding indebtedness, which obligations were subsequently cancelled and discharged upon delivery to us. See Note 12 for further discussion regarding this transaction.
The American Home Shield Segment is reported in this Quarterly Report on Form 10-Q in discontinued operations.
In connection with the American Home Shield spin-off, the Company and Frontdoor entered into (1) a separation and distribution agreement containing key provisions relating to the separation of Frontdoor effectuated through the Distribution, as well as insurance coverage, non-competition, indemnification and other matters, (2) an employee matters agreement allocating liabilities and responsibilities relating to employee benefit plans and programs and other related matters and (3) a tax matters agreement governing the respective rights, responsibilities and obligations of the parties thereto with respect to taxes, including allocating liabilities for income taxes attributable to Frontdoor and its subsidiaries generally to the Company for tax periods (or portions thereof) ending on or before October 1, 2018, and generally to Frontdoor for tax periods (or portions thereof) beginning after that date.
The charges for the transition services are designed to allow us to fully recover the direct costs of providing the services, plus specified margins and any out-of-pocket costs and expenses. The services provided under the transition services agreement will terminate at various specified times, and in no event later than December 31, 2019. Frontdoor may terminate the transition services agreement (or certain services under the transition services agreement) for convenience upon 90 days written notice, in which case Frontdoor will be required to reimburse us for early termination costs. Under this transition services agreement, in both the three and six months ended June 30, 2019, we recorded approximately $1 million of fees from Frontdoor, which are included, net of costs incurred, in Selling and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Payments received during both the three and six months ended June 30, 2019 totaled approximately $1 million.
The Company and Frontdoor also entered into a sublease agreement for the space Frontdoor retained in our Global Service Center and Memphis customer care center after the spin-off. We recognized approximately $1 million of rental income in both the three and six months ended June 30, 2019, respectively, and $1 million and $4 million of other cost reimbursements related to these sublease agreements during the three and six months ended June 30, 2019, respectively, which were recorded as a reduction of Selling and administrative expenses on the condensed consolidated statements of operations and comprehensive income. Payments received under the sublease agreements during the three and six months ended June 30, 2019 totaled $3 million and $4 million, respectively.
Financial Information for Discontinued Operations
Gain from discontinued operations, net of income taxes, for all periods presented includes the operating results of Frontdoor and previously sold businesses.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||
|
(In millions) |
|
June 30, 2018 |
|
June 30, 2018 |
||
|
Revenue |
|
$ |
355 |
|
$ |
602 |
|
Cost of services rendered and products sold |
|
|
196 |
|
|
331 |
|
Operating expenses(1) |
|
|
88 |
|
|
169 |
|
Interest and net investment income |
|
|
(1) |
|
|
(1) |
|
Income before income taxes |
|
|
71 |
|
|
103 |
|
Provision for income taxes |
|
|
15 |
|
|
23 |
|
Gain from discontinued operations, net of income taxes |
|
$ |
56 |
|
$ |
80 |
___________________________________
(1)Includes spin-off transaction costs incurred of $8 million and $15 million for the three and six months ended June 30, 2018.
The following selected financial information of Frontdoor is included in the statements of cash flows as cash flows from discontinued operations:
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
(In millions) |
|
June 30, 2018 |
|
|
Depreciation |
|
$ |
5 |
|
Amortization |
|
|
4 |
|
Capital expenditures |
|
|
(14) |
Note 6. Commitments and Contingencies
We carry insurance policies on insurable risks at levels that we believe to be appropriate, including workers’ compensation, automobile and general liability risks. We purchase insurance policies from third-party insurance carriers, which typically incorporate significant deductibles or self-insured retentions. We are 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 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 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.
In the normal course of business, we periodically enter into agreements that incorporate indemnification provisions. While the maximum amount to which we may be exposed under such agreements cannot be estimated, we do not expect these guarantees and indemnifications to have a material effect on our business, financial condition, results of operations or cash flows.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
Self-insured |
|
|
(In millions) |
|
Claims, Net |
|
|
Balance as of December 31, 2018 |
|
$ |
111 |
|
Provision for self-insured claims |
|
|
18 |
|
Cash payments |
|
|
(14) |
|
Balance as of June 30, 2019 |
|
$ |
115 |
|
|
|
|
|
|
Balance as of December 31, 2017 |
|
$ |
115 |
|
Provision for self-insured claims |
|
|
17 |
|
Cash payments |
|
|
(18) |
|
Balance as of June 30, 2018 |
|
$ |
114 |
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.
We have certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. 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.
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 a 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 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 fumigation matter, which could be material, is not currently known, and any such further penalties, fines, sanctions, costs or damages would not be covered under our general liability insurance policies.
In addition to the matter discussed above, in the ordinary course of conducting business activities, we and our 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. We have entered into settlement agreements in certain cases, including with respect to putative collective and class actions, which are subject to court or other approvals, and which require compliance with the terms of the agreements. If one or more of our settlements are not finally approved and implemented, we could have additional or different exposure, which could be material. Subject to the paragraphs above, we do not expect any of these proceedings to have a material effect on our reputation, business, financial position, results of operations or cash flows; however, we can give no assurance that the results of any such proceedings will not materially affect our reputation, business, financial position, results of operations and cash flows.
Note 7. Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets, primarily trade names, 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. Our annual assessment date is October 1. There were no impairment charges recorded in the three and six months ended June 30, 2019 and 2018. There were no accumulated impairment losses recorded as of June 30, 2019. The table below summarizes the goodwill balances for continuing operations by reportable segment and Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ServiceMaster |
|
|
|
|
|
||
|
(In millions) |
|
Terminix |
|
Brands |
|
Corporate |
|
Total |
||||
|
Balance as of December 31, 2018 |
|
$ |
1,781 |
|
$ |
175 |
|
$ |
— |
|
$ |
1,956 |
|
Acquisitions |
|
|
72 |
|
|
5 |
|
|
3 |
|
|
80 |
|
Impact of foreign exchange rates |
|
|
1 |
|
|
— |
|
|
— |
|
|
1 |
|
Balance as of June 30, 2019 |
|
$ |
1,854 |
|
$ |
180 |
|
$ |
3 |
|
$ |
2,038 |
The table below summarizes the other intangible asset balances for continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019 |
|
As of December 31, 2018 |
||||||||||||||
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Accumulated |
|
|
|
||
|
(In millions) |
|
Gross |
|
Amortization |
|
Net |
|
Gross |
|
Amortization |
|
Net |
||||||
|
Trade names(1) |
|
$ |
1,482 |
|
$ |
— |
|
$ |
1,482 |
|
$ |
1,482 |
|
$ |
— |
|
$ |
1,482 |
|
Customer relationships |
|
|
513 |
|
|
(413) |
|
|
100 |
|
|
469 |
|
|
(406) |
|
|
64 |
|
Franchise agreements |
|
|
88 |
|
|
(74) |
|
|
14 |
|
|
88 |
|
|
(73) |
|
|
15 |
|
Other |
|
|
66 |
|
|
(38) |
|
|
28 |
|
|
62 |
|
|
(35) |
|
|
27 |
|
Total |
|
$ |
2,149 |
|
$ |
(525) |
|
$ |
1,625 |
|
$ |
2,101 |
|
$ |
(513) |
|
$ |
1,588 |
___________________________________
(1)Not subject to amortization.
For the existing intangible assets, we anticipate amortization expense for the remainder of 2019 and each of the next five years of $11 million, $22 million, $21 million, $19 million, $16 million and $11 million, respectively.
Note 8. Stock-Based Compensation
For the three months ended June 30, 2019 and 2018, we recognized stock-based compensation expense of $4 million ($3 million, net of tax) and $4 million ($3 million, net of tax), respectively. For the six months ended June 30, 2019 and 2018, we recognized stock-based compensation expense of $8 million ($6 million, net of tax) and $8 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.
As of June 30, 2019, there was $33 million of total unrecognized compensation costs related to non-vested stock options, restricted stock units (“RSUs”) and performance share units granted under the Amended and Restated ServiceMaster Global Holdings, Inc. 2014 Omnibus Incentive Plan (the “Omnibus Incentive Plan”). These remaining costs are expected to be recognized over a weighted-average period of 2.36 years.
On February 24, 2015, our board of directors approved and recommended for approval by our stockholders the ServiceMaster Global Holdings, Inc. Employee Stock Purchase Plan (“Employee Stock Purchase Plan”), which became effective for offering periods commencing July 1, 2015. The Employee Stock Purchase Plan was intended to qualify for the favorable tax treatment under Section 423 of the Code. Under the plan, eligible employees of the Company may purchase common stock, subject to IRS limits, during pre-specified offering periods at a discount established by the Company not to exceed 10 percent of the then current fair market value. On April 27, 2015, our stockholders approved the Employee Stock Purchase Plan with a maximum of one million shares of common stock authorized for sale under the plan. On November 3, 2015, we filed a registration statement on Form S-8 under the Securities Act to register the one million shares of common stock that may be issued under the Employee Stock Purchase Plan and, as a result, all shares of common stock acquired under the Employee Stock Purchase Plan will be freely tradable under the Securities Act, unless purchased by our affiliates. Our Compensation Committee amended the Employee Stock Purchase Plan in February 2019 to allow for more frequent purchase periods and to change the allowed 10 percent discount to a company match of 10 percent of employee contributions. The authorized number of shares remaining in the Employee Stock Purchase Plan was not changed from 843,584 and the expiration date of the Employee Stock Purchase Plan was not changed from April 27, 2025.
Stock Options
In February 2019, our board of directors approved an amended Employee Stock Option Agreement, whereby all options granted in 2019 and thereafter will generally vest in three equal annual installments (rather than four), have a term of eight years (rather than 10 years) and remain subject to an employee’s continued employment. The three year vesting period is the requisite service period over which compensation cost will be recognized on a straight-line basis for all grants. All options issued are accounted for as equity-classified awards.
On January 1, 2019, in connection with an acquisition, we granted 136,092 RSUs to an executive key to our urban markets strategy. All such RSUs cliff vest on the third anniversary of their grant and are subject to the executive’s continued employment.
Note 9. Comprehensive Income
Comprehensive income, which primarily includes net income, unrealized gain (loss) on derivative instruments and the effect of foreign currency translation, is included in the condensed consolidated statements of operations and comprehensive income. Unrealized gains on marketable securities of $3 million ($2 million, net of tax) were included in other comprehensive income prior to our adoption of ASU 2016-01 on January 1, 2018. Subsequent to the adoption, these unrealized gains have been reclassified to retained earnings. Additionally, stranded tax effects of approximately $4 million resulting from the corporate income tax rate change in U.S. Tax Reform were reclassified upon our adoption of ASU 2018-02 on January 1, 2018. The income tax effects remaining in Accumulated other comprehensive income will be released into earnings as the related pre-tax amounts are reclassified to earnings.
During the six months ended June 30, 2019, we terminated $479 million of our interest rate swap and received $12 million from the counterparty. The fair value of the terminated portion of the interest rate swap of $12 million is recorded within accumulated other comprehensive income on the condensed consolidated statements of financial position and will be amortized into interest expense over the original term of the agreement.
The following tables summarize the activity in accumulated other comprehensive income, net of the related tax effects.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
Gains (Losses) |
|
|
|
|
|
|
||
|
|
|
Gains |
|
on Available |
|
Foreign |
|
|
|
|||
|
|
|
(Losses) on |
|
-for-Sale |
|
Currency |
|
|
|
|||
|
(In millions) |
|
Derivatives |
|
Securities |
|
Translation |
|
Total |
||||
|
Balance as of December 31, 2018 |
|
$ |
20 |
|
$ |
— |
|
$ |
(15) |
|
$ |
5 |
|
Other comprehensive income before reclassifications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax amount |
|
|
(11) |
|
|
— |
|
|
2 |
|
|
(9) |
|
Tax provision |
|
|
6 |
|
|
— |
|
|
— |
|
|
6 |
|
After-tax amount |
|
|
(5) |
|
|
— |
|
|
2 |
|
|
(3) |
|
Amounts reclassified from accumulated other comprehensive income(1) |
|
|
(2) |
|
|
— |
|
|
— |
|
|
(2) |
|
Net current period other comprehensive income |
|
|
(7) |
|
|
— |
|
|
2 |
|
|
(5) |
|
Balance as of June 30, 2019 |
|
$ |
13 |
|
$ |
— |
|
$ |
(13) |
|
$ |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017 |
|
$ |
16 |
|
$ |
2 |
|
$ |
(12) |
|
$ |
5 |
|
Reclassification of unrealized gain/loss on equity securities |
|
|
— |
|
|
(2) |
|
|
— |
|
|
(2) |
|
Reclassification of tax rate change |
|
|
3 |
|
|
1 |
|
|
— |
|
|
4 |
|
As revised, January 1, 2018 |
|
|
19 |
|
|
— |
|
|
(12) |
|
|
7 |
|
Other comprehensive income before reclassifications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax amount |
|
|
20 |
|
|
— |
|
|
(2) |
|
|
18 |
|
Tax benefit |
|
|
(5) |
|
|
— |
|
|
— |
|
|
(5) |
|
After-tax amount |
|
|
14 |
|
|
— |
|
|
(2) |
|
|
13 |
|
Amounts reclassified from accumulated other comprehensive income(1) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Net current period other comprehensive income |
|
|
15 |
|
|
— |
|
|
(2) |
|
|
13 |
|
Balance as of June 30, 2018 |
|
$ |
34 |
|
$ |
— |
|
$ |
(13) |
|
$ |
20 |
___________________________________
(1)Amounts are net of tax. Reclassifications out of accumulated other comprehensive income included the following components for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated |
||||||||||
|
|
|
Other Comprehensive Income |
||||||||||
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Gains (losses) on derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel swap contracts |
|
$ |
— |
|
$ |
1 |
|
$ |
— |
|
$ |
1 |
|
Interest rate swap contracts |
|
|
2 |
|
|
— |
|
|
3 |
|
|
(2) |
|
Net losses on derivatives |
|
|
2 |
|
|
— |
|
|
3 |
|
|
— |
|
Impact of income taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total reclassifications for the period |
|
$ |
2 |
|
$ |
— |
|
$ |
2 |
|
$ |
— |
Note 10. Supplemental Cash Flow Information
Supplemental information relating to the condensed consolidated statements of cash flows is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||
|
|
|
June 30, |
||||
|
(In millions) |
|
2019 |
|
2018 |
||
|
Cash paid for or (received from): |
|
|
|
|
|
|
|
Interest expense(1) |
|
$ |
42 |
|
$ |
69 |
|
Interest and dividend income |
|
|
(2) |
|
|
(2) |
|
Income taxes, net of refunds |
|
|
17 |
|
|
13 |
___________________________________
(1)For the six months ended June 30, 2019, excludes $12 million received in connection with our partial terminations of the interest rate swap.
As of June 30, 2019 and December 31, 2018, Cash and cash equivalents of $228 million and $224 million, respectively, and Restricted cash of $89 million and $89 million, respectively, as presented on the condensed consolidated statements of financial position represent the amounts comprising Cash and cash equivalents and Restricted cash of $316 million and $313 million, respectively, on the condensed consolidated statement of cash flows.
