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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, 2020
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 August 3, 2020: 131,991,945 shares of common stock, par value $0.01 per share.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In millions, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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Revenue |
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$ |
534 |
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$ |
494 |
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$ |
990 |
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$ |
913 |
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Cost of services rendered and products sold |
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297 |
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276 |
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577 |
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512 |
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Selling and administrative expenses |
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143 |
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138 |
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283 |
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261 |
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Amortization expense |
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9 |
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5 |
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18 |
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10 |
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Acquisition-related costs |
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— |
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3 |
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1 |
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4 |
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Fumigation related matters |
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— |
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(1) |
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— |
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— |
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Restructuring and other charges |
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8 |
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2 |
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12 |
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8 |
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Realized (gain) on investment in frontdoor, inc. |
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— |
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— |
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— |
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(40) |
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Interest expense |
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22 |
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18 |
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45 |
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45 |
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Interest and net investment income |
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(1) |
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(3) |
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(1) |
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(4) |
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Loss on extinguishment of debt |
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— |
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— |
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— |
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6 |
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Income from Continuing Operations before Income Taxes |
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57 |
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56 |
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56 |
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112 |
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Provision for income taxes |
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18 |
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14 |
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16 |
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17 |
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Equity in earnings of joint venture |
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1 |
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— |
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1 |
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— |
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Income from Continuing Operations |
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40 |
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42 |
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41 |
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95 |
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Net earnings from discontinued operations |
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13 |
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17 |
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26 |
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34 |
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Net Income |
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$ |
53 |
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$ |
59 |
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$ |
67 |
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$ |
129 |
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Total Comprehensive Income |
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$ |
54 |
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$ |
55 |
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$ |
19 |
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$ |
123 |
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Weighted-average common shares outstanding - Basic |
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131.9 |
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136.0 |
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133.4 |
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135.9 |
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Weighted-average common shares outstanding - Diluted |
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132.0 |
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136.5 |
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133.5 |
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136.3 |
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Basic Earnings Per Share: |
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Income from Continuing Operations |
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$ |
0.30 |
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$ |
0.31 |
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$ |
0.31 |
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$ |
0.70 |
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Net earnings from discontinued operations |
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0.10 |
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0.13 |
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0.19 |
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0.25 |
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Net Income |
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0.40 |
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0.43 |
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0.50 |
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0.95 |
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Diluted Earnings Per Share: |
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Income from Continuing Operations |
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$ |
0.30 |
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$ |
0.30 |
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$ |
0.31 |
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$ |
0.70 |
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Net earnings from discontinued operations |
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0.10 |
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0.13 |
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0.19 |
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0.25 |
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Net Income |
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0.40 |
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0.43 |
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0.50 |
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0.94 |
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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2020 |
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2019 |
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Assets: |
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Current Assets: |
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Cash and cash equivalents |
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$ |
302 |
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$ |
280 |
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Receivables, less allowances of $22 and $21, respectively |
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205 |
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178 |
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Inventories |
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45 |
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46 |
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Prepaid expenses and other assets |
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68 |
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81 |
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Current assets held for sale |
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884 |
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45 |
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Total Current Assets |
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1,505 |
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629 |
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Other Assets: |
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Property and equipment, net |
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189 |
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205 |
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Operating lease right-of-use assets |
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86 |
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95 |
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Goodwill |
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2,103 |
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2,096 |
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Intangible assets, primarily trade names, service marks and trademarks, net |
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1,146 |
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1,169 |
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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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33 |
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32 |
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Long-term marketable securities |
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13 |
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13 |
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Deferred customer acquisition costs |
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96 |
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94 |
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Other assets |
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78 |
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72 |
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Long-term assets held for sale |
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— |
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829 |
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Total Assets |
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$ |
5,339 |
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$ |
5,322 |
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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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$ |
96 |
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Accrued liabilities: |
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Payroll and related expenses |
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75 |
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54 |
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Self-insured claims and related expenses |
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84 |
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72 |
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Accrued interest payable |
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12 |
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16 |
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Other |
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108 |
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82 |
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Deferred revenue |
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112 |
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107 |
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Current portion of lease liability |
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18 |
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19 |
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Current portion of long-term debt |
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104 |
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70 |
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Current liabilities held for sale |
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54 |
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40 |
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Total Current Liabilities |
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683 |