As of June 30, 2018 and December 31, 2017, Cash and cash equivalents of $135 million and $192 million, respectively, and Restricted cash of $89 million and $89 million, respectively, as presented on the condensed consolidated statements of financial position, and cash related to discontinued operations of $314 million and $282 million, respectively, represent the amounts comprising Cash and cash equivalents and restricted cash of $538 million and $563 million, respectively, on the condensed consolidated statement of cash flows.
We acquired $23 million and $10 million of property and equipment through finance leases and other non-cash financing transactions in each of the six months ended June 30, 2019 and 2018, respectively, which have been excluded from the condensed consolidated statements of cash flows as non-cash investing and financing activities.
The proceeds from the Frontdoor debt issuances described in Note 12 were retained by the lender in satisfaction of the short-term credit facility and have been excluded from the condensed consolidated statements of cash flows as non-cash financing activities.
The non-cash lease transactions resulting from our adoption of ASC 842 are described in Note 13.
Note 11. 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 June 30, 2019 and December 31, 2018, our marketable securities consisted primarily of a deferred compensation trust (“Debt securities”) and common equity securities (“Equity securities”). The amortized cost, fair value and gross realized and unrealized gains and losses of our short- and long-term investments in Debt and Equity securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Realized |
|
Gross Realized |
|
|
|
||
|
|
|
Amortized |
|
and Unrealized |
|
and Unrealized |
|
Fair |
||||
|
(In millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
||||
|
June 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
$ |
4 |
|
$ |
— |
|
$ |
— |
|
$ |
4 |
|
Equity securities |
|
|
13 |
|
|
2 |
|
|
— |
|
|
15 |
|
Total securities |
|
$ |
17 |
|
$ |
2 |
|
$ |
— |
|
$ |
19 |
|
December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
$ |
4 |
|
$ |
— |
|
$ |
— |
|
$ |
4 |
|
Equity securities |
|
|
15 |
|
|
1 |
|
|
— |
|
|
16 |
|
Total securities |
|
$ |
19 |
|
$ |
1 |
|
$ |
— |
|
$ |
21 |
We account for Equity securities at fair value with adjustments to fair value recognized in Interest and net investment income in the condensed consolidated statements of operations and comprehensive income. There was $1 million of unrealized gains and $1 million of realized gains recognized within Interest and net investment income in the condensed consolidated statements of operations and comprehensive income in both the three and six months ended June 30, 2019. There were insignificant unrealized gains and losses recognized in the three and six months ended June 30, 2018.
We periodically review our Debt securities to determine whether there has been an other than temporary decline in value. There were no impairment charges due to declines in the value of these investments for the three and six months ended June 30, 2019 and 2018.
Additionally, we hold minority interests in several strategic investments that do not have readily determinable fair values and are recorded at cost and are remeasured upon the occurrence of observable price changes or impairments. We account for these
investments at fair value with adjustments to fair value recognized in our condensed consolidated statements of operations within Interest and net investment income. The investments are included within Other Assets on the condensed consolidated statements of financial position. At June 30, 2019, the carrying amount of these investments was $4 million.
Note 12. Long-Term Debt
Long-term debt is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
||
|
|
|
June 30, |
|
December 31, |
||
|
(In millions) |
|
2019 |
|
2018 |
||
|
Senior secured term loan facility maturing in 2023(1) |
|
$ |
169 |
|
$ |
637 |
|
Revolving credit facility maturing in 2021 |
|
|
— |
|
|
— |
|
5.125% notes maturing in 2024(2) |
|
|
741 |
|
|
740 |
|
7.45% notes maturing in 2027(3) |
|
|
166 |
|
|
172 |
|
7.25% notes maturing in 2038(3) |
|
|
40 |
|
|
42 |
|
Vehicle finance leases(4) |
|
|
93 |
|
|
90 |
|
Other(5) |
|
|
96 |
|
|
94 |
|
Less current portion |
|
|
(53) |
|
|
(49) |
|
Total long-term debt |
|
$ |
1,252 |
|
$ |
1,727 |
__________________________________
(1)As of June 30, 2019 and December 31, 2018, presented net of $1 million and $5 million, respectively, in unamortized debt issuance costs. As of December 31, 2018, presented net of $1 million in unamortized original issue discount paid.
(2)As of June 30, 2019 and December 31, 2018, presented net of $9 million and $10 million, respectively, in unamortized debt issuance costs.
(3)As of June 30, 2019 and December 31, 2018, collectively presented net of $30 million and $33 million, respectively, of unamortized fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown above.
(4)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. 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 percent.
(5)As of June 30, 2019 and December 31, 2018, includes approximately $84 million and $82 million, respectively, of future payments in connection with our acquisitions of Copesan and other companies as further described in Note 14.
Extinguishment of Debt and Repurchase of Notes
On March 12, 2019, we borrowed an aggregate principal amount of $600 million under a short-term credit facility to effectuate a debt-for-equity exchange of our Frontdoor retained shares. The proceeds of this short-term credit facility were used to repay $468 million aggregate principal amount of term loans outstanding under our senior secured term loan facility in March and April of 2019. Such prepayments resulted in a loss on extinguishment of debt of $4 million for the six months ended June 30, 2019.
On March 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 (proceeds of $486 million, net), plus used $114 million of proceeds from the short-term credit facility, to extinguish $600 million of our indebtedness under the short-term credit facility. The sale of the Frontdoor common stock resulted in a realized gain of $40 million, which was recorded within Realized (gain) on investment in frontdoor, inc. on the condensed consolidated statements of operations and comprehensive income for the six months ended June 30, 2019.
In March 2019, we purchased approximately $7 million in aggregate principal amount of our 7.45% notes maturing in 2027 at a price of 105.5% and $3 million in aggregate principal amount of our 7.25% notes maturing in 2038 at a price of 99.5% using available cash. The repurchased notes were delivered to the trustee for cancellation. In connection with these partial repurchases, we recorded a loss on extinguishment of debt of $2 million in the six months ended June 30, 2019.
In April 2019, we purchased $1 million in aggregate principal amount of our 7.45% notes maturing in 2027 at a price of 105.5%.
The proceeds from and the use of proceeds in connection with the debt-for-equity exchange are as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
Proceeds from the short-term credit facility |
$ |
600 |
|
Proceeds from the Frontdoor common shares retained, net of $16 million of fees paid |
|
486 |
|
Total proceeds |
$ |
1,086 |
|
|
|
|
|
Repayment of the term loan facility, including loss on extinguishment of debt of $4 million |
$ |
(472) |
|
Debt-for-equity exchange using net proceeds from the Frontdoor common shares retained |
|
(486) |
|
Repurchase of 2027 and 2038 notes, including loss on extinguishment of debt of $2 million |
|
(12) |
|
Interest and other payments |
|
(1) |
|
Use of cash to retire short-term credit facility |
|
(114) |
|
Total uses |
$ |
(1,086) |
In connection with the prepayments on our senior secured term loan facility, we terminated $479 million of our interest rate swap agreement, receiving $12 million in connection with the terminations. The fair value of the terminated portions of the agreement of $12 million is recorded within accumulated other comprehensive income on the condensed consolidated statements of financial position and will be amortized into interest expense over the original term of the agreement.
Interest Rate Swaps
On November 7, 2016, we entered into a seven year interest rate swap agreement effective November 8, 2016. The notional amount of the agreement was $650 million. Under the terms of the agreement, we will pay a fixed rate of interest of 1.493 percent on the $650 million notional amount, and we will receive a floating rate of interest (based on one-month LIBOR, subject to a floor of zero percent) on the notional amount. Therefore, during the term on the agreement, the effective interest rate on $650 million of the Term Loan Facility is fixed at a rate of 1.493 percent, plus the incremental borrowing margin of 2.50 percent.
The changes in our interest rate swap agreement, as well as the cumulative interest rate swap outstanding, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
||
|
(In millions) |
|
Amount |
|
Fixed Rate(1) |
||
|
Interest rate swap agreement in effect as of December 31, 2018 |
|
$ |
650 |
|
1.493 |
% |
|
Terminated |
|
|
(441) |
|
|
|
|
Interest rate swap agreement in effect as of March 31, 2019 |
|
|
209 |
|
1.493 |
% |
|
Terminated |
|
|
(38) |
|
|
|
|
Interest rate swap agreement in effect as of June 30, 2019 |
|
$ |
171 |
|
1.493 |
% |
___________________________________
(1)Before the application of the applicable borrowing margin.
In accordance with accounting standards for derivative instruments and hedging activities, and as further described in Note 17, our interest rate swap agreement is classified as a cash flow hedge, and, as such, is recorded on the condensed consolidated statements of financial position as either an asset or liability at fair value, with changes in fair value attributable to the hedged risks recorded in accumulated other comprehensive income.
Note 13. Leases
We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets, Current portion of lease liability and Long-term lease liability on the condensed consolidated statements of financial position. Finance leases are included in Property and equipment, net; Current portion of long-term debt and Long-term debt on the condensed consolidated statements of financial position.
We lease a variety of facilities, principally in the United States, for branch and service center operations and for office, storage, customer care centers and data processing space. These leases are classified as operating leases. Our facilities leases have remaining lease terms of less than one year to 23 years, some of which may include options to extend the leases for up to 15 years, and some of which may include options to terminate the leases within one year. These lease agreements contain lease and non-lease components. Non-lease components include items such as common area maintenance. For facility leases, we account for the lease and non-lease components as a single lease component.
Additionally, our Fleet Agreement allows us to obtain fleet vehicles through a leasing program. These leases are classified as finance leases. Our vehicle leases have remaining lease terms of less than one year to eight years. For vehicle leases, we account for the lease and non-lease components separately.
Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments, including fixed non-lease components, over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments and fixed non-lease components is recognized on a straight-line basis over the lease term.
As of June 30, 2019, assets recorded under finance leases were $205 million and accumulated depreciation associated with finance leases was $114 million.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
||
|
(In millions) |
|
June 30, 2019 |
|
June 30, 2019 |
||
|
Finance lease cost |
|
|
|
|
|
|
|
Depreciation of finance lease ROU assets |
|
$ |
8 |
|
$ |
16 |
|
Interest on finance lease liabilities |
|
|
1 |
|
|
2 |
|
Operating lease cost |
|
|
7 |
|
|
13 |
|
Variable lease cost |
|
|
1 |
|
|
1 |
|
Sublease income |
|
|
(1) |
|
|
(1) |
|
Total lease cost |
|
$ |
16 |
|
$ |
32 |
Supplemental cash flow information and other information for leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
||
|
(In millions) |
|
|
|
|
June 30, 2019 |
||
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows for operating leases |
|
|
|
|
$ |
12 |
|
|
Operating cash flows for finance leases |
|
|
|
|
|
2 |
|
|
Financing cash flows for finance leases |
|
|
|
|
|
16 |
|
|
ROU assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
5 |
|
|
Finance leases |
|
|
|
|
|
23 |
|
|
Weighted Average Remaining Lease Term (in years): |
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
10.78 |
|
|
Finance leases |
|
|
|
|
|
3.73 |
|
|
Weighted Average Discount Rate: |
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
5.55 |
% |
|
Finance leases |
|
|
|
|
|
3.85 |
% |
As of June 30, 2019, there was $33 million and $60 million of finance leases included within Current portion of long-term debt and Long-term debt, respectively, on the condensed consolidated statements of financial position. Future minimum lease payments under non-cancellable leases as of June 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
Operating Leases |
|
Finance Leases |
||
|
Year ended December 31, |
|
|
|
|
|
|
|
2019 (excluding the six months ended June 30, 2019) |
|
$ |
11 |
|
$ |
18 |
|
2020 |
|
|
25 |
|
|
33 |
|
2021 |
|
|
20 |
|
|
25 |
|
2022 |
|
|
18 |
|
|
14 |
|
2023 |
|
|
14 |
|
|
8 |
|
Thereafter |
|
|
95 |
|
|
2 |
|
Total future minimum lease payments |
|
|
184 |
|
|
101 |
|
Less imputed interest |
|
|
(51) |
|
|
(7) |
|
Total |
|
$ |
133 |
|
$ |
93 |
Following is a summary of the future minimum lease payments due under capital and operating leases with terms of more than one year at December 31, 2018:
|
|
|
|
|
|
|
|
|
(In millions) |
|
Operating Leases |
|
Capital Leases |
||
|
Year ended December 31, |
|
|
|
|
|
|
|
Less than 1 Yr |
|
$ |
17 |
|
$ |
31 |
|
1 - 3 Yrs |
|
|
36 |
|
|
46 |
|
3 - 5 Yrs |
|
|
25 |
|
|
14 |
|
More than 5 Yrs |
|
|
67 |
|
|
1 |
|
Total future minimum lease payments |
|
$ |
146 |
|
$ |
92 |
As of June 30, 2019, we have additional vehicle finance leases that have not yet commenced of $9 million. These leases are scheduled to commence in 2019 with lease terms generally of five years.
Practical Expedients
We adopted the new standard using the modified retrospective approach and applied the transition approach as of the beginning of the period of adoption. We adopted the package of practical expedients and therefore did not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs for all leases. We elected to make the accounting policy election for short-term leases resulting in lease payments being recorded as an expense on a straight-line basis over the lease term. We elected to not separate lease and non-lease components for real estate operating leases. We did not elect the hindsight practical expedient.
Impact of ASC 842 on the Condensed Consolidated Financial Statements
Changes to the condensed consolidated statements of financial position include the recognition of an operating lease right-of-use asset, a current portion of lease liability and long-term lease liability. Changes to the condensed consolidated statements of cash flows include the presentation of ROU asset amortization. The adoption of ASC 842 did not have a significant impact on the Company’s condensed consolidated statements of operations and comprehensive income.
Note 14. Acquisitions
Acquisitions have been accounted for as business combinations 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. Asset acquisitions have been accounted for under ASU 2017-01. 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 six months ended June 30, 2019, we completed 20 acquisitions, including 19 pest acquisitions and the reacquisition of a ServiceMaster Brands franchisee, which were accounted for as business combinations. We funded $119 million at closing for these acquisitions using available cash on hand. Another $13 million of deferred purchase price is due to the sellers between one year and five years from the acquisition dates. As a result of these acquisitions, we recorded preliminary values of $81 million of goodwill, $4 million of tradenames and $44 million of customer relationships. As of June 30, 2019, the purchase price allocations for these acquisitions have not been finalized as we are still evaluating working capital balances and the fair value and useful lives of the acquired intangible assets. We expect to complete the purchase price allocations no later than the second quarter of 2020.
During the six months ended June 30, 2018, we completed the acquisition of Copesan and four additional pest control acquisitions which have been accounted for as business combinations and purchased a ServiceMaster Restore master distributor within ServiceMaster Brands which has been accounted for as an asset acquisition in accordance with ASU 2017-01. We funded $149 million at closing for these acquisitions using available cash on hand. An additional $39 million of deferred purchase price and up to
$14 million of earnouts contingent on the successful achievement of projected revenue and earnings targets are due to the sellers between one year and five years from the acquisition dates. During the six months ended June 30, 2019, $1 million was paid related to these earnouts. In connection with these acquisitions, we recorded $134 million of goodwill, $18 million of tradenames and $49 million of other intangibles, primarily customer lists and reacquired rights. As of June 30, 2019, the purchase price allocations for these acquisitions have been finalized.