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557 |
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Long-Term Debt |
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1,620 |
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1,667 |
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Other Long-Term Liabilities: |
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Deferred taxes |
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486 |
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499 |
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Other long-term obligations, primarily self-insured claims |
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196 |
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158 |
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Long-term lease liability |
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103 |
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110 |
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Long-term liabilities held for sale |
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— |
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9 |
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Total Other Long-Term Liabilities |
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786 |
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776 |
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Commitments and Contingencies (Note 6) |
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Stockholders' Equity: |
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Common stock $0.01 par value (authorized 2,000,000,000 shares with 148,193,311 shares issued and 131,981,085 outstanding at June 30, 2020 and 147,872,959 shares issued and 135,408,054 outstanding at December 31, 2019) |
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2 |
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2 |
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Additional paid-in capital |
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2,348 |
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2,334 |
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Retained Earnings |
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358 |
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291 |
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Accumulated other comprehensive (loss) income |
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(40) |
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9 |
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Less common stock held in treasury, at cost (16,212,226 shares at June 30, 2020 and 12,464,905 shares at December 31, 2019) |
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(417) |
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(313) |
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Total Stockholders' Equity |
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2,251 |
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2,322 |
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Total Liabilities and Stockholders' Equity |
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$ |
5,339 |
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$ |
5,322 |
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, 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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— |
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70 |
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(2) |
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— |
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— |
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68 |
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Exercise of stock options |
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— |
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— |
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5 |
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— |
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— |
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— |
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— |
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5 |
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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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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 |
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$ |
2 |
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$ |
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 |
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Net income |
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— |
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— |
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— |
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|
59 |
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— |
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— |
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— |
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59 |
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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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(4) |
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— |
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— |
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(4) |
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Total comprehensive income (loss) |
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— |
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— |
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— |
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59 |
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(4) |
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— |
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— |
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|
55 |
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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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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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(15) |
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(15) |
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Balance June 30, 2019 |
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|
148 |
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$ |
2 |
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$ |
2,326 |
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$ |
285 |
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$ |
(1) |
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|
(12) |
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$ |
(283) |
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$ |
2,329 |
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|
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Balance December 31, 2019 |
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|
148 |
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$ |
2 |
|
$ |
2,334 |
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$ |
291 |
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$ |
9 |
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(12) |
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$ |
(313) |
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$ |
2,322 |
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Net income |
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|
— |
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|
— |
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|
— |
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|
14 |
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|
— |
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|
— |
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|
— |
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|
14 |
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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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(50) |
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|
— |
|
|
— |
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|
(50) |
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Total comprehensive income (loss) |
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|
— |
|
|
— |
|
|
— |
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|
14 |
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(50) |
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|
— |
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|
— |
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(36) |
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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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|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2 |
|
Stock-based employee compensation |
|
|
— |
|
|
— |
|
|
5 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
5 |
|
Repurchase of common stock |
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|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(4) |
|
|
(103) |
|
|
(103) |
|
Balance March 31, 2020 |
|
|
148 |
|
$ |
2 |
|
$ |
2,341 |
|
$ |
305 |
|
$ |
(41) |
|
|
(16) |
|
$ |
(417) |
|
$ |
2,190 |
|
Net income |
|
|
— |
|
|
— |
|
|
— |
|
|
53 |
|
|
— |
|
|
— |
|
|
— |
|
|
53 |
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1 |
|
|
— |
|
|
— |
|
|
1 |
|
Total comprehensive income |
|
|
— |
|
|
— |
|
|
— |
|
|
53 |
|
|
1 |
|
|
— |
|
|
— |
|
|
54 |
|
Stock-based employee compensation |
|
|
— |
|
|
— |
|
|
6 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6 |
|
Balance June 30, 2020 |
|
|
148 |
|
$ |
2 |
|
$ |
2,348 |
|
$ |
358 |
|
$ |
(40) |
|
|
(16) |
|
$ |
(417) |
|
$ |
2,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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, |
||||
|
|
|
2020 |
|
2019 |
||
|
Cash and Cash Equivalents and Restricted Cash at Beginning of Period |
|
$ |
368 |
|
$ |
313 |
|
Cash Flows from Operating Activities from Continuing Operations: |
|
|
|
|
|
|
|
Net Income |
|
|
67 |
|
|
129 |
|
Adjustments to reconcile net income to net cash provided from operating activities: |
|
|
|
|
|
|
|
Net earnings from discontinued operations |
|
|
(26) |
|
|
(34) |
|
Depreciation expense |
|
|
37 |
|
|
35 |
|
Amortization expense |
|
|
18 |
|
|
10 |
|
Amortization of debt issuance costs |
|
|
2 |
|
|
2 |
|
Amortization of lease right-of-use assets |
|
|
9 |
|
|
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 |
|
Stock-based compensation expense |
|
|
10 |
|
|
8 |
|
Gain on sale of marketable securities |
|
|
— |
|
|
(1) |
|
Restructuring and other charges |
|
|
12 |
|
|
8 |
|
Payments for restructuring and other charges |
|
|
(6) |
|
|
(9) |
|
Acquisition-related costs |
|
|
1 |
|
|
4 |
|
Payments for acquisition-related costs |
|
|
(4) |
|
|
(3) |
|
Other |
|
|
(10) |
|
|
(9) |
|
Change in working capital, net of acquisitions: |
|
|
|
|
|
|
|
Receivables |
|
|
(29) |
|
|
(12) |
|
Inventories and other current assets |
|
|
(6) |
|
|
(12) |
|
Accounts payable |
|
|
26 |
|
|
27 |
|
Deferred revenue |
|
|
4 |
|
|
6 |
|
Accrued liabilities |
|
|
31 |
|
|
(9) |
|
Accrued interest payable |
|
|
(4) |
|
|
1 |
|
Current income taxes |
|
|
40 |
|
|
5 |
|
Net Cash Provided from Operating Activities from Continuing Operations |
|
|
172 |
|
|
124 |
|
Cash Flows from Investing Activities from Continuing Operations: |
|
|
|
|
|
|
|
Property additions |
|
|
(15) |
|
|
(13) |
|
Business acquisitions, net of cash acquired |
|
|
(24) |
|
|
(115) |
|
Origination of notes receivable |
|
|
(20) |
|
|
(56) |
|
Collections on notes receivable |
|
|
22 |
|
|
64 |
|
Net Cash Used for Investing Activities from Continuing Operations |
|
|
(36) |
|
|
(119) |
|
Cash Flows from Financing Activities from Continuing Operations: |
|
|
|
|
|
|
|
Borrowings of debt |
|
|
— |
|
|
600 |
|
Payments of debt |
|
|
(40) |
|
|
(624) |
|
Repurchase of common stock |
|
|
(103) |
|
|
(17) |
|
Issuance of common stock |
|
|
3 |
|
|
9 |
|
Net Cash Used For Financing Activities from Continuing Operations |
|
|
(140) |
|
|
(32) |
|
Cash Flows from Discontinued Operations: |
|
|
|
|
|
|
|
Cash provided from operating activities |
|
|
27 |
|
|
32 |
|
Cash provided from investing activities |
|
|
— |
|
|
(2) |
|
Cash used for financing activities |
|
|
— |
|
|
— |
|
Net Cash Provided from Discontinued Operations |
|
|
28 |
|
|
30 |
|
Effect of Exchange Rate Changes on Cash |
|
|
(1) |
|
|
— |
|
Cash Increase During the Period |
|
|
22 |
|
|
3 |
|
Cash and Cash Equivalents and Restricted Cash at End of Period |
|
$ |
391 |
|
$ |
316 |
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 and pest control markets. Our mission is to create cleaner, healthier, safer environments for our customers wherever they are – at home, at work or at play. Our portfolio of well‑recognized brands includes Terminix (residential termite and pest control), Terminix Commercial (commercial termite and pest control), Copesan (commercial national accounts pest management), Assured Environments (commercial pest control), Gregory Pest Solutions (commercial pest control), McCloud Services (commercial pest control) and Nomor (European 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, 2019, as filed with the SEC (the “2019 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.
Exploration of Strategic Alternatives for ServiceMaster Brands
On January 21, 2020, we announced we are exploring strategic alternatives related to ServiceMaster Brands, including the potential sale of the business. The divestiture group includes the assets and liabilities of the ServiceMaster Brands businesses, which is comprised of the Amerispec, Furniture Medic, Merry Maids, ServiceMaster Clean and ServiceMaster Restore brands, ServiceMaster Acceptance Corporation, our financing subsidiary that was historically reported as part of European Pest Control and Other, and the ServiceMaster trade name (the “ServiceMaster Brands Divestiture Group”). These operations were reported in our Annual Report on Form 10-K as part of continuing operations. Beginning with the quarterly report on Form 10-Q for the period ended March 31, 2020, the ServiceMaster Brands business is classified as held for sale and reported in discontinued operations for all periods presented.
Recent Events
The effects of COVID-19 and related actions to attempt to control its spread negatively impacted our business beginning in the last few weeks of March 2020. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic, and governments around the world mandated, orders to slow the transmission of the virus. States in the United States, including Tennessee, where we are headquartered, declared states of emergency, and countries around the world, including the United States, took steps to restrict travel, instituted work from home policies, enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. Uncertainty with respect to the economic effects of the pandemic and the restrictive policies to mitigate its spread have introduced significant volatility in the financial markets. The exact timing and pace of recovery are uncertain. Certain markets have reopened while others remain closed or have closed again in an effort to control the spread of the virus. Although demand for our services improved through the second quarter, it remains marginally below prior year demand, particularly in our Terminix Commercial service line.
Within the United States, our residential and commercial pest control and cleaning and restore businesses have been designated essential businesses by the U.S. Department of Homeland Security, which has allowed us to continue to serve our customers while ensuring the health and safety of our employees and our customers. We have also continued serving our customers in all of the international markets in which we operate.
Note 2. Significant Accounting Policies
Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2019 Form 10-K. There have been no material changes to the significant accounting policies for the six months ended June 30, 2020, other than those described below.
Adoption of New Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 also requires enhanced disclosures relating to
significant estimates and judgments used in estimating credit losses, as well as the credit quality. We adopted this ASU on January 1, 2020, and this adoption did not have a material impact on our financial condition or the results of our operations.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement.” Under ASU 2018-13, entities are required to disclose the amount of total gains or losses for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held as of the balance sheet date and categorized within Level 3 of the fair value hierarchy. Additionally, the ASU requires the disclosure of the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated for fair value measurements categorized within Level 3 of the fair value hierarchy. We adopted this ASU on January 1, 2020, and this adoption had no impact to our disclosures. See Note 16 for further discussion of our Level 3 investments.
In March 2020, the FASB issued ASU 2020-03, “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, 2020. We adopted the updates, as applicable, in 2020, and this adoption did not have a material impact on our financial condition or the results of our operations.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (LIBOR). This amendment provides for optional expedients and exceptions for applying generally accepted accounting principles to contracts and hedging relationships that are affected by LIBOR and other reference rates. The ASU generally allows for a hedge accounting to continue if the hedge was highly effective or met other standards prior to reference rate reform. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU is only available for a limited time, generally through December 31, 2022. Our debt agreement and interest rate swap that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt and interest rate swap arrangements change to another accepted rate, we will utilize the relief in this ASU to continue hedge accounting as we expect the remaining critical terms of our hedging relationship will still match.
Accounting Standards Issued But Not Yet Effective
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact the adoption of this ASU will have on 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
The following tables present our reportable segment revenues from continuing operations, 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. As noted in the business segment reporting information in Note 15, our reportable segment is Terminix.
Revenue related to fumigation completion services and the related renewals (the “Fumigation Services”) is shown in Termite and Home Services below and prior period amounts related to the Fumigation Services have been reclassified from Fumigation to Termite and Home Services to conform to the current period presentation. Additionally, prior period revenue for Residential Pest Control and Commercial Pest Control has been reclassified to conform to the current period presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest Control |
|
|
||||||||||||
|
|
|
Terminix |
|
and Other |
|
Total |
||||||||||||
|
|
|
Three months ended |
|
Three months ended |
|
Three months ended |
||||||||||||
|
|
|
June 30, |
|
June 30, |
|
June 30, |
||||||||||||
|
(In millions) |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
Major service line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Pest Control |
|
$ |
182 |
|
$ |
182 |
|
$ |
— |
|
$ |
— |
|
$ |
182 |
|
$ |
182 |
|
Commercial Pest Control |
|
|
107 |
|
|
105 |
|
|
— |
|
|
— |
|
|
107 |
|
|
105 |
|
Termite and Home Services |
|
|
196 |
|
|
183 |
|
|
— |
|
|
— |
|
|
196 |
|
|
183 |
|
Sales of Products and Other |
|
|
32 |
|
|
25 |
|
|
— |
|
|
— |
|
|
32 |
|
|
25 |
|
European Pest Control |
|
|
— |
|
|
— |
|
|
17 |
|
|
— |
|
|
17 |
|
|
— |
|
Total |
|
$ |
517 |
|
$ |
495 |
|
$ |
17 |
|
$ |
— |
|
$ |
534 |
|
$ |
494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest Control |
|
|
||||||||||||
|
|
|
Terminix |
|
and Other |
|
Total |
||||||||||||
|
|
|
Six months ended |
|
Six months ended |
|
Six months ended |
||||||||||||
|
|
|
June 30, |
|
June 30, |
|
June 30, |
||||||||||||
|
(In millions) |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
Major service line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Pest Control |
|
$ |
341 |
|
$ |
335 |
|
$ |
— |
|
$ |
— |
|
$ |
341 |
|
$ |
335 |
|
Commercial Pest Control |
|
|
213 |
|
|
199 |
|
|
— |
|
|
— |
|
|
213 |
|
|
199 |
|
Termite and Home Services |
|
|
351 |
|
|
339 |
|
|
— |
|
|
— |
|
|
351 |
|
|
339 |
|
Sales of Products and Other |
|
|
50 |
|
|
41 |
|
|
— |
|
|
— |
|
|
50 |
|
|
41 |
|
European Pest Control |
|
|
— |
|
|
— |
|
|
35 |
|
|
— |
|
|
35 |
|
|
— |
|
Total |
|
$ |
955 |
|
$ |
914 |
|
$ |
35 |
|
$ |
— |
|
$ |
990 |
|
$ |
913 |
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 Terminix customers, are included within Receivables, less allowances, on the condensed consolidated statement of financial position and totaled $31 million and $38 million as of June 30, 2020 and December 31, 2019, 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. Terminix had deferred revenue of $95 million and $92 million as of June 30, 2020 and December 31, 2019, respectively.
Changes in deferred revenue for the six months ended June 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
(In millions) |
|
Deferred revenue |
|
|
Balance, December 31, 2019 |
|
$ |
92 |
|
Deferral of revenue |
|
|
63 |
|
Recognition of deferred revenue |
|
|
(59) |
|
Balance, June 30, 2020 |
|
$ |
95 |
|
|
|
|
|
|
Balance, December 31, 2018 |
|
$ |
91 |
|
Deferral of revenue |
|
|
75 |
|
Recognition of deferred revenue |
|
|
(68) |
|
Balance, June 30, 2019 |
|
$ |
97 |
Approximately $17 million and $15 million of deferred revenue is recognized in the Condensed Consolidated Statements of Financial Position in European Pest Control and Other as of June 30, 2020 and December 31, 2019, primarily related to our acquisition of Nomor. This amount is being evaluated and is subject to change as we finalize our purchase accounting. See Note 13 for further discussion.
There was approximately $16 million and $40 million of revenue recognized in the three and six months ended June 30, 2020, that was included in the deferred revenue balance as of December 31, 2019. There was approximately $19 million and $44 million of revenue recognized in the three and six months ended June 30, 2019, that was included in the deferred revenue balance as of December 31, 2018.