Supplemental cash flow information regarding the acquisitions is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||
|
|
|
June 30, |
||||
|
(In millions) |
|
2019 |
|
2018 |
||
|
Assets acquired |
|
$ |
138 |
|
$ |
228 |
|
Liabilities assumed(1) |
|
|
(6) |
|
|
(27) |
|
Net assets acquired |
|
$ |
132 |
|
$ |
201 |
|
|
|
|
|
|
|
|
|
Net cash paid |
|
$ |
119 |
|
$ |
149 |
|
Seller financed debt |
|
|
10 |
|
|
39 |
|
Contingent earnout |
|
|
3 |
|
|
12 |
|
Purchase price |
|
$ |
132 |
|
$ |
201 |
___________________________________
(1)Includes $12 million of deferred tax liabilities recognized as a result of tax basis differences in intangible assets for the six months ended June 30, 2018.
Note 15. Income Taxes
As required by ASC 740, “Income Taxes,” we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from continuing operations before income taxes, except for significant unusual or infrequently occurring items. Our estimated tax rate is adjusted each quarter in accordance with ASC 740.
The effective tax rate on income from continuing operations was 25.9 percent and 32.6 percent for the three months ended June 30, 2019 and 2018, respectively. The effective tax rate on income from continuing operations for the three months ended June 30, 2018 was primarily unfavorably impacted by the reflection of American Home Shield as discontinued operations.
The effective tax rate on income from continuing operations was 18.6 percent and 31.1 percent for the six months ended June 30, 2019 and 2018, respectively. The effective tax rate on income from continuing operations for the six months ended June 30, 2019, was primarily affected by the disposition of the Frontdoor retained shares in a non-taxable debt-for-equity exchange that was recorded discretely in the three months ended March 31, 2019.
As of both June 30, 2019 and December 31, 2018, we had $15 million of tax benefits primarily reflected in US Federal and 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. Our policy is to recognize interest income, interest expense and penalties related to our tax positions within the tax provision.
Note 16. Business Segment Reporting
Our business is conducted through two reportable segments: Terminix and ServiceMaster Brands.
In accordance with accounting standards for segments, our 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 primarily under the Terminix, Terminix Commercial and Copesan brand names. The ServiceMaster Brands segment provides residential and commercial disaster restoration and commercial 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 furniture repair primarily under the Furniture Medic brand name and home inspection services primarily under the AmeriSpec brand name. Corporate includes certain international investments, our financing subsidiary exclusively dedicated to providing financing to our franchisees and retail customers of our operating units and our headquarters operations (substantially all of which costs are allocated to our reportable segments), which provide various technology, marketing, finance, legal and other support services to the reportable segments. The composition of our reportable segments is consistent with that used by our chief operating decision maker (the “CODM”) to evaluate performance and allocate resources.
Information regarding the accounting policies used by us are described in our 2018 Form 10-K. We derive substantially all of our revenue from customers and franchisees in the United States with approximately three percent generated in foreign markets. Operating expenses of the business units consist primarily of direct costs and indirect costs allocated from Corporate.
We use Reportable Segment Adjusted EBITDA as our 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: unallocated corporate expenses; costs historically allocated to American Home Shield; (gain) loss from discontinued operations, net of income taxes; provision for income taxes; interest expense; depreciation and amortization expense; acquisition-related costs; fumigation related matters; non-cash stock-based compensation expense; restructuring charges; loss on extinguishment of debt; and realized (gain) on investment in frontdoor, inc. Our definition of Reportable Segment Adjusted EBITDA may not be calculated or comparable to similarly titled measures of other companies. We believe 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, restructuring initiatives and equity-based, long-term incentive plans.
Information for continuing operations for each reportable segment and Corporate is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
$ |
495 |
|
$ |
456 |
|
$ |
914 |
|
$ |
823 |
|
ServiceMaster Brands |
|
|
65 |
|
|
64 |
|
|
128 |
|
|
123 |
|
Reportable Segment Revenue |
|
$ |
560 |
|
$ |
519 |
|
$ |
1,041 |
|
$ |
947 |
|
Corporate |
|
|
— |
|
|
— |
|
|
1 |
|
|
1 |
|
Total Revenue |
|
$ |
560 |
|
$ |
520 |
|
$ |
1,042 |
|
$ |
947 |
|
Reportable Segment Adjusted EBITDA:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
$ |
106 |
|
$ |
110 |
|
$ |
189 |
|
$ |
196 |
|
ServiceMaster Brands |
|
|
24 |
|
|
24 |
|
|
47 |
|
|
46 |
|
Reportable Segment Adjusted EBITDA |
|
$ |
130 |
|
$ |
134 |
|
$ |
236 |
|
$ |
243 |
___________________________________
(1)Presented below is a reconciliation of Net Income to Reportable Segment Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Net Income |
|
$ |
59 |
|
$ |
96 |
|
$ |
129 |
|
$ |
136 |
|
Unallocated corporate expenses |
|
|
(1) |
|
|
(2) |
|
|
(4) |
|
|
(1) |
|
Costs historically allocated to American Home Shield |
|
|
— |
|
|
11 |
|
|
— |
|
|
22 |
|
Depreciation and amortization expense |
|
|
24 |
|
|
23 |
|
|
49 |
|
|
44 |
|
Acquisition-related costs |
|
|
3 |
|
|
1 |
|
|
4 |
|
|
1 |
|
Fumigation related matters |
|
|
(1) |
|
|
— |
|
|
— |
|
|
— |
|
Non-cash stock-based compensation expense |
|
|
4 |
|
|
4 |
|
|
8 |
|
|
8 |
|
Restructuring charges |
|
|
3 |
|
|
— |
|
|
10 |
|
|
12 |
|
Realized (gain) on investment in frontdoor, inc. |
|
|
— |
|
|
— |
|
|
(40) |
|
|
— |
|
(Gain) loss from discontinued operations, net of income taxes |
|
|
— |
|
|
(56) |
|
|
1 |
|
|
(80) |
|
Provision for income taxes |
|
|
21 |
|
|
19 |
|
|
30 |
|
|
26 |
|
Loss on extinguishment of debt |
|
|
— |
|
|
— |
|
|
6 |
|
|
— |
|
Interest expense |
|
|
18 |
|
|
37 |
|
|
45 |
|
|
75 |
|
Reportable Segment Adjusted EBITDA |
|
$ |
130 |
|
$ |
134 |
|
$ |
236 |
|
$ |
243 |
Note 17. Fair Value Measurements
The period-end carrying amounts of cash and cash equivalents, receivables, restricted cash, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The period-end carrying amounts of long-term notes receivable approximate fair value as the effective interest rates for these instruments are comparable to period-end market rates. The period-end carrying amounts of short- and long-term marketable securities also approximate fair value, with unrealized gains and losses reported in interest and net investment income in the condensed consolidated statements of operations and comprehensive income. The carrying amount of total debt was $1,305 million and $1,776 million, and the estimated fair value was $1,391 million and $1,791 million as of June 30, 2019 and December 31, 2018, respectively. The fair value of our debt is estimated based on available market prices for the same or similar instruments which are considered significant other observable inputs (Level 2) within the fair value hierarchy. The fair values presented reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to us as of June 30, 2019 and December 31, 2018.
We have estimated the fair value of our financial instruments measured at fair value on a recurring basis using the market and income approaches. For investments in marketable securities, deferred compensation trust assets and derivative contracts, which are
carried at their fair values, our fair value estimates incorporate quoted market prices, other observable inputs (for example, forward interest rates) and unobservable inputs (for example, forward commodity prices) at the balance sheet date.
Interest rate swap contracts are valued using forward interest rate curves obtained from third-party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contracts.
Fuel swap contracts are valued using forward fuel price curves obtained from third-party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract fuel price to the expected forward fuel price as of each settlement date and applying the difference between the contract and expected prices to the notional gallons in the fuel swap contracts. We regularly review the forward price curves obtained from third-party market data providers and related changes in fair value for reasonableness utilizing information available to us from other published sources.
We have not changed our valuation techniques for measuring the fair value of any financial assets and liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period. There were no significant transfers between levels during each of the six month periods ended June 30, 2019 and 2018.
The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Measurements |
|||||||
|
|
|
|
|
|
|
|
Quoted |
|
Significant |
|
|
|
||
|
|
|
|
|
|
|
|
Prices In |
|
Other |
|
Significant |
|||
|
|
|
|
|
|
|
|
Active |
|
Observable |
|
Unobservable |
|||
|
|
|
Statement of Financial |
|
Carrying |
|
Markets |
|
Inputs |
|
Inputs |
||||
|
(In millions) |
|
Position Location |
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
||||
|
As of June 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation trust |
|
Long-term marketable securities |
|
$ |
13 |
|
$ |
13 |
|
$ |
— |
|
$ |
— |
|
Investments in marketable securities |
|
Long-term marketable securities |
|
|
6 |
|
|
6 |
|
|
— |
|
|
— |
|
Interest rate swap contract |
|
Prepaid expenses and other assets and Other assets |
|
|
1 |
|
|
— |
|
|
1 |
|
|
— |
|
Total financial assets |
|
|
|
$ |
20 |
|
$ |
19 |
|
$ |
1 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation trust |
|
Long-term marketable securities |
|
$ |
13 |
|
$ |
13 |
|
$ |
— |
|
$ |
— |
|
Investment in Frontdoor |
|
Investment in frontdoor, inc. |
|
|
445 |
|
|
— |
|
|
445 |
|
|
— |
|
Investments in marketable securities |
|
Long-term marketable securities |
|
|
8 |
|
|
8 |
|
|
— |
|
|
— |
|
Interest rate swap contract |
|
Other assets |
|
|
30 |
|
|
— |
|
|
30 |
|
|
— |
|
Total financial assets |
|
|
|
$ |
496 |
|
$ |
21 |
|
$ |
475 |
|
$ |
— |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel swap contracts |
|
Other accrued liabilities |
|
$ |
4 |
|
$ |
— |
|
$ |
— |
|
$ |
4 |
|
Total financial liabilities |
|
|
|
$ |
4 |
|
$ |
— |
|
$ |
— |
|
$ |
4 |
A reconciliation of the beginning and ending fair values of financial instruments valued using significant unobservable inputs (Level 3) on a recurring basis is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Swap |
|
|
|
|
|
|
Contract |
|
|
|
|
|
|
Assets |
|
|
|
|
(In millions) |
|
(Liabilities) |
|
Location of Gain (Loss) included in Earnings |
|
|
Balance as of December 31, 2018 |
|
$ |
(4) |
|
|
|
Total (losses) gains (realized and unrealized) |
|
|
|
|
|
|
Included in earnings |
|
|
— |
|
Cost of services rendered and products sold |
|
Included in other comprehensive income |
|
|
3 |
|
|
|
Settlements |
|
|
— |
|
|
|
Balance as of June 30, 2019 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017 |
|
$ |
3 |
|
|
|
Total (losses) gains (realized and unrealized) |
|
|
|
|
|
|
Included in earnings |
|
|
1 |
|
Cost of services rendered and products sold |
|
Included in other comprehensive income |
|
|
1 |
|
|
|
Settlements |
|
|
(1) |
|
|
|
Balance as of June 30, 2018 |
|
$ |
4 |
|
|
The following tables present information relating to the significant unobservable inputs of our Level 3 financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Valuation |
|
|
|
|
|
Weighted |
||
|
|
|
(in millions) |
|
Technique |
|
Unobservable Input |
|
Range |
|
Average |
||
|
As of June 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel swap contracts |
|
$ |
— |
|
Discounted Cash Flows |
|
Forward Unleaded Price per Gallon(1) |
|
$2.36 - $2.76 |
|
$ |
2.57 |
|
As of December 31, 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel swap contracts |
|
$ |
(4) |
|
Discounted Cash Flows |
|
Forward Unleaded Price per Gallon(1) |
|
$2.09 - $2.43 |
|
$ |
2.26 |
___________________________________
(1)Forward prices per gallon were derived from third-party market data providers. A decrease in the forward price would result in a decrease in the fair value of the fuel swap contracts.
We use derivative financial instruments to manage risks associated with changes in fuel prices and interest rates. We do not hold or issue derivative financial instruments for trading or speculative purposes. In designating our derivative financial instruments as hedging instruments under accounting standards for derivative instruments, we formally document the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives to forecasted transactions. We assess at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the projected changes in cash flows of the associated forecasted transactions. All of our designated hedging instruments are classified as cash flow hedges.
We have historically hedged a significant portion of our annual fuel consumption. We have also historically hedged the interest payments on a portion of our variable rate debt through the use of interest rate swap agreements. All of our fuel swap contracts and interest rate swap contracts are classified as cash flow hedges, and, as such, the hedging instruments are recorded on the condensed consolidated statements of financial position as either an asset or liability at fair value, with the effective portion of changes in the fair value attributable to the hedged risks recorded in accumulated other comprehensive income. Cash flows related to fuel and interest rate derivatives are classified as operating activities in the condensed consolidated statements of cash flows.
As of June 30, 2019, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $30 million, maturing through 2020. Under the terms of our fuel swap contracts, we are required to post collateral in the event that the fair value of the contracts exceeds a certain agreed upon liability level and in other circumstances required by the counterparty. As of June 30, 2019, we had posted $2 million in letters of credit as collateral under our fuel hedging program, which were issued under the Revolving Credit Facility.
The effective portion of the gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments is recorded in accumulated other comprehensive income. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement or the fuel settlement affects earnings. See Note 9 to the condensed consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in accumulated other comprehensive income and for the amounts reclassified out of accumulated other comprehensive income and into earnings. The amount expected to be reclassified into earnings during the next 12 months includes unrealized gains and losses related to open fuel hedges and interest rate swaps. Specifically, as the underlying forecasted transactions occur during the next 12 months,
the hedging gains and losses in accumulated other comprehensive income expected to be recognized in earnings is a gain of $3 million, net of tax, as of June 30, 2019. The amounts that are ultimately reclassified into earnings will be based on actual fuel prices and interest rates at the time the positions are settled and may differ materially from the amount noted above.
Note 18. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income 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, RSUs and performance share units are reflected in diluted earnings per share by applying the treasury stock method.
A reconciliation of the amounts included in the computation of basic earnings per share from continuing operations and diluted earnings per share from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions, except per share data) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Income from continuing operations |
|
$ |
59 |
|
$ |
40 |
|
$ |
129 |
|
$ |
56 |
|
Weighted-average common shares outstanding |
|
|
136.0 |
|
|
135.5 |
|
|
135.9 |
|
|
135.4 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs |
|
|
0.3 |
|
|
0.1 |
|
|
0.2 |
|
|
0.1 |
|
Stock options(1) |
|
|
0.3 |
|
|
0.2 |
|
|
0.3 |
|
|
0.2 |
|
Weighted-average common shares outstanding—assuming dilution |
|
|
136.5 |
|
|
135.8 |
|
|
136.4 |
|
|
135.7 |
|
Basic earnings per share from continuing operations |
|
$ |
0.44 |
|
$ |
0.29 |
|
$ |
0.95 |
|
$ |
0.42 |
|
Diluted earnings per share from continuing operations |
|
$ |
0.43 |
|
$ |
0.29 |
|
$ |
0.95 |
|
$ |
0.42 |
___________________________________
(1)Options to purchase 0.4 million shares for the three months ended June 30, 2018, and 0.5 million and 0.4 million shares for the six months ended June 30, 2019 and 2018, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q. 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.”
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, Merry Maids, 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.
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,
earnings per share,
Adjusted EBITDA, and
organic revenue growth.
To the extent applicable, these measures are evaluated with and without impairment, 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, Terminix Commercial and Copesan 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 in the United States. In 2018, approximately 97 percent of our revenue was generated by sales in the United States.
Operating Expenses. In addition to the impact of changes in our revenue results, our operating results 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.
Net Income and Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income 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 net income per share by applying the treasury stock method. The presentation of basic and diluted earnings per share provides GAAP measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons.
Adjusted EBITDA. We evaluate performance and allocate resources based primarily on Adjusted EBITDA. We define Adjusted EBITDA as net income before: (gain) loss from discontinued operations, net of income taxes; provision for income taxes; interest expense; depreciation and amortization expense; acquisition-related costs; fumigation related matters; non-cash stock-based compensation expense; restructuring charges; loss on extinguishment of debt; and realized (gain) on investment in frontdoor, inc. 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 and equity-based, long-term incentive plans.
Organic Revenue Growth. We evaluate organic revenue growth to track performance of the business, 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 2018, approximately 23 percent, 27 percent, 26 percent and 24 percent of our revenue and approximately 25 percent, 31 percent, 24 percent and 20 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 the seasonal nature of our termite and pest control services, home inspection services and disaster 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. For example, in the third quarter of 2017, our Terminix business was negatively impacted by hurricanes Harvey and Irma, which resulted in 53 branches, primarily in Texas and Florida, being temporarily closed for a period of time during August and September. Weather conditions which have a potentially favorable impact to our business include mild winters which can lead to higher demand for termite and pest control services; and severe storms which can lead to an increase in demand for restoration services. For example, in the third and fourth quarters of 2018, our ServiceMaster Restore business saw a significant increase in royalty fees related to hurricanes Florence and Michael.
Franchises
Franchises are important to the Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec businesses. Total profits from our franchised operations were $24 million for both the three months ended June 30, 2019 and 2018, and $47 million and $45 million for the six months ended June 30, 2019 and 2018, respectively. Nearly all of the franchise fees received by our ServiceMaster Brands segment are derived from the ServiceMaster Restore, ServiceMaster Clean and Merry Maids businesses. Franchise fees from our Terminix franchisees represented less than one percent of Terminix revenue for the three and six months ended June 30, 2019. We evaluate the performance of our franchise businesses based primarily on operating profit before corporate general and administrative expenses, interest expense and amortization of intangible assets. Franchise agreements entered into in the course of these businesses are generally for a term of five years. The majority of these franchise agreements are renewed prior to expiration. Internationally, we have license agreements, whereby licensees provide services under our brand names that would ordinarily be provided by franchisees in the United States. The majority of international licenses are for 10-year terms.
For the three months ended June 30, 2019, approximately 53% of our revenue in the ServiceMaster Brands segment consisted of ongoing monthly royalty fees. For the six months ended June 30, 2019, approximately 54% of our revenue in the ServiceMaster Brands segment consisted of ongoing monthly royalty fees. Royalty fees are the amounts paid to us by our franchisees and are based on a percentage of our franchisees’ customer-level revenue. We estimate that customer-level revenue for the ServiceMaster Brands segment and Terminix segment were $690 million and $597 million, respectively, for the three months ended June 30, 2019, and $1,339 million and $1,096 million, respectively, for the six months ended June 30, 2019.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Increase |
|
|
|
|
|
|
|||||
|
|
|
June 30, |
|
(Decrease) |
|
% of Revenue |
|||||||||
|
(In millions) |
|
2019 |
|
2018 |
|
2019 vs. 2018 |
|
2019 |
|
2018 |
|||||
|
Revenue |
|
$ |
560 |
|
$ |
520 |
|
8 |
% |
|
100 |
% |
|
100 |
% |
|
Cost of services rendered and products sold |
|
|
303 |
|
|
272 |
|
12 |
|
|
54 |
|
|
52 |
|
|
Selling and administrative expenses |
|
|
151 |
|
|
146 |
|
3 |
|
|
27 |
|
|
28 |
|
|
Amortization expense |
|
|
6 |
|
|
5 |
|
25 |
|
|
1 |
|
|
1 |
|
|
Acquisition-related costs |
|
|
3 |
|
|
1 |
|
* |
|
|
— |
|
|
— |
|
|
Fumigation related matters |
|
|
(1) |
|
|
— |
|
* |
|
|
— |
|
|
— |
|
|
Restructuring charges |
|
|
3 |
|
|
— |
|
* |
|
|
1 |
|
|
— |
|
|
Interest expense |
|
|
18 |
|
|
37 |
|
(51) |
|
|
3 |
|
|
7 |
|
|
Interest and net investment income |
|
|
(3) |
|
|
(1) |
|
* |
|
|
(1) |
|
|
— |
|
|
Income from Continuing Operations before Income Taxes |
|
|
80 |
|
|
59 |
|
36 |
|
|
14 |
|
|
11 |
|
|
Provision for income taxes |
|
|
21 |
|
|
19 |
|
8 |
|
|
4 |
|
|
4 |
|
|
Income from Continuing Operations |
|
$ |
59 |
|
$ |
40 |
|
49 |
% |
|
11 |
% |
|
8 |
% |
________________________________
* not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Increase |
|
|
|
|
|
|
|||||
|
|
|
June 30, |
|
(Decrease) |
|
% of Revenue |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2019 |
|
2018 |
|
2019 vs. 2018 |
|
2019 |
|
2018 |
|||||
|
Revenue |
|
$ |
1,042 |
|
$ |
947 |
|
10 |
% |
|
100 |
% |
|
100 |
% |
|
Cost of services rendered and products sold |
|
|
564 |
|
|
498 |
|
13 |
|
|
54 |
|
|
53 |
|
|
Selling and administrative expenses |
|
|
287 |
|
|
272 |
|
6 |
|
|
28 |
|
|
29 |
|
|
Amortization expense |
|
|
12 |
|
|
8 |
|
44 |
|
|
1 |
|
|
1 |
|
|
Acquisition-related costs |
|
|
4 |
|
|
1 |
|
* |
|
|
— |
|
|
— |
|
|
Mark-to-market loss on investment in frontdoor, inc. |
|
|
(40) |
|
|
— |
|
* |
|
|
(4) |
|
|
— |
|
|
Restructuring charges |
|
|
10 |
|
|
12 |
|
* |
|
|
1 |
|
|
1 |
|
|
Interest expense |
|
|
45 |
|
|
75 |
|
(40) |
|
|
4 |
|
|
8 |
|
|
Interest and net investment income |
|
|
(4) |
|
|
(1) |
|
* |
|
|
— |
|
|
— |
|
|
Loss on extinguishment of debt |
|
|
6 |
|
|
— |
|
* |
|
|
1 |
|
|
— |
|
|
Income from Continuing Operations before Income Taxes |
|
|
159 |
|
|
82 |
|
94 |
|
|
15 |
|
|
9 |
|
|
Provision for income taxes |
|
|
30 |
|
|
26 |
|
16 |
|
|
3 |
|
|
3 |
|
|
Income from Continuing Operations |
|
$ |
129 |
|
$ |
56 |
|
129 |
% |
|
12 |
% |
|
6 |
% |
________________________________
* not meaningful
Revenue
We reported revenue of $560 million and $520 million for the three months ended June 30, 2019 and 2018, respectively, and revenue of $1,042 million and $947 million for the six months ended June 30, 2019 and 2018, respectively. A summary of changes in revenue for each of our reportable segments and Corporate is included in the tables below. See “—Segment Review” for a discussion of the drivers of the year-over-year changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ServiceMaster |
|
|
|
|
|
||
|
(In millions) |
|
Terminix |
|
Brands |
|
Corporate |
|
Total |
||||
|
Three Months Ended June 30, 2018 |
|
$ |
456 |
|
$ |
64 |
|
$ |
— |
|
$ |
520 |
|
Residential Pest Control(1) |
|
|
22 |
|
|
— |
|
|
— |
|
|
22 |
|
Commercial Pest Control(2) |
|
|
11 |
|
|
— |
|
|
— |
|
|
11 |
|
Termite and Home Services(3) |
|
|
8 |
|
|
— |
|
|
— |
|
|
8 |
|
Commercial Cleaning National Accounts |
|
|
— |
|
|
3 |
|
|
— |
|
|
3 |
|
Sale of Products and Other |
|
|
1 |
|
|
(1) |
|
|
— |
|
|
— |
|
Fumigation |
|
|
(3) |
|
|
— |
|
|
— |
|
|
(3) |
|
Three Months Ended June 30, 2019 |
|
$ |
495 |
|
$ |
65 |
|
$ |
— |
|
$ |
560 |
_________________________________
(1)Includes growth from acquisitions of approximately $11 million for the three months ended June 30, 2019.
(2)Includes growth from acquisitions of approximately $9 million for the three months ended June 30, 2019.
(3)Includes growth from acquisitions of approximately $2 million for the three months ended June 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ServiceMaster |
|
|
|
|
|
||
|
(In millions) |
|
Terminix |
|
Brands |
|
Corporate |
|
Total |
||||
|
Six Months Ended June 30, 2018 |
|
$ |
823 |
|
$ |
123 |
|
$ |
1 |
|
$ |
947 |
|
Residential Pest Control (1) |
|
|
40 |
|
|
— |
|
|
— |
|
|
40 |
|
Commercial Pest Control (2) |
|
|
38 |
|
|
— |
|
|
— |
|
|
38 |
|
Termite and Home Services(3) |
|
|
15 |
|
|
— |
|
|
— |
|
|
15 |
|
Royalty Fees |
|
|
— |
|
|
1 |
|
|
— |
|
|
1 |
|
Commercial Cleaning National Accounts |
|
|
— |
|
|
5 |
|
|
— |
|
|
5 |
|
Sale of Products and Other |
|
|
2 |
|
|
(2) |
|
|
— |
|
|
— |
|
Fumigation |
|
|
(4) |
|
|
— |
|
|
— |
|
|
(4) |
|
Six Months Ended June 30, 2019 |
|
$ |
914 |
|
$ |
128 |
|
$ |
1 |
|
$ |
1,042 |
_________________________________
(1)Includes growth from acquisitions of approximately $24 million for the six months ended June 30, 2019.
(2)Includes growth from acquisitions of approximately $36 million for the six months ended June 30, 2019.
(3)Includes growth from acquisitions of approximately $4 million for the six months ended June 30, 2019.
Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of $303 million and $272 million for the three months ended June 30, 2019 and 2018, respectively, and $564 million and $498 million for the six months ended June 30, 2019 and 2018, respectively. The following tables provide a summary of changes in cost of services rendered and products sold for each of our reportable segments and Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ServiceMaster |
|
|
|
|
|
||
|
(In millions) |
|
Terminix |
|
Brands |
|
Corporate |
|
Total |
||||
|
Three Months Ended June 30, 2018 |
|
$ |
249 |
|
$ |
24 |
|
$ |
(2) |
|
$ |
272 |
|
Impact of change in revenue(1) |
|
|
25 |
|
|
2 |
|
|
— |
|
|
27 |
|
Production labor |
|
|
(2) |
|
|
— |
|
|
— |
|
|
(2) |
|
Damage claims |
|
|
2 |
|
|
— |
|
|
— |
|
|
2 |
|
Insurance program |
|
|
— |
|
|
— |
|
|
1 |
|
|
1 |
|
Other |
|
|
2 |
|
|
1 |
|
|
— |
|
|
3 |
|
Three Months Ended June 30, 2019 |
|
$ |
277 |
|
$ |
27 |
|
$ |
(1) |
|
$ |
303 |
_________________________________
(1)For Terminix, includes approximately $16 million for the three months ended June 30, 2019 from acquisitions.
For Terminix, the impact of the change in revenue reflects the impact of the disposition of our fumigation service line. The decrease in production labor was driven by improved labor management. The increase in damage claims was driven by increased termite warranty claims, primarily in the Gulf Coast region.
For Corporate, we realized favorable claims results in our automobile, general liability and workers’ compensation program at a lesser extent than generated in the three months ended June 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
ServiceMaster |
|
|
|
|
|
||
|
(In millions) |
|
Terminix |
|
Brands |
|
Corporate |
|
Total |
||||
|
Six Months Ended June 30, 2018 |
|
$ |
453 |
|
$ |
47 |
|
$ |
(2) |
|
$ |
498 |
|
Impact of change in revenue(1) |
|
|
61 |
|
|
4 |
|
|
— |
|
|
65 |
|
Production labor |
|
|
(1) |
|
|
— |
|
|
— |
|
|
(1) |
|
Damage claims |
|
|
1 |
|
|
— |
|
|
— |
|
|
1 |
|
Insurance program |
|
|
— |
|
|
— |
|
|
(2) |
|
|
(2) |
|
Other |
|
|
2 |
|
|
1 |
|
|
1 |
|
|
3 |
|
Six Months Ended June 30, 2019 |
|
$ |
516 |
|
$ |
52 |
|
$ |
(3) |
|
$ |
564 |
_________________________________
(1)For Terminix, includes approximately $47 million for the six months ended June 30, 2019 from acquisitions.
For Terminix, the impact of the change in revenue reflects the impact of the disposition of our fumigation service line. The decrease in production labor was driven by improved labor management. The increase in damage claims was driven by increased termite warranty claims, primarily in the Gulf Coast region.
For Corporate, the decrease in insurance program expense was primarily attributable to favorable claims results in our automobile, general liability and workers’ compensation program.