Note 4. Restructuring and Other Charges
We incurred restructuring charges of $8 million ($6 million, net of tax) and $2 million ($1 million, net of tax) in the three months ended June 30, 2020 and 2019, respectively. We incurred restructuring charges of $12 million ($9 million, net of tax) and $8 million ($6 million, net of tax) in the six months ended June 30, 2020 and 2019, respectively. Restructuring charges were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Terminix(1) |
|
$ |
4 |
|
$ |
1 |
|
$ |
5 |
|
$ |
3 |
|
European Pest Control and Other(2) |
|
|
4 |
|
|
1 |
|
|
7 |
|
|
4 |
|
Global Service Center relocation(3) |
|
|
— |
|
|
— |
|
|
— |
|
|
1 |
|
Total restructuring charges |
|
$ |
8 |
|
$ |
2 |
|
$ |
12 |
|
$ |
8 |
___________________________________
(1)For the three and six months ended June 30, 2020, these charges included $2 million of severance and other costs and $2 million of impairment charges on our call center right of use assets, which we exited during the second quarter. Severance and other costs of $2 million were unpaid and accrued as of June 30, 2020. For the three and six months ended June 30, 2019, these charges included $1 million and $3 million, respectively, of severance and other costs.
(2)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, which represents costs to enhance capabilities and align corporate functions with those required to support our strategic needs as a pure play pest control company after the potential sale of the ServiceMaster Brands business and after the American Home Shield spin-off. Of the restructuring charges incurred by European Pest Control and Other, $3 million was unpaid and accrued as of June 30, 2020. For the three and six months ended June 30, 2020 and 2019, these charges were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
|
June 30, |
|
June 30, |
||||||||
|
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
|
Severance |
|
$ |
2 |
|
$ |
— |
|
$ |
3 |
|
$ |
1 |
|
|
Other costs(a) |
|
|
2 |
|
|
1 |
|
|
4 |
|
|
4 |
|
|
Total European Pest Control and Other |
|
$ |
4 |
|
$ |
1 |
|
$ |
7 |
|
$ |
4 |
___________________________________
(a)Represents costs incurred in connection with our CEO transition, charges associated with the marketing of our corporate aircraft for sale and accelerated depreciation on systems we are replacing with the implementation of our new customer experience platform.
(3)For the six months ended June 30, 2019, these charges included lease termination and other charges of $1 million related to our headquarter relocation.
The pretax charges discussed above are reported in Restructuring and other 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, 2019 |
|
$ |
1 |
|
Costs incurred |
|
|
12 |
|
Costs paid or otherwise settled |
|
|
(8) |
|
Balance as of June 30, 2020 |
|
$ |
5 |
|
|
|
|
|
|
Balance as of December 31, 2018 |
|
$ |
7 |
|
Costs incurred |
|
|
8 |
|
Costs paid or otherwise settled |
|
|
(12) |
|
Balance as of June 30, 2019 |
|
$ |
3 |
We expect substantially all of our accrued restructuring charges to be paid by December 31, 2020.
Note 5. Discontinued Operations
In January 2020, we announced we are exploring strategic alternatives related to ServiceMaster Brands in order to focus on our core pest control and termite business. We intend to complete our review of strategic alternatives and consummate a transaction, which may include the sale of the business, during the current fiscal year.
The ServiceMaster Brands Divestiture Group is classified as held for sale on the Condensed Consolidated Statements of Financial Position and as discontinued operations on the Condensed Consolidated Statements of Operations and Comprehensive Income and Condensed Consolidated Statements of Cash Flows for all periods presented. The net amount of assets and liabilities held for sale related to discontinued operations are required to be recorded at the lower of carrying value or fair value less costs to sell.
The following table summarizes the comparative financial results of discontinued operations which are presented as Net earnings from discontinued operations on the Condensed Consolidated Statements of Operations and Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Revenue |
|
$ |
63 |
|
$ |
66 |
|
$ |
128 |
|
$ |
128 |
|
Cost of services rendered and products sold |
|
|
31 |
|
|
27 |
|
|
60 |
|
|
52 |
|
Selling and administrative expenses |
|
|
10 |
|
|
12 |
|
|
22 |
|
|
26 |
|
Amortization expense |
|
|
— |
|
|
1 |
|
|
1 |
|
|
2 |
|
Restructuring and other charges(1) |
|
|
5 |
|
|
1 |
|
|
9 |
|
|
2 |
|
Income before income taxes |
|
|
18 |
|
|
24 |
|
|
35 |
|
|
47 |
|
Provision for income taxes |
|
|
5 |
|
|
7 |
|
|
9 |
|
|
12 |
|
Net earnings from discontinued operations |
|
$ |
13 |
|
$ |
17 |
|
$ |
26 |
|
$ |
34 |
___________________________________
(1)Includes $5 million and $9 million of professional fees and other costs incurred in connection with the strategic evaluation in the three and six months ended June 30, 2020, respectively.
The total assets and liabilities held for sale related to discontinued operations are stated separately in the Condensed Consolidated Statements of Financial Position and comprised the following items:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
||
|
(In millions) |
|
June 30, 2020 |
|
December 31, 2019 |
||
|
Assets: |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Receivables, less allowances of $4 and $3, respectively |
|
$ |
44 |
|
$ |
40 |
|
Inventories |
|
|
4 |
|
|
2 |
|
Prepaid expenses and other assets |
|
|
3 |
|
|
3 |
|
Total Current Assets |
|
|
51 |
|
|
45 |
|
Other Assets: |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
9 |
|
|
8 |
|
Operating lease right-of-use assets |
|
|
2 |
|
|
2 |
|
Goodwill |
|
|
178 |
|
|
183 |
|
Intangible assets, primarily trade names, service marks and trademarks, net |
|
|
626 |
|
|
622 |
|
Notes receivable |
|
|
11 |
|
|
13 |
|
Deferred customer acquisition costs |
|
|
1 |
|
|
1 |
|
Other assets |
|
|
1 |
|
|
1 |
|
Total Assets |
|
$ |
879 |
|
$ |
875 |
|
Liabilities and Stockholders' Equity: |
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
11 |
|
$ |
8 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
Payroll and related expenses |
|
|
2 |
|
|
5 |
|
Other |
|
|
27 |
|
|
23 |
|
Deferred revenue |
|
|
4 |
|
|
4 |
|
Current portion of lease liability |
|
|
1 |
|
|
1 |
|
Total Current Liabilities |
|
|
44 |
|
|
40 |
|
Other Long-Term Liabilities: |
|
|
|
|
|
|
|
Deferred taxes |
|
|
2 |
|
|
1 |
|
Other long-term obligations |
|
|
6 |
|
|
6 |
|
Long-term lease liability |
|
|
1 |
|
|
2 |
|
Total Liabilities |
|
$ |
54 |
|
$ |
50 |
All assets and liabilities held for sale were classified as Current assets held for sale and Current liabilities held for sale as of June 30, 2020 in the Condensed Consolidated Statements of Financial Position as it is probable the sale will occur within one year.