Selling and Administrative Expenses
We reported selling and administrative expenses of $151 million and $146 million for the three months ended June 30, 2019 and 2018, respectively, and $287 million and $272 million for the six months ended June 30, 2019, and 2018, respectively. For the three months ended June 30, 2019 and 2018, selling and administrative expenses comprised general and administrative expenses of $78 million and $74 million, respectively, and selling and marketing expenses of $73 million and $72 million, respectively. For the six months ended June 30, 2019 and 2018, selling and administrative expenses comprised general and administrative expenses of $154 million and $144 million, respectively, and selling and marketing expenses of $132 million and $128 million, respectively. The following tables provide a summary of changes in selling and administrative expenses for each of our reportable segments and Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ServiceMaster |
|
|
|
|
|
||
|
(In millions) |
|
Terminix |
|
Brands |
|
Corporate |
|
Total |
||||
|
Three Months Ended June 30, 2018 |
|
$ |
107 |
|
$ |
17 |
|
$ |
22 |
|
$ |
146 |
|
Sales and marketing costs |
|
|
2 |
|
|
(1) |
|
|
— |
|
|
1 |
|
Impact of acquisitions on selling and administrative expenses |
|
|
3 |
|
|
— |
|
|
— |
|
|
3 |
|
Investments in growth |
|
|
4 |
|
|
— |
|
|
— |
|
|
4 |
|
Spin-off dis-synergies |
|
|
4 |
|
|
— |
|
|
— |
|
|
4 |
|
Incentive compensation |
|
|
1 |
|
|
— |
|
|
— |
|
|
1 |
|
Costs historically allocated to American Home Shield |
|
|
— |
|
|
— |
|
|
(11) |
|
|
(11) |
|
Other |
|
|
3 |
|
|
(1) |
|
|
— |
|
|
2 |
|
Three Months Ended June 30, 2019 |
|
$ |
124 |
|
$ |
15 |
|
$ |
12 |
|
$ |
151 |
The increase in sales and marketing costs at Terminix was driven by targeted investments to drive sales growth. Additionally, Terminix incurred incremental selling and administrative expenses as a result of acquisitions. The increase in investments in growth primarily includes our partnership with Salesforce to replace legacy operating systems, investments to optimize our commercial pest business and investments to transform our operating model.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
ServiceMaster |
|
|
|
|
|
||
|
(In millions) |
|
Terminix |
|
Brands |
|
Corporate |
|
Total |
||||
|
Six Months Ended June 30, 2018 |
|
$ |
196 |
|
$ |
32 |
|
$ |
44 |
|
$ |
272 |
|
Sales and marketing costs |
|
|
4 |
|
|
(1) |
|
|
— |
|
|
3 |
|
Impact of acquisitions on selling and administrative expenses |
|
|
9 |
|
|
— |
|
|
— |
|
|
9 |
|
Investments in growth |
|
|
9 |
|
|
— |
|
|
— |
|
|
9 |
|
Spin-off dis-synergies |
|
|
7 |
|
|
1 |
|
|
— |
|
|
8 |
|
Incentive compensation |
|
|
2 |
|
|
— |
|
|
— |
|
|
2 |
|
Investments in training |
|
|
2 |
|
|
— |
|
|
— |
|
|
2 |
|
Costs historically allocated to American Home Shield |
|
|
— |
|
|
— |
|
|
(22) |
|
|
(22) |
|
Other |
|
|
4 |
|
|
(1) |
|
|
— |
|
|
4 |
|
Six Months Ended June 30, 2019 |
|
$ |
234 |
|
$ |
31 |
|
$ |
22 |
|
$ |
287 |
The increase in sales and marketing costs at Terminix was driven by targeted investments to drive sales growth. Additionally, Terminix incurred incremental selling and administrative expenses as a result of Copesan and other acquisitions. We completed the acquisition of Copesan on March 30, 2018. Beginning on March 31, 2019, Copesan is no longer included in Impact of acquisitions on selling and administrative expenses. Investments in growth primarily includes our partnership with Salesforce to replace legacy operating systems, investments to optimize our commercial pest business and investments to transform our operating model.
Amortization Expense
Amortization expense was $6 million and $5 million in the three months ended June 30, 2019 and 2018, respectively, and $12 million and $8 million in the six months ended June 30, 2019 and 2018, respectively.
Acquisition-Related Costs
Acquisition-related costs were $3 million and $1 million in the three months ended June 30, 2019 and 2018, respectively, and $4 million and $1 million in the six months end June 30, 2019 and 2018, respectively.
Fumigation Related Matters
We reversed a previously accrued $1 million charge for fumigation related matters due to favorable activity in the three and six months ended June 30, 2019. There were no charges for fumigation related matters in the three and six months ended June 30, 2018.
Restructuring Charges
We incurred restructuring charges of approximately $3 million in the three months ended June 30, 2019, and $10 million and $12 million in the six months ended June 30, 2019 and 2018, respectively. Restructuring charges were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Terminix(1) |
|
$ |
1 |
|
$ |
(1) |
|
$ |
3 |
|
$ |
2 |
|
ServiceMaster Brands(2) |
|
|
1 |
|
|
— |
|
|
2 |
|
|
— |
|
Corporate(3) |
|
|
1 |
|
|
— |
|
|
5 |
|
|
3 |
|
Global Service Center relocation(4) |
|
|
— |
|
|
1 |
|
|
1 |
|
|
7 |
|
Total restructuring charges |
|
$ |
3 |
|
$ |
— |
|
$ |
10 |
|
$ |
12 |
___________________________________
(1)For the three and six months ended June 30, 2019, these charges included $1 million and $3 million, respectively, of severance and other costs. For the three and six months ended June 30, 2018, restructuring charges included a $1 million reserve adjustment associated with previous restructuring initiatives and $2 million of severance and other costs, respectively.
(2)For the three and six months ended June 30, 2019, these charges included $1 million and $2 million, respectively, of severance costs.
(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 three and six months ended June 30, 2019, these charges included $1 million and $4 million, respectively, of professional fees, accelerated depreciation and other costs to enhance capabilities and align corporate functions with those required to support our strategic needs after the American Home Shield spin-off. For the six months ended June 30, 2019 and 2018, these charges included $1 million and $3 million of severance and other costs.
(4)For the three months ended June 30, 2018, these charges included lease termination and other charges of $1 million, related to the relocation of our Global Service Center. For the six months ended June 30, 2019 and 2018, these charges included lease termination and other charges of $1 million and $7 million, respectively, related to the relocation.
Realized (Gain) on Investment in frontdoor, inc.
We recorded a gain of $40 million related to the sale of our retained investment in Frontdoor in the six months ended June 30, 2019. There was no gain recorded in the three months ended June 30, 2019, or in the three and six months ended June 30, 2018.
Interest Expense
Interest expense was $18 million and $37 million in the three months ended June 30, 2019 and 2018, respectively, and $45 million and $75 million in the six months ended June 30, 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 of the American Home Shield segment, as well as the repayment of approximately $484 million in debt in connection with the monetization of our shares of Frontdoor.
Interest and Net Investment Income
Interest and net investment income was $3 million and $1 million for the three months ended June 30, 2019 and 2018, respectively, and $4 million and $1 million in the six months ended June 30, 2019 and 2018, respectively. Interest and net investment income is comprised of net investment gains and losses from equity investments and other strategic investments and interest income on other cash balances.
Loss on Extinguishment of Debt
A loss on extinguishment of debt of $6 million was recorded in the six months ended June 30, 2019. No similar loss was recognized in the three months ended June 30, 2019 and 2018 or the six months ended June 30, 2018. See Note 12 to the condensed consolidated financial statements for more details.
Income from Continuing Operations before Income Taxes
Income from continuing operations before income taxes was $80 million and $59 million for the three months ended June 30, 2019 and 2018, respectively, and $159 million and $82 million in the six months ended June 30, 2019 and 2018, respectively. The change in income from continuing operations before income taxes primarily reflects the net effect of year-over-year changes in the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||
|
|
|
June 30, |
|
June 30, |
||
|
(In millions) |
|
2019 vs. 2018 |
|
2019 vs. 2018 |
||
|
Reportable segments and Corporate(1) |
|
$ |
7 |
|
$ |
18 |
|
Depreciation expense(2) |
|
|
— |
|
|
(1) |
|
Amortization expense(3) |
|
|
(1) |
|
|
(4) |
|
Acquisition-related costs(4) |
|
|
(2) |
|
|
(3) |
|
Restructuring charges(5) |
|
|
(2) |
|
|
2 |
|
Loss on extinguishment of debt(6) |
|
|
— |
|
|
(6) |
|
Realized (gain) on investment in frontdoor, inc.(7) |
|
|
— |
|
|
40 |
|
Interest Expense(8) |
|
|
19 |
|
|
30 |
|
Other(9) |
|
|
1 |
|
|
— |
|
Increase in income from continuing operations before income taxes |
|
$ |
21 |
|
$ |
77 |
___________________________________
(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 net change in restructuring expense as described in “—Restructuring Charges.”
(6)Represents the net change in the loss on extinguishment of debt as described in “—Loss on Extinguishment of Debt.”
(7)Represents the net change in the investment in frontdoor, inc. as described in “—Realized (Gain) on Investment in frontdoor, inc.”
(8)Primarily represents the net change in interest expense, as described in “—Interest Expense.”
(9)Primarily represents the net change in stock-based compensation.
Provision for Income Taxes
The effective tax rate on income from continuing operations was 25.9 percent and 32.6 percent for the three months ended June 30, 2019 and 2018, respectively, and 18.6 percent and 31.1 percent in the six months ended June 30, 2019 and 2018, respectively. The effective tax rate on income from continuing operations for the six months ended June 30, 2019, was primarily affected by the disposition of the Frontdoor retained shares in a non-taxable debt-for-equity exchange pursuant to the private letter ruling from the IRS that was recorded discretely in the three months ended March 31, 2019.
Gain (Loss) from Discontinued Operations, Net of Income Taxes
Gain from discontinued operations, net of income taxes, was $56 million for the three months ended June 30, 2018, and $80 million in the six months ended June 30, 2018, related to operating results of Frontdoor. There was a $1 million loss from discontinued operations, net of taxes, for the six months ended June 30, 2019.
Net Income
Net income was $59 million and $96 million for the three months ended June 30, 2019 and 2018, respectively, and was primarily driven by a $21 million increase in income from continuing operations before income taxes offset by a gain from discontinued operations in the three months ended June 30, 2018 of $56 million. Net income was $129 million and $136 million in the six months ended June 30, 2019 and 2018, respectively, and was primarily driven by a $77 million increase in income from continuing operations before income taxes offset by a gain from discontinued operations in the six months ended June 30, 2018 of $80 million.
Segment Review
The following business segment reviews should be read in conjunction with the required footnote disclosures presented in the notes to the condensed consolidated financial statements included in this report.
Revenue and Adjusted EBITDA by reportable segment and for Corporate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Six Months Ended |
|
|
||||||||||
|
|
|
June 30, |
|
Increase |
|
June 30, |
|
Increase |
||||||||||
|
(In millions) |
|
2019 |
|
2018 |
|
(Decrease) |
|
2019 |
|
2018 |
|
(Decrease) |
||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
$ |
495 |
|
$ |
456 |
|
9 |
% |
|
$ |
914 |
|
$ |
823 |
|
11 |
% |
|
ServiceMaster Brands |
|
|
65 |
|
|
64 |
|
2 |
|
|
|
128 |
|
|
123 |
|
3 |
|
|
Corporate |
|
|
— |
|
|
— |
|
* |
|
|
|
1 |
|
|
1 |
|
* |
|
|
Total Revenue: |
|
$ |
560 |
|
$ |
520 |
|
8 |
% |
|
$ |
1,042 |
|
$ |
947 |
|
10 |
% |
|
Adjusted EBITDA:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
$ |
106 |
|
$ |
110 |
|
(4) |
% |
|
$ |
189 |
|
$ |
196 |
|
(4) |
% |
|
ServiceMaster Brands |
|
|
24 |
|
|
24 |
|
2 |
|
|
|
47 |
|
|
46 |
|
2 |
|
|
Reportable Segment Adjusted EBITDA |
|
|
130 |
|
|
134 |
|
(3) |
|
|
|
236 |
|
|
243 |
|
(3) |
|
|
Corporate(2) |
|
|
1 |
|
|
2 |
|
* |
|
|
|
4 |
|
|
1 |
|
* |
|
|
Costs historically allocated to American Home Shield(3) |
|
|
— |
|
|
(11) |
|
* |
|
|
|
— |
|
|
(22) |
|
* |
|
|
Total Adjusted EBITDA |
|
$ |
131 |
|
$ |
125 |
|
5 |
% |
|
$ |
240 |
|
$ |
222 |
|
8 |
% |
___________________________________
* not meaningful
(1)See Note 16 to the condensed consolidated financial statements for our definition of Adjusted EBITDA and a reconciliation of Net Income to Reportable Segment Adjusted EBITDA.
(2)Represents unallocated corporate gains, net of expenses.
(3)Includes amounts historically allocated to the American Home Shield business not permitted to be classified as discontinued operations under GAAP as described in Note 5 to the condensed consolidated financial statements.
Terminix Segment
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
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 three months ended June 30, 2019 compared to the three months ended June 30, 2018.
On April 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.
Revenue
Revenue by service line is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2019 |
|
2018 |
|
Growth |
|
Acquired |
|
Organic |
||||||||||||||
|
Residential Pest Control |
|
$ |
187 |
|
$ |
166 |
|
$ |
22 |
|
13 |
% |
|
$ |
11 |
|
7 |
% |
|
$ |
10 |
|
6 |
% |
|
Commercial Pest Control |
|
|
100 |
|
|
88 |
|
|
11 |
|
13 |
% |
|
|
10 |
|
11 |
% |
|
|
2 |
|
2 |
% |
|
Termite and Home Services |
|
|
171 |
|
|
163 |
|
|
8 |
|
5 |
% |
|
|
2 |
|
2 |
% |
|
|
6 |
|
4 |
% |
|
Other |
|
|
25 |
|
|
24 |
|
|
1 |
|
2 |
% |
|
|
— |
|
— |
% |
|
|
1 |
|
2 |
% |
|
|
|
$ |
483 |
|
$ |
441 |
|
$ |
42 |
|
10 |
% |
|
$ |
24 |
|
5 |
% |
|
$ |
18 |
|
4 |
% |
|
Fumigation |
|
|
12 |
|
|
15 |
|
|
(3) |
|
(20) |
% |
|
|
— |
|
— |
% |
|
|
(3) |
|
(20) |
% |
|
Total revenue |
|
$ |
495 |
|
$ |
456 |
|
$ |
39 |
|
9 |
% |
|
$ |
24 |
|
5 |
% |
|
$ |
15 |
|
3 |
% |
Residential pest control revenue increased 13 percent. Residential pest control organic revenue growth was six percent, reflecting improved price realization, unit growth in mosquito services and higher customer retention, offset, in part, by lower new sales units in core pest. Residential pest control revenue also increased seven percent from acquisitions completed during the last 12 months.
Commercial pest control revenue increased 13 percent. Commercial pest control organic revenue growth was two percent, approximately half of which reflects growth at Copesan. The remaining organic growth was driven by higher customer retention and higher price realization, offset, in part, by lower sales of non-recurring services. We completed the acquisition of Copesan on March 30, 2018. Beginning on March 31, 2019, Copesan is included in our evaluation of organic revenue growth. Commercial pest control revenue also increased 11 percent from acquisitions completed during the last 12 months, the most significant of which was Assured Environments, an acquisition completed in January 2019.
Termite revenue, including wildlife exclusion, crawl space encapsulation and attic insulation, which are managed as a component of our termite line of business, increased five percent compared to prior year, primarily reflecting an increase in home services new unit sales and improved price realization. In the three months ended June 30, 2019, termite renewal revenue comprised 46 percent of total termite revenue, while the remainder consisted of termite new unit revenue. Termite activity is unpredictable in its nature. Factors that can impact termite activity include conducive weather conditions and consumer awareness of termite swarms.
Revenue growth for the three months ended June 30, 2019 was negatively impacted by approximately $3 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.
Adjusted EBITDA
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Three Months Ended June 30, 2018 |
|
$ |
110 |
|
Impact of change in revenue |
|
|
7 |
|
Sales and marketing |
|
|
(2) |
|
Production labor |
|
|
2 |
|
Damage claims |
|
|
(2) |
|
Investments in growth |
|
|
(4) |
|
Spin-off dis-synergies |
|
|
(4) |
|
Incentive compensation |
|
|
(1) |
|
Fuel, bad debt and other |
|
|
(5) |
|
Impact of acquisitions |
|
|
6 |
|
Three Months Ended June 30, 2019 |
|
$ |
106 |
The increase in sales and marketing costs was driven by targeted investments to drive sales growth. The decrease in production labor was driven by improved labor management. The increase in damage claims was driven by increased termite warranty claims, primarily in the Gulf Coast region. The increase in investments in growth primarily includes our partnership with Salesforce to replace legacy operating systems, investments to optimize our commercial pest business and investments to transform our operating model. The increase in spin-off dis-synergies represents increased corporate allocations to Terminix as a result of the American Home Shield spin-off.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The Terminix segment reported an 11 percent increase in revenue and a four percent decrease in Adjusted EBITDA for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Revenue
Revenue by service line is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2019 |
|
2018 |
|
Growth |
|
Acquired |
|
Organic |
||||||||||||||
|
Residential Pest Control |
|
$ |
346 |
|
$ |
306 |
|
$ |
40 |
|
13 |
% |
|
$ |
24 |
|
8 |
% |
|
$ |
16 |
|
5 |
% |
|
Commercial Pest Control |
|
|
188 |
|
|
150 |
|
|
38 |
|
25 |
% |
|
|
37 |
|
24 |
% |
|
|
1 |
|
1 |
% |
|
Termite and Home Services |
|
|
317 |
|
|
303 |
|
|
15 |
|
5 |
% |
|
|
4 |
|
1 |
% |
|
|
10 |
|
3 |
% |
|
Other |
|
|
41 |
|
|
39 |
|
|
2 |
|
5 |
% |
|
|
— |
|
— |
% |
|
|
2 |
|
5 |
% |
|
|
|
$ |
892 |
|
$ |
798 |
|
$ |
94 |
|
12 |
% |
|
$ |
64 |
|
8 |
% |
|
$ |
30 |
|
4 |
% |
|
Fumigation |
|
|
22 |
|
|
25 |
|
|
(4) |
|
(15) |
% |
|
|
— |
|
— |
% |
|
|
(4) |
|
(15) |
% |
|
Total revenue |
|
$ |
914 |
|
$ |
823 |
|
$ |
90 |
|
11 |
% |
|
$ |
64 |
|
8 |
% |
|
$ |
26 |
|
3 |
% |
Residential pest control revenue increased 13 percent. Residential pest control organic revenue growth was five percent, reflecting improved price realization, unit growth in mosquito services and higher customer retention, offset, in part, by lower new sales units in core pest. Residential pest control revenue also increased eight percent from acquisitions completed during the last 12 months.
Commercial pest control revenue increased 25 percent. Commercial pest control organic revenue growth was one percent, reflecting growth at Copesan in the three months ended June 30, 2019. We completed the acquisition of Copesan on March 30, 2018. Beginning on March 31, 2019, Copesan is included in our evaluation of organic revenue growth. The remaining organic growth was driven by higher customer retention and higher price realization, offset, in part, by lower sales of non-recurring services. Commercial pest control revenue also increased 24 percent from acquisitions completed during the last 12 months and included Copesan for the three months ended March 31, 2019.
Termite revenue, including wildlife exclusion, crawl space encapsulation and attic insulation, which are managed as a component of our termite line of business, increased five percent compared to prior year, primarily reflecting an increase in home services new unit sales and improved price realization. In the six months ended June 30, 2019, termite renewal revenue comprised 49 percent of total termite revenue, while the remainder consisted of termite new unit revenue. Termite activity is unpredictable in its nature. Factors that can impact termite activity include conducive weather conditions and consumer awareness of termite swarms.
Revenue growth for the three months ended June 30, 2019 was negatively impacted by approximately $3 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. The three months ended March 31, 2019 and 2018 were each negatively impacted by approximately $3 million due to unfavorable weather conditions.
Adjusted EBITDA
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Six Months Ended June 30, 2018 |
|
$ |
196 |
|
Impact of change in revenue |
|
|
13 |
|
Sales and marketing |
|
|
(4) |
|
Production labor |
|
|
1 |
|
Damage claims |
|
|
(1) |
|
Investments in growth |
|
|
(9) |
|
Spin-off dis-synergies |
|
|
(7) |
|
Incentive compensation |
|
|
(2) |
|
Investments in training |
|
|
(2) |
|
Fuel, bad debt and other |
|
|
(6) |
|
Impact of acquisitions |
|
|
10 |
|
Six Months Ended June 30, 2019 |
|
$ |
189 |
The increase in sales and marketing costs was driven by targeted investments to drive sales growth. The decrease in production labor was driven by improved labor management. The increase in damage claims was driven by increased termite warranty claims, primarily in the Gulf Coast region. The increase in investments in growth primarily includes our partnership with Salesforce to replace legacy operating systems, investments to optimize our commercial pest business and investments to transform our operating model. The increase in spin-off dis-synergies represents increased corporate allocations to Terminix as a result of the American Home Shield spin-off. The impact of acquisitions represents the increase in relatively low margin revenue from Copesan, which is reflected within Impact of acquisitions above for activity the three months ended March 31, 2019 only. We expect the Adjusted EBITDA contribution from Copesan and other acquisitions to increase in the future as we continue to drive synergies, leveraging world-class service capabilities from Copesan and our service partners, and working towards systematically incorporating those service capabilities into our owned branch locations.
ServiceMaster Brands Segment
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
The ServiceMaster Brands segment, which consists of the ServiceMaster Restore (disaster restoration), ServiceMaster Clean (commercial cleaning), Merry Maids (residential cleaning), Furniture Medic (cabinet and furniture repair) and AmeriSpec (home inspection) businesses, reported a two percent increase in revenue and a two percent increase in Adjusted EBITDA for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Revenue
Revenue by service line is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
% of |
|
% of |
||||||
|
|
|
June 30, |
|
Revenue |
|
Revenue |
||||||
|
(In millions) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Royalty Fees |
|
$ |
35 |
|
$ |
35 |
|
53 |
% |
|
55 |
% |
|
Commercial Cleaning National Accounts |
|
|
19 |
|
|
16 |
|
29 |
|
|
26 |
|
|
Sales of Products |
|
|
3 |
|
|
4 |
|
5 |
|
|
6 |
|
|
Other |
|
|
8 |
|
|
8 |
|
13 |
|
|
13 |
|
|
Total revenue |
|
$ |
65 |
|
$ |
64 |
|
100 |
% |
|
100 |
% |
The increase in revenue from commercial cleaning national accounts was driven by increased sales activity.
Adjusted EBITDA
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Three Months Ended June 30, 2018 |
|
$ |
24 |
|
Sales and marketing |
|
|
1 |
|
Three Months Ended June 30, 2019 |
|
$ |
24 |
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The ServiceMaster Brands segment reported a three percent increase in revenue and a two percent increase in Adjusted EBITDA for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Revenue
Revenue by service line is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
% of |
|
% of |
||||||
|
|
|
June 30, |
|
Revenue |
|
Revenue |
||||||
|
(In millions) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Royalty Fees |
|
$ |
69 |
|
$ |
68 |
|
54 |
% |
|
55 |
% |
|
Commercial Cleaning National Accounts |
|
|
36 |
|
|
31 |
|
28 |
|
|
25 |
|
|
Sales of Products |
|
|
6 |
|
|
7 |
|
5 |
|
|
6 |
|
|
Other |
|
|
16 |
|
|
17 |
|
12 |
|
|
14 |
|
|
Total revenue |
|
$ |
128 |
|
$ |
123 |
|
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 national accounts was driven by increased sales activity.
Adjusted EBITDA
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Six Months Ended June 30, 2018 |
|
$ |
46 |
|
Sales and marketing |
|
|
1 |
|
Spin-off dis-synergies |
|
|
(1) |
|
Six Months Ended June 30, 2019 |
|
$ |
47 |
Corporate
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Adjusted EBITDA for Corporate for the three months ended June 30, 2019 was relatively flat when compared to the three months ended June 30, 2018.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Adjusted EBITDA for Corporate for the six months ended June 30, 2019 increased $3 million when compared to the six months ended June 30, 2018, primarily attributable to favorable claims results in our automobile, general liability and workers’ compensation program.
Costs Historically Allocated to American Home Shield
We have historically incurred the cost of certain corporate-level activities which we performed on behalf of our businesses, including American 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 cost of such activities were historically allocated to our segments, including American Home Shield. Certain corporate expenses which were historically allocated to the American Home Shield business are not permitted to be classified as discontinued operations under GAAP (“Historically Allocated Services”). Such Historically Allocated Services amounted to $11 million and $22 million for the three and six months ended June 30, 2018, and are included in Corporate 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 American Home Shield business were separated from us and transferred to Frontdoor.
The costs of Historically Allocated Services which were not transferred to Frontdoor will be borne by our remaining businesses in the future as dis-synergies. We continue to estimate these dis-synergies to be approximately $18 million in 2019.
Liquidity and Capital Resources
Liquidity
A portion of our liquidity needs are due to service requirements on our indebtedness. The agreements governing our term loan facility maturing November 8, 2023 and revolving credit facility (the “Revolving Credit Facility”) maturing November 8, 2021 (together, 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 of June 30, 2019, we were in compliance with the covenants under the agreements that were in effect on such date.
On October 1, 2018, we completed the spin-off of our American Home Shield business. The separation was effectuated through the Distribution to our stockholders of approximately 80.2% of the outstanding shares of common stock of Frontdoor, which was formed as a wholly owned subsidiary to hold our American Home Shield business. The Distribution was made to our stockholders of record as of the close of business on September 14, 2018, and such stockholders received one share of Frontdoor common stock for every two shares of ServiceMaster common stock held as of the close of business on the Record Date. Subsequent to the Distribution, we retained 16,734,092 shares, or approximately 19.8%, of the common stock of Frontdoor immediately following the Distribution.
On March 12, 2019, we borrowed an aggregate principal amount of $600 million under a short-term credit facility to effectuate a debt-for-equity exchange of our Frontdoor retained shares. The proceeds of this short-term credit facility were used to repay $468 million aggregate principal amount of term loans outstanding under our senior secured term loan facility in March and April of 2019. Such prepayments resulted in a loss on extinguishment of debt of $4 million for the six months ended June 30, 2019.
On March 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 (proceeds of $486 million, net), plus used $114 million of proceeds from the short-term credit facility, to extinguish $600 million of our indebtedness under the short-term credit facility. The sale of the Frontdoor common stock resulted in a realized gain of $40 million, which was recorded within Realized (gain) on investment in frontdoor, inc. on the condensed consolidated statements of operations and comprehensive income for the six months ended June 30, 2019.
In March 2019, we purchased approximately $7 million in aggregate principal amount of our 7.45% notes maturing in 2027 at a price of 105.5% and $3 million in aggregate principal amount of our 7.25% notes maturing in 2038 at a price of 99.5% using available cash. The repurchased notes were delivered to the trustee for cancellation. In connection with these partial repurchases, we recorded a loss on extinguishment of debt of $2 million in the six months ended June 30, 2019.
In April 2019, we purchased $1 million in aggregate principal amount of our 7.45% notes maturing in 2027 at a price of 105.5%.
The proceeds from and the use of proceeds in connection with the debt-for-equity exchange are as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
Proceeds from the short-term credit facility |
$ |
600 |
|
Proceeds from the Frontdoor common shares retained, net of $16 million of fees paid |
|
486 |
|
Total proceeds |
$ |
1,086 |
|
|
|
|
|
Repayment of the term loan facility, including loss on extinguishment of det of $4 million |
$ |
(472) |
|
Debt-for-equity exchange using net proceeds from the Frontdoor common shares retained |
|
(486) |
|
Repurchase of 2027 and 2038 notes, including loss on extinguishment of debt of $2 million |
|
(12) |
|
Interest and other payments |
|
(1) |
|
Use of cash to retire short-term credit facility |
|
(114) |
|
Total uses |
$ |
(1,086) |
In connection with the prepayments on our senior secured term loan facility, we terminated $479 million of our interest rate swap, receiving $12 million in connection with the terminations. The fair value of the terminated agreements of $12 million is recorded within accumulated other comprehensive income on the condensed consolidated statements of financial position and will be amortized into interest expense over the original term of the agreement.
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 short- and long-term marketable securities totaled $246 million as of June 30, 2019, compared with $690 million as of December 31, 2018, which included our investment in Frontdoor. As of June 30, 2019, there were $23 million of letters of credit outstanding and $277 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.
In 2016, our board of directors authorized a three-year share repurchase program (that expired in February 2019), under which we may repurchase up to $300 million of outstanding shares of our common stock. On February 19, 2019, our board of directors approved a three-year extension of the share repurchase plan allowing for an aggregate of $150 million of repurchases though February 19, 2022. As of June 30, 2019, we have repurchased $17 million of outstanding shares under this program, which are included in treasury stock on the condensed consolidated statements of financial position.
Cash and short- and long-term marketable securities include balances associated with a subsidiary borrowing arrangement at our financing subsidiary. See “—Limitations on Distributions and Dividends by Subsidiaries.” As of June 30, 2019, the total net assets subject to these third-party restrictions was $23 million. We expect that such limitations will be in effect for the foreseeable future.
As of June 30, 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 condensed 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 of June 30, 2019, the estimated fair value of our fuel swap contracts was less than $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.
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 six months ended June 30, 2019, we acquired $23 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 percent. We have no minimum commitment for the number of vehicles to be obtained under the Fleet Agreement.
Additionally, a portion of our property and equipment is leased through programs outside the scope of the Fleet Agreement. For the six months ended June 30, 2019, no property and equipment was acquired through these incremental leasing programs. We anticipate new lease financings, including the Fleet Agreement and incremental leasing programs, for the full year 2019 will range from $35 million to $45 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 are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These restrictions are related to a subsidiary borrowing arrangement at our financing subsidiary. As of June 30, 2019, the total net assets subject to these third-party restrictions was $23 million. We expect that such limitations will be in effect for the foreseeable future. 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 with U.S. tax principles, of certain foreign owned corporations owned by U.S. stockholders. While the Transition Tax resulted in all pre-2018 undistributed foreign earnings being subject to U.S. tax, an actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes.
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in the accompanying condensed consolidated statements of cash flows, are summarized in the following table.