The following selected financial information of ServiceMaster Brands is included in the Condensed Consolidated Statements of Cash Flows as cash flows from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|||||
|
(In millions) |
|
2020 |
|
|
2019 |
||
|
Depreciation |
|
$ |
— |
|
|
$ |
1 |
|
Amortization |
|
|
— |
|
|
|
1 |
|
Capital expenditures |
|
|
(1) |
|
|
|
(1) |
In addition, during the six months ended June 30, 2020, the Company began marketing its corporate aircraft for sale and reclassified its book value of $5 million to Current assets held for sale on the Condensed Consolidated Statements of Financial Position.
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, 2019 |
|
$ |
111 |
|
Provision for self-insured claims |
|
|
24 |
|
Cash payments |
|
|
(16) |
|
Balance as of June 30, 2020 |
|
$ |
119 |
|
|
|
|
|
|
Balance as of December 31, 2018 |
|
$ |
111 |
|
Provision for self-insured claims |
|
|
18 |
|
Cash payments |
|
|
(14) |
|
Balance as of June 30, 2019 |
|
$ |
115 |
Our Terminix business is subject to a significant number of damage claims related to termite activity in homes for which we provide termite control services, often accompanied by a termite damage warranty. Our termite damage warranty is a differentiator in the industry that has enabled us to become a market leader of this product line. Termite damage claims include circumstances when a customer notifies us that they have experienced damage to their property and we reach an agreement to remediate that damage (a “Non-litigated Claim”); and circumstances when we do not reach an agreement with a customer to remediate the damage and that customer initiates litigation or arbitration proceedings (a “Litigated Claim”). We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Current activity can differ, causing a change in estimates which could be material.
During the fourth quarter of the year ended December 31, 2019, we recorded a change in estimate of our reserve for termite damages for Litigated Claims and Non-Litigated Claims in the amount of $53 million.
A reconciliation of beginning and ending accrued Litigated Claims, which are included in Accrued liabilities—Other and Other long-term obligations, primarily self-insured claims on the Condensed Consolidated Statements of Financial Position, and Non-Litigated Claims, which are included in Accrued liabilities—Self-insured claims and related expenses on the Condensed Consolidated Statements of Financial Position, is presented as follows:
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
Termite Damage |
|
|
(In millions) |
|
Claims |
|
|
Balance as of December 31, 2019 |
|
$ |
80 |
|
Provision for termite damage claims |
|
|
27 |
|
Cash payments |
|
|
(24) |
|
Balance as of June 30, 2020 |
|
$ |
83 |
|
|
|
|
|
|
Balance as of December 31, 2018 |
|
$ |
28 |
|
Provision for termite damage claims |
|
|
16 |
|
Cash payments |
|
|
(23) |
|
Balance as of June 30, 2019 |
|
$ |
21 |
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 or estimable, and any such further penalties, fines, sanctions, costs or damages would not be covered under our general liability insurance policies.
In addition to the matters 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. We accrue for these liabilities when it is probable the future costs will be incurred and such costs can be reasonably estimated. Current activity can differ, causing a change in estimates which could be material. 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, shareholder 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. There were no impairment charges recorded in the three and six months ended June 30, 2020 and 2019. There were no accumulated impairment losses recorded as of June 30, 2020. Customer relationships and Other intangible assets, which primarily includes trade names subject to amortization, are amortized over their respective useful lives. The table below summarizes the goodwill balances for continuing operations by reportable segment and European Pest Control and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest |
|
|
|
|
|
(In millions) |
|
Terminix |
|
Control and Other(1) |
|
Total |
|||
|
Balance as of December 31, 2019 |
|
$ |
1,946 |
|
$ |
150 |
|
$ |
2,096 |
|
Acquisitions |
|
|
8 |
|
|
1 |
|
|
9 |
|
Impact of foreign exchange rates |
|
|
(1) |
|
|
— |
|
|
(2) |
|
Balance as of June 30, 2020 |
|
$ |
1,953 |
|
$ |
150 |
|
$ |
2,103 |
___________________________________
(1)European Pest Control and Other includes goodwill related to pest control operations in Europe. See Note 13 for further discussion of these acquisitions and purchase price allocations.
The table below summarizes the other intangible asset balances for continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020 |
|
As of December 31, 2019 |
||||||||||||||
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Accumulated |
|
|
|
||
|
(In millions) |
|
Gross |
|
Amortization |
|
Net |
|
Gross |
|
Amortization |
|
Net |
||||||
|
Trade names(1) |
|
$ |
888 |
|
$ |
— |
|
$ |
888 |
|
$ |
888 |
|
$ |
— |
|
$ |
888 |
|
Customer relationships |
|
|
654 |
|
|
(437) |
|
|
217 |
|
|
659 |
|
|
(423) |
|
|
236 |
|
Other |
|
|
78 |
|
|
(37) |
|
|
41 |
|
|
79 |
|
|
(34) |
|
|
45 |
|
Total |
|
$ |
1,621 |
|
$ |
(474) |
|
$ |
1,146 |
|
$ |
1,626 |
|
$ |
(457) |
|
$ |
1,169 |
___________________________________
(1)Not subject to amortization.
For the existing intangible assets, we anticipate amortization expense for the remainder of 2020 and each of the next five years as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2020 |
|
2021 |
|
2022 |
|
2023 |
|
2024 |
|
2025 |
||||||
|
Amortization expense |
|
$ |
18 |
|
$ |
37 |
|
$ |
35 |
|
$ |
31 |
|
$ |
23 |
|
$ |
19 |
Note 8. Stock-Based Compensation
For the three months ended June 30, 2020 and 2019, we recognized stock-based compensation expense of $5 million ($4 million, net of tax) and $4 million ($3 million, net of tax), respectively. For the six months ended June 30, 2020 and 2019, we recognized stock-based compensation expense of $10 million ($7 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, 2020, there were $42 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 2.14 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. As of June 30, 2020 there were 800,967 shares available for issuance under the Employee Stock Purchase Plan.
Note 9. Comprehensive (Loss) Income
Comprehensive (loss) 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.
During the six months ended June 30, 2019, we terminated $479 million of our then-existing $650 million interest rate swap, receiving $12 million from the counterparty. We terminated the remaining $171 million of our then-existing $650 million interest rate swap later in 2019, receiving $1 million from the counterparty. The fair value of the terminated agreement of $12 million as of June 30, 2019, and $12 million as of December 31, 2019, is recorded within accumulated other comprehensive (loss) income on the Condensed Consolidated Statements of Financial Position and will be amortized into interest expense over the original term of the agreement. The remaining unamortized balance at June 30, 2020 is $8 million.