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|
|
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Six Months Ended |
||||
|
|
|
June 30, |
||||
|
(In millions) |
|
2019 |
|
2018 |
||
|
Net cash provided from (used for): |
|
|
|
|
|
|
|
Operating activities |
|
$ |
158 |
|
$ |
138 |
|
Investing activities |
|
|
(121) |
|
|
(182) |
|
Financing activities |
|
|
(32) |
|
|
(104) |
|
Discontinued operations |
|
|
(2) |
|
|
122 |
|
Cash increase (decrease) during the period |
|
$ |
3 |
|
$ |
(25) |
Operating Activities
Net cash provided from operating activities from continuing operations increased $20 million to $158 million for the six months ended June 30, 2019 compared to $138 million for the six months ended June 30, 2018.
Net cash provided from operating activities for the six months ended June 30, 2019 comprised $171 million in earnings adjusted for non-cash charges, offset, in part, by $13 million in payments related to restructuring and fumigation matters and a $1 million increase in cash required for working capital (a $6 million increase excluding the working capital impact of accrued interest and taxes). For the six months ended June 30, 2019, working capital requirements were favorably impacted by seasonal activity and the timing of interest and income tax payments.
Net cash provided from operating activities for the six months ended June 30, 2018 comprised $129 million in earnings adjusted for non-cash charges, offset, in part, by $8 million in payments related to restructuring, and a $18 million decrease in cash required for working capital (a $3 million increase excluding the working capital impact of accrued interest and taxes). For the six months ended June 30, 2018, working capital requirements were favorably impacted by seasonal activity and the timing of income tax payments.
Investing Activities
Net cash used for investing activities from continuing operations was $121 million for the six months ended June 30, 2019, compared to $182 million for the six months ended June 30, 2018.
Cash paid for business acquisitions, which decreased to $119 million, net of $1 million of cash acquired, for the six months ended June 30, 2019, from $149 million, net of $1 million of cash acquired, for the six months ended June 30, 2018. We expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions.
Capital expenditures decreased to $15 million for the six months ended June 30, 2019 from $35 million ($28 million net of government grants) in the six months ended June 30, 2018 and included recurring capital needs, information technology projects, and a reduction in Global Service Center relocation costs. We anticipate capital expenditures for the full year 2019 will range from $35 million to $45 million, reflecting 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.
Cash flows received from the sale and maturity of securities for the six months ended June 30, 2019 totaled $3 million and was driven by the sale of equity securities. There was no cash received from the sale and maturity of securities for the six months ended June 30, 2018.
Cash flows received for notes receivable, net, for the six months ended June 30, 2019 totaled $10 million. Cash flows used for notes receivable, net, for the six months ended June 30, 2018 totaled $5 million. This was a result of a net increase in financing provided by our financing subsidiary to our franchisees and retail customers of our operating units and collections from other long-term financing arrangements.
Financing Activities
Net cash used for financing activities from continuing operations was $32 million and $104 million for the six months ended June 30, 2019 and 2018, respectively.
During the first quarter of 2019, we completed a debt-for-equity exchange which resulted in $600 million of borrowings of debt under a short-term credit facility, $472 million of repayments of our senior secured term loan facility and $114 million of repayments under a short-term credit facility. In addition, we repaid $14 million of other debt.
During the six months ended June 30, 2019, we completed a debt-for-equity exchange and made other debt payments which impacted net cash used for financing activities as follows:
|
|
|
|
|
(in millions) |
|
|
|
Proceeds from the short-term credit facility |
$ |
600 |
|
|
|
|
|
Repayment of the term loan facility, including prepayment penalty of $4 million |
$ |
(472) |
|
Repurchase of 2027 and 2038 notes, including prepayment penalty of $2 million |
|
(12) |
|
Use of cash to retire short-term credit facility |
|
(114) |
|
Total uses |
|
(599) |
|
Other debt payments |
|
(25) |
|
Total payments of debt |
$ |
(624) |
During the six months ended June 30, 2019, we repurchased $17 million of common stock and received $9 million from the issuance of common stock through the exercise of stock options. During the six months ended June 30, 2018, we made scheduled principal payments on long-term debt of $110 million, which included a $79 million payment upon maturity of the 2018 Notes using cash on hand from operations and received $6 million from the issuance of common stock upon the exercise of stock options.
Contractual Obligations
Our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) includes disclosures of our contractual obligations and commitments as of December 31, 2018. As indicated above, in connection with the debt-for-equity exchange transaction, we repaid $468 million of our outstanding term loan debt. In addition, we continue to make the contractually required payments, and, therefore, the 2019 obligations and commitments as listed in our 2018 Form 10-K have been reduced by the required payments and the debt-for-equity exchange.
Off-Balance Sheet Arrangements
As of June 30, 2019, we did not have any significant off-balance sheet arrangements.
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.
Regulatory Matters
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 a 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 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 fumigation matter, which could be material, is not currently known, and any such further penalties, fines, sanctions, costs or damages would not be covered under our general liability policies.
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. Forward-looking statements are subject to known and unknown risks and uncertainties. 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; customer retention; 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; estimates of future payments under operating and finance leases; estimates on current and deferred tax provisions; the outcome (by judgment or 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 market 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 market 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” in our 2018 Form 10-K and in “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:
our ability to successfully implement our business strategies;
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;
risks associated with acquisitions, including, without limitation, retaining customers from businesses acquired, difficulties in integrating acquired businesses and achieving expected synergies therefrom;
resolution of fumigation related matters;
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;
adverse weather conditions;
weakening general economic conditions, unemployment and consumer confidence or spending levels;
our ability to generate the cash needed to fund our operations and service our debt obligations;
adverse credit and financial markets impeding access, increasing financing costs or causing our customers to incur liquidity issues leading to some of our services not being purchased or cancelled;
increase in prices for fuel and raw materials, and in minimum wage levels;
changes in the source and intensity of competition in our market 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 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 SEC.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The economy and its impact on discretionary consumer spending, labor wages, fuel prices and other material costs, home resales, unemployment rates, insurance costs and medical costs could have a material adverse impact on future results of operations.
We do not hold or issue derivative financial instruments for trading or speculative purposes. We have entered into specific financial arrangements, primarily fuel swap agreements and interest rate swap agreements, in the normal course of business to manage certain market risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of derivative financial instrument transactions could have a material impact on our financial statements.
Interest Rate Risk
We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps. In our opinion, other than the impact of our repayment of $468 million of our term loan facility and the termination of $479 million of our interest rate swap, the market risk associated with our remaining debt obligations and other significant instruments as of June 30, 2019 has not materially changed from December 31, 2018 (see Item 7A of the 2018 Form 10-K).
Fuel Price Risk
We are exposed to market risk for changes in fuel prices through the consumption of fuel by our vehicle fleet in the delivery of services to our customers. We expect to use approximately 12 million gallons of fuel in 2019. As of June 30, 2019, a 10 percent change in fuel prices would result in a change of approximately $2 million in our annual fuel cost before considering the impact of fuel swap contracts.
We use fuel swap contracts to mitigate the financial impact of fluctuations in fuel prices. As of June 30, 2019, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $30 million, maturing through 2020. The estimated fair value of these contracts as of June 30, 2019 was less than $1 million. These fuel swap contracts provide a fixed price for approximately 79 percent and 59 percent of our estimated fuel usage for the remainder of 2019 and 2020 respectively.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our Chief Executive Officer, Nikhil M. Varty, and Senior Vice President and Chief Financial Officer, Anthony D. DiLucente, have evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q as required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act. Messrs. Varty and DiLucente have concluded that both the design and operation of our disclosure controls and procedures were effective as of June 30, 2019.
Changes in internal control over financial reporting
No changes in our internal control over financial reporting, as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act, occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 a 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 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 fumigation matter, which could be material, is not currently known, and any such further penalties, fines, sanctions, costs or damages would not be covered under our general liability insurance policies.
In addition to the matter discussed above, in the ordinary course of conducting business activities, we and our 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. We have entered into settlement agreements in certain cases, including with respect to putative collective and class actions, which are subject to court or other approvals, and which require compliance with the terms of the agreements. If one or more of our settlements are not finally approved and implemented, we could have additional or different exposure, which could be material. Subject to the paragraphs above, we do not expect any of these proceedings to have a material effect on our reputation, business, financial position, results of operations or cash flows; however, we can give no assurance that the results of any such proceedings will not materially affect our reputation, business, financial position, results of operations and cash flows. See Note 6 to the condensed consolidated financial statement for more details.
ITEM 1A. RISK FACTORS
We discuss in our 2018 Form 10-K and our other filings with the SEC various risks that may materially affect our business. There have been no material changes to the risk factors disclosed in the 2018 Form 10-K. The materialization of any risks and uncertainties identified in Forward-Looking Statements contained in this report, together with those previously disclosed in the 2018 Form 10-K and our other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Information Regarding Forward-Looking Statements” above.
ITEM 2. UNREGISTERED SALES OF REGISTERED SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
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|
|
|
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|
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|
|
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|
|
|
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|
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Total number of |
|
Maximum dollar value |
|
|
|
|
|
|
|
|
|
shares purchased as |
|
of shares that may yet |
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|
|
|
|
|
|
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part of publicly |
|
be purchased under |
|
|
|
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Total number of |
|
Average price |
|
announced plans or |
|
the plans or programs |
||
|
Period |
|
shares purchased |
|
paid per share |
|
programs |
|
(in millions)(1) |
||
|
April 1, 2019 through April 30, 2019 |
|
95,445 |
|
$ |
47.96 |
|
95,445 |
|
$ |
144 |
|
May 1, 2019 through May 31, 2019 |
|
99,990 |
|
|
52.44 |
|
99,990 |
|
|
138 |
|
June 1, 2019 through June 30, 2019 |
|
90,900 |
|
|
53.56 |
|
90,900 |
|
|
134 |
|
Total |
|
286,335 |
|
$ |
51.30 |
|
286,335 |
|
$ |
134 |
___________________________________
(1)On February 23, 2016, our board of directors authorized a three-year share repurchase program (that expired February 23, 2019), under which we were authorized to repurchase up to $300 million of outstanding shares of our common stock. Of the total amount authorized, $155 million was remaining on the date the program expired. On February 19, 2019, our board of directors approved a three-year extension of the share repurchase plan allowing for an aggregate of $150 million of repurchases through February 19, 2022.
ITEM 6. EXHIBITS
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Exhibit
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Description |
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10.1#* |
Separation Agreement and General Release entered into with Mary Kay Wegner, dated May 16, 2019. |
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10.2#* |
Schedule of Signatories to a Director Indemnification Agreement. |
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31.1* |
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31.2* |
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||
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32.1* |
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32.2* |
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101.INS* |
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XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* |
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XBRL Taxonomy Extension Schema |
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101.CAL* |
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XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF* |
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XBRL Taxonomy Extension Definition Linkbase |
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101.LAB* |
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XBRL Taxonomy Extension Label Linkbase |
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101.PRE* |
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XBRL Extension Presentation Linkbase |
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104* |
|
The cover page from ServiceMaster’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in Inline XBRL (included in Exhibit 101). |
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___________________________________
# Denotes management compensatory plans, contracts or arrangements.
* Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 6, 2019
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SERVICEMASTER GLOBAL HOLDINGS, INC. |
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(Registrant) |
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By: |
/s/ Anthony D. DiLucente |
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Anthony D. DiLucente |
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Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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47
Exhibit 10.1
SEPARATION AGREEMENT AND GENERAL RELEASE
This Separation Agreement and General Release (“Agreement”) is entered into by you, Mary Kay Wegner, on behalf of yourself, your heirs, executors, administrators, successors, assigns (collectively, “you”) and The ServiceMaster Company, LLC, on behalf of itself, subsidiaries, parent companies, affiliated entities, predecessors, successors, assigns, and their respective officers, directors, employees, insurers and agents (collectively, “Company” or “ServiceMaster”). In consideration of the mutual covenants in this Agreement, the parties hereby agree as follows:
1. Separation from Employment. You have resigned from your position as president, ServiceMaster Brands, effective May 24, 2019 (“Separation Date”), and will no longer hold any other officer or director position with ServiceMaster or any of its subsidiaries or affiliated entities. You will continue to be paid your current base salary and benefits through your Separation Date in accordance with ServiceMaster’s normal payroll practices.
2. Severance Benefits. In exchange for your promises as set forth in this Agreement and subject to your compliance with the terms and conditions hereof, ServiceMaster agrees to provide you with the following severance benefits:
a. Severance Pay. You will receive a severance payment totaling $425,000.00, which equals your current annual base salary.
b. Target Bonus. You will receive a payment totaling $276,250.00, which equals your target bonus under the ServiceMaster 2019 Annual Incentive Plan (“AIP”).
c. AIP Bonus. You will be eligible for a pro-rated bonus payout under the 2019 AIP based on your target bonus percentage, which will be calculated and paid based on the terms and conditions of the Plan, including actual Plan funding and performance measures. Any AIP bonus will be paid to you when paid to active employees, which is expected to be by March 15, 2020.
d. Supplemental Payment. You will receive a one-time supplemental payment of $6,117.72, which equals your premiums for COBRA continuation coverage for 12 months. You may use this payment to cover your COBRA premiums or as you otherwise see fit. This supplemental payment will be “grossed-up” for tax purposes so you receive the full amount after payroll tax deductions and withholdings.
The severance payment, target bonus and supplemental payment will be paid to you within 15 days after the Effective Date (defined below).
Except as otherwise expressly specified in this Agreement, the compensation set forth in paragraph 2 above represents all of the amounts you will be entitled to receive from the Company and you will not be paid any other compensation or benefits.
3. Career Transition Assistance. The Company will pay for executive‑level career transition assistance services for you with the Company’s outplacement services provider (or other provider designated by you and approved in writing by the Company) for a period of up to 12 months and at a cost not to exceed $65,000 If you wish to initiate career transition services, you must do so no later than 12 months after your Separation Date.
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4. Other Benefits. Upon separation of employment, you may be eligible for payout or benefits under the following policies, compensation plans and benefit plans, even if you do not sign this Agreement:
a. Group Health Insurance. If you participate in or are eligible to participate in the ServiceMaster Health and Welfare Benefit Plan, your eligibility to participate will end on your Separation Date. You will become eligible for continuation of coverage under COBRA on the first day following your Separation Date. You are solely responsible for the payment of any premiums for COBRA coverage.
b. Unused Vacation Time. You will receive payment for any accrued, unused vacation time on the first regularly scheduled pay date following your Separation Date or within the time period required by state law.
c. PSRP. If you participate in the ServiceMaster Profit Sharing and Retirement Plan (“PSRP”), your eligibility to participate will end on your Separation Date. Any Company match credited to your account will follow the PSRP’s vesting schedules. Subject to the terms and conditions of the PSRP, any balance in your account will be distributed in accordance with your prior elections.
d. DCP. If you participate in the ServiceMaster Deferred Compensation Plan (“DCP”), your eligibility to participate will end on your Separation Date. Subject to the terms and conditions of the DCP, any balance in your account will be distributed in accordance with your prior elections.
e. Stock Plans. If you participate in any ServiceMaster stock plans, including the ServiceMaster Employee Stock Purchase Plan, the Amended and Restated ServiceMaster Global Holdings, Inc. Stock Incentive Plan, as amended and restated as of October 25, 2012 (“MSIP”), the Amended and Restated ServiceMaster Global Holdings, Inc. 2014 Omnibus Incentive Plan, as amended and restated as of April 27, 2015, and/or the ServiceMaster Global Holdings, Inc. Employee Stock Purchase Plan, any account balances, stock options, restricted stock units or other equity owned by you as of your Separation Date are subject to the terms and conditions of the applicable stock plans. This Agreement does not change the terms of those plans.