The following tables summarize the activity in accumulated other comprehensive (loss) income, net of the related tax effects.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Gains |
|
Foreign |
|
|
|
||
|
|
|
(Losses) on |
|
Currency |
|
|
|
||
|
(In millions) |
|
Derivatives |
|
Translation |
|
Total |
|||
|
Balance as of December 31, 2019 |
|
$ |
13 |
|
$ |
(5) |
|
$ |
9 |
|
Other comprehensive income before reclassifications: |
|
|
|
|
|
|
|
|
|
|
Pre-tax amount |
|
|
(55) |
|
|
(6) |
|
|
(61) |
|
Tax provision |
|
|
12 |
|
|
— |
|
|
12 |
|
After-tax amount |
|
|
(44) |
|
|
(6) |
|
|
(50) |
|
Amounts reclassified within accumulated other comprehensive (loss) income(1) |
|
|
10 |
|
|
(10) |
|
|
— |
|
Amounts reclassified from accumulated other comprehensive (loss) income(2) |
|
|
1 |
|
|
— |
|
|
1 |
|
Net current period other comprehensive (loss) income |
|
|
(33) |
|
|
(16) |
|
|
(48) |
|
Balance as of June 30, 2020 |
|
$ |
(19) |
|
$ |
(20) |
|
$ |
(40) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018 |
|
$ |
20 |
|
$ |
(15) |
|
$ |
5 |
|
Other comprehensive income before reclassifications: |
|
|
|
|
|
|
|
|
|
|
Pre-tax amount |
|
|
(11) |
|
|
2 |
|
|
(9) |
|
Tax benefit |
|
|
6 |
|
|
— |
|
|
6 |
|
After-tax amount |
|
|
(5) |
|
|
2 |
|
|
(3) |
|
Amounts reclassified from accumulated other comprehensive (loss) income(2) |
|
|
(2) |
|
|
— |
|
|
(2) |
|
Net current period other comprehensive (loss) income |
|
|
(7) |
|
|
2 |
|
|
(5) |
|
Balance as of June 30, 2019 |
|
$ |
13 |
|
$ |
(13) |
|
$ |
(1) |
___________________________________
(1)Represents unrealized gains (losses) on our cross currency swap and net investment hedge related to foreign currency exchange rate fluctuations.
(2)Amounts are net of tax. Reclassifications out of accumulated other comprehensive (loss) income included the following components for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from Accumulated |
||||||||||
|
|
|
Other Comprehensive (Loss) Income |
||||||||||
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Gains (losses) on derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel swap contracts |
|
$ |
(2) |
|
$ |
— |
|
$ |
(2) |
|
$ |
— |
|
Cross currency swap and net investment hedge |
|
|
(1) |
|
|
2 |
|
|
— |
|
|
3 |
|
Net gains (losses) on derivatives |
|
|
(2) |
|
|
2 |
|
|
(2) |
|
|
3 |
|
Impact of income taxes |
|
|
1 |
|
|
— |
|
|
1 |
|
|
— |
|
Total reclassifications for the period |
|
$ |
(2) |
|
$ |
2 |
|
$ |
(1) |
|
$ |
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) |
|
2020 |
|
2019 |
||
|
Cash paid for or (received from): |
|
|
|
|
|
|
|
Interest expense(1) |
|
$ |
42 |
|
$ |
42 |
|
Interest and dividend income |
|
|
(1) |
|
|
(2) |
|
Income taxes, net of refunds |
|
|
(15) |
|
|
17 |
___________________________________
(1)For the six months ended June 30, 2019, excludes $12 million received in connection with our partial terminations of the then-existing interest rate swap.
As of June 30, 2020 and December 31, 2019, Cash and cash equivalents of $302 million and $280 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 $391 million and $368 million, respectively, on the Condensed Consolidated Statement of Cash Flows.
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.
The non-cash lease transactions are described in Note 12. The proceeds from the frontdoor, inc. (“Frontdoor”) debt issuances described in Note 11 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.
Note 11. Long-Term Debt
Long-term debt is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
||
|
|
|
June 30, |
|
December 31, |
||
|
(In millions) |
|
2020 |
|
2019 |
||
|
Senior secured term loan facility maturing in 2026(1) |
|
$ |
591 |
|
$ |
593 |
|
Revolving credit facility maturing 2024 |
|
|
— |
|
|
— |
|
5.125% notes maturing in 2024(2) |
|
|
743 |
|
|
742 |
|
7.45% notes maturing in 2027(3) |
|
|
168 |
|
|
167 |
|
7.25% notes maturing in 2038(3) |
|
|
40 |
|
|
40 |
|
Vehicle finance leases(4) |
|
|
95 |
|
|
95 |
|
Other(5) |
|
|
87 |
|
|
100 |
|
Less current portion(6) |
|
|
(104) |
|
|
(70) |
|
Total long-term debt |
|
$ |
1,620 |
|
$ |
1,667 |
__________________________________
(1)As of June 30, 2020 and December 31, 2019, presented net of $6 million in unamortized debt issuance costs in each period and $1 million of unamortized original issue discount in each period.
(2)As of June 30, 2020 and December 31, 2019, presented net of $7 million and 8 million, respectively of unamortized debt issuance costs.
(3)As of June 30, 2020 and December 31, 2019, collectively presented net of $27 million and $28 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, 2020 and December 31, 2019, includes approximately $86 million and $91 million, respectively, of future payments in connection with acquisitions.
(6)The increase in the current portion of long-term debt consists of deferred purchase price and earnout payments on acquisitions due within 12 months.
Term Loan Facility
On November 5, 2019, we closed on an amended $600 million Term Loan B due 2026, as well as a $400 million revolving credit agreement due 2024 (the “Amended Term Loan Facility”).
The interest rates applicable to the loans under the Amended Term Loan Facility are based on a fluctuating rate of interest measured by reference to either, at the borrower’s option, (i) an adjusted LIBOR plus 1.75% per annum, or (ii) an alternate base rate (“ABR”) plus 0.75% per annum. Voluntary prepayments of borrowings under the Amended Term Loan Facility are permitted at any time, in minimum principal amounts, without premium or penalty.