5. Release and Covenant Not to Sue.
a. Release: In exchange for the consideration provided to you in this Agreement, you hereby release and forever discharge ServiceMaster, its past and present parent entities, subsidiaries, divisions, limited partnerships, affiliated corporations, successors and assigns, as well as their respective past and present directors, managers, officers, partners, agents, employees, insurers, attorneys, servants, and each of them, separately and collectively (“Releasees”), from any and all claims, charges, complaints, liens, demands, causes of action, obligations, damages and liabilities, known or unknown, suspected or unsuspected, whether or not mature or ripe (“Claims”), that you ever had and now have against any of the Releasees, including, but not limited to, Claims arising out of or in any way related to your employment with or separation from the Company. This includes, but is not limited to, Claims based on statutes, torts, contracts and common law, Claims for discrimination, wrongful discharge, harassment, retaliation, and unpaid wages, Claims arising under Title VII of the Civil Rights Act of 1964, the Fair Labor Standards Act (“FLSA”), Family Medical Leave Act (“FMLA”), the Americans with
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Disabilities Act, the Age Discrimination in Employment Act, the Worker Adjustment and Retraining Notification Act, the Employee Retirement Income Security Act, and any other federal, state or local law or regulation governing the employment relationship. You understand that this Agreement includes a release of all known and unknown claims through the Effective Date.
b. Limitation of Release: Nothing in this Agreement will prohibit you from filing a charge of discrimination with the National Labor Relations Board, the Equal Employment Opportunity Commission (“EEOC”) or an equivalent state civil rights agency, but you agree and understand that you are expressly waiving your right to monetary compensation or damages thereby if any such agency elects to pursue a claim on your behalf. Further, nothing in this Agreement shall be construed to waive any right that is not subject to waiver by private agreement under federal, state or local employment or other laws.
c. Covenant Not To Sue. To the extent that any Claims covered by the scope of the release herein are not subject to waiver by this Agreement under applicable law (including, without limitation, any Claims arising under or related to FMLA, FLSA, and any other local, state or federal statute governing employment and/or the payment of wages and benefits), you hereby covenant and agree not to sue or otherwise seek any remedy or other form of relief against any of the Releasees relating to such Claims.
6. Confidential Information. You acknowledge and agree that (a) you have not used or disclosed any Confidential Information other than as necessary in the ordinary course of performing your duties as a ServiceMaster employee for the benefit of ServiceMaster, and (b) you will keep in confidence and trust all Confidential Information known to you, and will not use or disclose such Confidential Information without the prior written consent of ServiceMaster. As used in this Agreement, “Confidential Information” means (a) all trade secrets, proprietary information, business techniques and processes, technical know-how and other non-public information (including customer, supplier, marketing and financial information) used by the Company in connection with its business operations; (b) non-public business information obtained from customers, franchisees, suppliers, contractors and other business partners; and (c) private personnel information. Nothing in this Agreement precludes you from (a) making any report or disclosure to a government agency to the extent required or protected by statute, regulation or other applicable law; or (b) testifying truthfully in any legal proceedings to the extent compelled by subpoena.
Pursuant to the Defend Trade Secrets Act, 18 USC §§ 1831-39, you are hereby noticed as follows: An individual may not be held criminally or civilly liable under any federal or state trade secret law for disclosure of a trade secret: (a) made in confidence to a government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law; and/or (b) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Additionally, an individual suing an employer for retaliation based on the reporting of a suspected violation of law may disclose a trade secret to his or her attorney and use the trade secret information in the court proceeding, so long as any document containing the trade secret is filed under seal and the individual does not disclose the trade secret except pursuant to court order.
7. Non‑Compete/Non‑Solicitation/Non‑Interference. While you remain employed by ServiceMaster and for a period of 12 months following your Separation Date, you shall not, directly or indirectly (whether as owner, stockholder, director, officer, employee, principal, agent, consultant, independent contractor, partner or otherwise), in North America or any other
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geographic area in which ServiceMaster or any subsidiary of ServiceMaster is then conducting business:
a. own, manage, operate, control, participate in, perform work for, or otherwise carry on, a business similar to or competitive with the business conducted by ServiceMaster, provided that the foregoing shall not prohibit your passive ownership of less than 1% of any publicly-held company;
b. solicit the business of any customer of ServiceMaster in competition with ServiceMaster;
c. induce or attempt to induce any employee of ServiceMaster to terminate his or her employment with ServiceMaster and/or to become employed by any other business or other entity; or
d. interfere with ServiceMaster’s relations with any of its customers, franchisees, subcontractors, consultants, suppliers or business partners.
This Agreement is in addition to and does not supersede any other agreements prohibiting competition with ServiceMaster. Failure to abide by this Agreement or other such agreements with the Company will give the Company (in addition to any other remedies which may be available to the Company) the right, exercised in its sole and absolute discretion, to (a) suspend or cancel the payments contemplated in this Agreement and (b) obtain a refund for any such payments already made (collectively, “Company Rights”). You understand and recognize that, as a result of your executive role with ServiceMaster, you had contact with, and developed and furthered relationships with, customers and/or prospective customers and/or had access to secret, proprietary and confidential information regarding ServiceMaster and its businesses, including Confidential Information (as defined above), and therefore understand and agree that (a) both the nature of this covenant and the scope of this covenant, as well as the covenants in Paragraphs 6 and 7 of this Agreement, are reasonable and necessary for the protection of ServiceMaster, including its secret, proprietary and confidential information, goodwill and customer relationships and (b) that ServiceMaster will be irreparably harmed by any breach of Paragraphs 6 and 7, entitling it to seek injunctive and other equitable relief.
8. Code of Ethics and Business Conduct. In the course of your employment, you were provided a copy of the Company’s Code of Ethics and Business Conduct (the “Code”). The discovery of any failure by you to abide by the Code, whenever discovered, shall entitle the Company to exercise any and all of its Company Rights, including the suspension and recoupment of any payments paid or due under this Agreement and any other agreements between the parties. Further, you acknowledge that you are not aware of any material breach of law or regulation by the Company or its subsidiaries that has not been reported to the Audit Committee, Chief Executive Officer or Chief Ethics Officer of the Company
9. Return of ServiceMaster Property. You agree to return to ServiceMaster all ServiceMaster property, equipment and materials, including, but not limited to, any company vehicle, any laptop computer and peripherals; any cell phone or other portable computing device; any telephone calling cards; keys; ServiceMaster identification card; any credit or fuel cards; and all tangible written or graphic materials (and all copies) relating in any way to ServiceMaster or its business, including, without limitations, documents, manuals, customer lists and reports, as well as all data contained on computer files, “thumb” drives, “cloud” services, or other data storage device, or home or personal computers.
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10. Assistance. You agree to assist ServiceMaster as it may reasonably request from time to time to help transition your job duties and to cooperate fully with the Company and its counsel with respect to any claims, investigations, legal proceedings or other matters relating to your employment or about which you have knowledge.
11. Non‑Disparagement. You agree that you will refrain from making any public statements, written or oral, which defame or disparage the business, goodwill or reputation of ServiceMaster (including its products and services), its directors, officers, executives, subsidiaries, parent entities, and/or employees. Similarly, the Company will instruct its chief executive officer and other executive officers to refrain from making any statements to third parties that disparage or defame you. You agree to direct any prospective employers seeking to verify your employment data to The Work Number (www.theworknumber.com), an on-line employment verification service operated by Equifax Workforce Solutions.
12. Severability. You and ServiceMaster agree that to the extent that any portion of this Agreement may be held to be invalid or legally unenforceable, the remaining portions will not be affected and will be given full force and effect.
13. Dispute Resolution. Any dispute or controversy between you and ServiceMaster, whether arising out of or relating to this Agreement, the breach of this Agreement, or otherwise, shall be subject to The ServiceMaster We Listen Dispute Resolution Plan in effect on your Separation Date, which provides the mandatory and exclusive remedy and procedure for disputes between you and ServiceMaster. Notwithstanding the foregoing, you agree that ServiceMaster may seek a temporary restraining order and/or preliminary injunction in any court of competent jurisdiction, without the posting of a bond, in order to preserve the status quo or to enforce the covenants in this Agreement.
14. Notices. All notices required or permitted pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. Such notice shall be addressed as follows:
If to ServiceMaster:
The ServiceMaster Company, LLC
150 Peabody Place
Memphis, TN 38103-3270
Attn: General Counsel
If to you, at your most recent address as shown in the Company’s human resources information system and to your attorney addressed as follows:
Richard C. Schoenstein, Esq.
Tarter Krinsky & Drogin LLP
1350 Broadway
New York, NY 10018
rschoenstein@tarterskinsky.com
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15. Governing Law and Venue. The interpretation and enforcement of this Agreement shall be governed by the laws of the State of Tennessee without regard to the principle of conflict of laws that would require application of another state’s laws. Subject to the arbitration provisions herein, any judicial proceeding arising from or relating to this Agreement shall be brought in the federal or state courts located in Shelby County, Tennessee, which shall be the exclusive forum for resolving such disputes. Both parties irrevocably consent to the personal jurisdiction of such courts for the purposes of such proceeding. The parties shall stipulate in any legal proceeding that this Agreement is considered for all purposes to have been executed and delivered in the State of Tennessee.
16. Taxes. Unless otherwise specified, all payments contemplated by this Agreement shall be subject to applicable payroll taxes and other required withholdings. This Agreement is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and shall be interpreted and construed consistently with such intent. Payments provided herein are intended to be exempt from Section 409A of the Code to the maximum extent possible under either the separation pay exemption pursuant to Treasury regulation §1.409A-1(b)(9)(iii) or as short-term deferrals pursuant to Treasury regulation §1.409A-1(b)(4), and for such purposes, each payment under this Agreement shall constitute a “separately identified” amount within the meaning of Treasury regulation §1.409A-2(b)(2). In the event the terms of this Agreement would subject you to taxes or penalties under Section 409A of the Code (“409A Penalties”), you shall cooperate diligently with the Company to amend the terms of this Agreement to avoid such 409A Penalties, to the extent possible; provided, that in no event shall the Company be responsible for any 409A Penalties that arise in connection with any amounts payable under this Agreement. You understand that the Company has not provided any advice regarding the tax liability resulting from this Agreement and you shall not rely upon any representations or policies of the Company related to taxation. You are advised to seek the advice of your own personal tax advisor or counsel as to the tax treatment of any payments contemplated by this Agreement. The Company specifically disclaims that it has responsibility for the proper calculation or payment of any taxes which may be due other than for standard statutory withholding.
17. Entire Agreement. You and ServiceMaster agree that this Agreement constitutes the complete understanding between you and ServiceMaster regarding the matters herein and that no other promises or agreements, express or implied, will be binding between you and ServiceMaster unless signed in writing by you and ServiceMaster. This Agreement fully supersedes and replaces any and all prior agreements or understandings, if any, between you and ServiceMaster on any matter that is addressed in this Agreement with the exception of confidentiality/non‑solicitation/non‑compete issues except as stated herein.
18. Older Workers Benefit Protection Act Notice. Pursuant to the Older Workers Benefit Protection Act, you are advised as follows:
a. This Agreement includes a waiver of claims of age discrimination under the federal Age Discrimination in Employment Act;
b. You have been advised and are again hereby advised to consult an attorney of your choosing before signing this Agreement;
c. You have (i) 21 days from your receipt of this Agreement; or (ii) seven days from your Separation Date, whichever period is longer, to consider the Agreement (the “Review Period”);
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d. You have seven days after you sign this Agreement to revoke the Agreement. If you want to revoke this Agreement, you must deliver a written revocation to The ServiceMaster Company, LLC; 150 Peabody Place; Memphis, TN 38103-3270; Attn: General Counsel;
e. If your executed Agreement is not received by the Company within seven days from the end of the Review Period, the Agreement and any promises offered on behalf of Company contained therein will be null and void.
19. Effective Date: This Agreement becomes effective on the 8th day after you sign, provided you do not revoke the Agreement as provided above (such date, the “Effective Date”).
YOU ACKNOWLEDGE THAT YOU HAVE READ THIS AGREEMENT CAREFULLY, UNDERSTAND ALL OF ITS TERMS AND AGREE TO THOSE TERMS KNOWINGLY, FREELY, VOLUNTARILY, AND WITHOUT DURESS. YOU HAVE CONSULTED WITH COUNSEL OF YOUR OWN CHOOSING (OR HAVE HAD AN OPPORTUNITY TO DO SO) REGARDING THE TERMS AND LEGAL EFFECT OF THIS AGREEMENT.
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/s/ Mary Kay Wegner Mary Kay Wegner |
/s/ David Dart
David Dart
The ServiceMaster Company, LLC |
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Date: May 16, 2019 |
Date: May 21, 2019 |
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ServiceMaster Global Holdings, Inc.
Schedule of Signatories* to a Director Indemnification Agreement
Deborah H. Caplan (effective July 26, 2019)
John B. Corness
Laurie Ann Goldman
Naren K. Gursahaney
Steven B. Hochhauser
Stephen J. Sedita
Mark E. Tomkins
Nikhil M. Varty
* Peter L. Cella, William C. Cobb, Richard P. Fox, Jerri L. DeVard, Robert J. Gillette, Thomas C. Tiller, Jr., John Krenicki, Jr., David H. Wasserman, Darren M. Friedman, Sarah Kim and Curtis D. Hecht each previously signed a Director Indemnification Agreement, but they are no longer serving on our Board of Directors.
The form of Director Indemnification Agreement was filed with the SEC on June 19, 2014 as Exhibit 10.71 to the Registration Statement on Form S-1 of ServiceMaster Global Holdings, Inc.
CERTIFICATIONS
I, Nikhil M. Varty, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of ServiceMaster Global Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: August 6, 2019 |
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/s/ Nikhil M. Varty |
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Nikhil M. Varty |
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Chief Executive Officer |
CERTIFICATIONS
I, Anthony D. DiLucente, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of ServiceMaster Global Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: August 6, 2019 |
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/s/ Anthony D. DiLucente |
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Anthony D. DiLucente |
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Senior Vice President and Chief Financial Officer |
Certification of Chief Executive Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of The United States Code
I, Nikhil M. Varty, the Chief Executive Officer of ServiceMaster Global Holdings, Inc., certify that (i) the Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ServiceMaster Global Holdings, Inc.
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/s/ Nikhil M. Varty |
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Nikhil M. Varty |
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August 6, 2019 |
Certification of Chief Financial Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of The United States Code
I, Anthony D. DiLucente, the Senior Vice President and Chief Financial Officer of ServiceMaster Global Holdings, Inc., certify that (i) the Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ServiceMaster Global Holdings, Inc.
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/s/ Anthony D. DiLucente |
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Anthony D. DiLucente |
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August 6, 2019 |