The Term Loan Facility and the guarantees thereof are secured by substantially all of the tangible and intangible assets of the Company and certain of our domestic subsidiaries, excluding certain subsidiaries subject to regulatory requirements in various states, including pledges of all the capital stock of all direct domestic subsidiaries (other than foreign subsidiary holding companies, which are deemed to be foreign subsidiaries) owned by the Company or any Guarantor and of up to 65% of the capital stock of each direct foreign subsidiary owned by the Company or any Guarantor. The Term Loan Facility security interests are subject to certain exceptions, including, but not limited to, exceptions for (i) equity interests, (ii) indebtedness or other obligations of subsidiaries, (iii) real estate or (iv) any other assets, if the granting of a security interest therein would require that the 7.45% notes maturing in
2027 or 7.25% notes maturing in 2038 be secured. The Term Loan Facility is secured on a pari passu basis with the security interests created in the same collateral securing our $400 million revolving credit facility due 2024 (“the Revolving Credit Facility”).
Extinguishment of Debt and Repurchase of Notes
On March 12, 2019, in connection with the spin-off of the American Home Shield segment, 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%.
Interest Rate Swaps
We have historically entered into interest rate swap agreements. Under the terms of these agreements, we pay a fixed rate of interest on the stated notional amount and receive a floating rate of interest (based on one month LIBOR) on the stated notional amount. Therefore, during the term of the swap agreements, the effective interest rate on the portion of the term loans equal to the stated notional amount is fixed at the stated rate in the interest rate swap agreements plus the incremental borrowing margin.
On November 5, 2019, we entered into a seven year interest swap agreement effective November 5, 2019. The notional amount of the agreement is $550 million. Under the terms of the agreement, we will pay a fixed rate of interest of 1.615% on the $550 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 of the agreement, the effective interest rate on $550 million of the new Term Loan B is fixed at a rate of 3.365%.
In connection with the repayments of our previous Term Loan B due 2023 in 2019, we terminated $479 million of our then existing $650 million interest rate swap agreement, receiving $12 million from the counterparty. The remaining $171 million interest rate swap was terminated in November 2019 upon the final repayment of our previous Term Loan B due 2023, with no proceeds from the counterparty. The fair value of the terminated agreement of $12 million was recorded within accumulated other comprehensive income on the Condensed Consolidated Statements of Financial Position and is being amortized into interest expense over the original term of the agreement.
The changes in our interest rate swap agreement, as well as the cumulative interest rate swap outstanding, are as follows:
___________________________________
(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 16, 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 12. 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.
As of June 30, 2020 and December 31, 2019, assets recorded under finance leases were $231 million and $220 million, respectively, and accumulated depreciation associated with finance leases was $141 million and $127 million, respectively.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
||||||||
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of finance lease ROU assets |
|
$ |
10 |
|
$ |
8 |
|
$ |
20 |
|
$ |
16 |
|
Interest on finance lease liabilities |
|
|
1 |
|
|
1 |
|
|
2 |
|
|
2 |
|
Operating lease cost |
|
|
6 |
|
|
6 |
|
|
13 |
|
|
13 |
|
Variable lease cost |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
Sublease income |
|
|
(1) |
|
|
(1) |
|
|
(1) |
|
|
(1) |
|
Total lease cost |
|
$ |
17 |
|
$ |
16 |
|
$ |
33 |
|
$ |
31 |
Supplemental cash flow information and other information for leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
||||
|
(In millions) |
|
2020 |
|
2019 |
||
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
Operating cash flows for operating leases |
|
$ |
14 |
|
$ |
12 |
|
Operating cash flows for finance leases |
|
|
2 |
|
|
2 |
|
Financing cash flows for finance leases |
|
|
20 |
|
|
16 |
|
ROU assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
Operating leases |
|
|
3 |
|
|
5 |
|
Finance leases |
|
|
16 |
|
|
22 |
As of June 30, 2020, there were $35 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, 2020 were as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
Operating Leases |
|
Finance Leases |
||
|
Year ended December 31, |
|
|
|
|
|
|
|
2020 (excluding the six months ended June 30, 2020) |
|
$ |
13 |
|
$ |
17 |
|
2021 |
|
|
22 |
|
|
28 |
|
2022 |
|
|
19 |
|
|
18 |
|
2023 |
|
|
15 |
|
|
12 |
|
2024 |
|
|
11 |
|
|
5 |
|
Thereafter |
|
|
85 |
|
|
1 |
|
Total future minimum lease payments |
|
|
165 |
|
|
81 |
Note 13. 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, 2020, our investment in acquisitions was $24 million, using available cash on hand, which included $7 million for seven tuck-in pest control acquisitions which have been accounted for as business combinations, as well as $18 million for final funding for two pest control acquisitions and minority interests completed in 2019 that were included in Accrued liabilities—Other on the Consolidated Statements of Financial Position as of December 31, 2019. Another $2 million of deferred purchase price on the 2020 acquisitions is due to the sellers between one year and three years from the acquisition dates. We recorded a preliminary value of $8 million of goodwill for the 2020 acquisitions. We also made a minority investment in a pest control company for approximately $7 million, which was unfunded and is included in Accrued liabilities—Other in the Condensed
Consolidated Statements of Financial Position as of June 30, 2020. During the six months ended June 30, 2020 we received $3 million from post-closing working capital adjustments related to acquisitions completed in 2019.
During the six months ended June 30, 2019, our investment in acquisitions was $115 million, using available cash on hand, for 19 pest control acquisitions which have been accounted for as business combinations. We recorded $76 million of goodwill, $4 million of trade names and $44 million of other intangibles, primarily customer lists, related to these acquisitions.
We continue to finalize the valuations of intangible and tangible assets acquired in the last 12 months and plan to finalize all purchase accounting within 12 months from the date of each acquisition. The following sets forth the adjustments made to purchase price allocations during the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|||
|
(In millions) |
|
Goodwill |
|
Trade Names(1) |
|
Intangible Assets(2) |
|||
|
Balance as of December 31, 2019 |
|
$ |
309 |
|
$ |
31 |
|
$ |
197 |
|
Measurement period adjustments |
|
|
— |
|
|
— |
|
|
(4) |
|
Balance as of June 30, 2020 |
|
$ |
310 |
|
$ |
31 |
|
$ |
192 |
___________________________________
(1)Subject to amortization.
(2)Primarily customer lists.
Supplemental cash flow information regarding the acquisitions was as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||
|
|
|
June 30, |
||||
|
(In millions) |
|
2020 |
|
2019 |
||
|
Assets acquired |
|
$ |
9 |
|
$ |
133 |
|
Liabilities assumed |
|
|
— |
|
|
(6) |
|
Net assets acquired |
|
$ |
9 |
|
$ |
127 |
|
|
|
|
|
|
|
|
|
Net cash paid |
|
$ |
7 |
|
$ |
115 |
|
Seller financed debt |
|
|
2 |
|
|
9 |
|
Contingent earnout |
|
|
— |
|
|
3 |
|
Purchase price |
|
$ |
9 |
|
$ |
127 |
Nomor
On September 6, 2019, we acquired Nomor, a leading provider of pest control services in Sweden and Norway, for approximately 2 billion Swedish krona (approximately $198 million using the September 6, 2019 exchange rate, net of approximately $9 million of cash acquired). This strategic acquisition launched our expansion into the European pest control market. We funded the acquisition using cash on hand and proceeds from a $120 million borrowing under our Revolving Credit Facility.
Nomor is included in the Condensed Consolidated Statements of Financial Position based on an allocation of the purchase price. Given the timing and complexity of this acquisition, the presentation of Nomor in our financial statements, including the allocation of the purchase price, is preliminary and will likely change in future periods, perhaps significantly, as fair value estimates of the assets acquired and liabilities assumed are refined during the measurement period. Specifically, we are still evaluating the intangible and tangible assets acquired, deferred revenue balances, as well as the appropriate useful lives to assign to all assets, including intangibles. The majority of this purchase price is allocated to goodwill and is not expected to be deductible for income tax purposes. We will complete the purchase price allocation no later than the third quarter of 2020.
A preliminary purchase price allocation was as follows (in millions):
|
|
|
|
|
|
Current assets(1) |
|
$ |
11 |
|
Property and equipment |
|
|
6 |
|
Goodwill |
|
|
127 |
|
Identifiable intangible assets(2) |
|
|
94 |
|
Current liabilities(3) |
|
|
(18) |
|
Long-term liabilities(4) |
|
|
(22) |
|
Total purchase price |
|
$ |
198 |
___________________________________
(1)Primarily trade receivables and net of approximately $9 million of cash acquired.
(2)Primarily customer lists.
(3)Primarily advanced collections from customers.
(4)Includes $20 million of deferred tax liabilities as a result of tax basis differences in intangible assets.
The following pro forma consolidated financial information presents the combined operations of ServiceMaster and Nomor for the three and six months ended June 30, 2019 (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|||||
|
|
|
Three months ended |
|
Six months ended |
|||
|
|
|
June 30, 2019 |
|
June 30, 2019 |
|||
|
Consolidated revenue |
|
$ |
509 |
|
$ |
942 |
|
|
Consolidated net income |
|
$ |
60 |
|
$ |
131 |
|
|
Basic earnings per share |
|
$ |
0.44 |
|
$ |
0.96 |
|
|
Diluted earnings per share |
|
$ |
0.44 |
|
$ |
0.96 |
|
ASC 805, “Business Combinations,” establishes guidelines regarding the presentation of the unaudited pro forma information. Therefore, this unaudited pro forma information is not intended to represent, nor do we believe it is indicative of, the consolidated results of operations of ServiceMaster that would have been reported had the acquisition been completed at the beginning of 2018. This unaudited pro forma information does not give effect to the anticipated business and tax synergies of the acquisition and is not representative or indicative of the anticipated future consolidated results of operations of ServiceMaster. The most significant adjustment made to the pro forma financial information is the inclusion of estimated quarterly interest expense of approximately $1 million related to financing obtained for the transaction and the estimated tax impact of this adjustment. The unaudited pro forma financial information includes various assumptions, including those related to the preliminary purchase price allocation, that may be impacted by the finalization of the purchase price allocation. The tax impact of these adjustments was calculated based on Nomor’s statutory rate.
Note 14. 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 31.0 percent and 25.8 percent for the three months ended June 30, 2020 and 2019, respectively.
The effective tax rate on income from continuing operations was 28.5 percent and 15.5 percent for the six months ended June 30, 2020 and 2019, 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 June 30, 2020 and December 31, 2019, we had $13 million and $14 million, respectively, of tax benefits primarily reflected in U.S. 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 15. Business Segment Reporting
Through January 2020, when we announced were exploring strategic alternatives related to the ServiceMaster Brands business that resulted in it being classified as held for sale, we conducted business through two reportable segments: Terminix and ServiceMaster Brands. We now have one reportable segment, Terminix.
In accordance with accounting standards for segments, we identified Terminix as our reportable segment primarily based on the nature of the services it provides and the operating results that are regularly reviewed by our chief operating decision maker (the “CODM”) to evaluate performance and allocate resources. 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, Copesan, Assured Environments, Gregory Pest Solutions and McCloud Services brand names.
European Pest Control and Other includes our European pest control operations, primarily under our Nomor brand, our captive insurance subsidiary, which provides automobile, workers' compensation and general liability coverage to our reportable segment, and our headquarters operations (substantially all of which costs are allocated to our reportable segment), which provides various technology, finance, legal and other support services to Terminix. Our European pest control operations meet the definition of an operating segment, but do not meet the quantitative thresholds to require them to be reported as a reportable segment.
Information regarding the accounting policies used by us are described in our 2019 Form 10-K. We derive substantially all of our revenue from customers and franchisees in the United States with approximately five percent generated in foreign markets as of June 30, 2020. Operating expenses of Terminix consist primarily of direct costs and indirect costs allocated from Corporate.
We use Reportable Segment Adjusted EBITDA as our measure of reportable 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 ServiceMaster Brands; European pest control; depreciation and amortization expense; acquisition-related costs; fumigation related matters; non-cash stock-based compensation expense; restructuring and other charges; realized (gain) on investment in frontdoor, inc.; net earnings from discontinued operations; provision for income taxes; loss on extinguishment of debt; and interest expense. 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 Terminix and European Pest Control and Other is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
$ |
517 |
|
$ |
495 |
|
$ |
955 |
|
$ |
914 |
|
European Pest Control and Other |
|
|
17 |
|
|
— |
|
|
35 |
|
|
— |
|
Total Revenue |
|
$ |
534 |
|
$ |
494 |
|
$ |
990 |
|
$ |
913 |
|
Reportable Segment Adjusted EBITDA:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
$ |
120 |
|
$ |
106 |
|
$ |
184 |
|
$ |
189 |
___________________________________
(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) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Net Income |
|
$ |
53 |
|
$ |
59 |
|
$ |
67 |
|
$ |
129 |
|
Unallocated corporate expenses |
|
|
— |
|
|
(1) |
|
|
1 |
|
|
(4) |
|
Costs historically allocated to ServiceMaster Brands |
|
|
3 |
|
|
3 |
|
|
6 |
|
|
6 |
|
European pest control |
|
|
(2) |
|
|
— |
|
|
(3) |
|
|
— |
|
Depreciation and amortization expense |
|
|
27 |
|
|
22 |
|
|
55 |
|
|
45 |
|
Acquisition-related costs |
|
|
— |
|
|
3 |
|
|
1 |
|
|
4 |
|
Fumigation related matters |
|
|
— |
|
|
(1) |
|
|
— |
|
|
— |
|
Non-cash stock-based compensation expense |
|
|
5 |
|
|
4 |
|
|
10 |
|
|
8 |
|
Restructuring and other charges |
|
|
8 |
|
|
2 |
|
|
12 |
|
|
8 |
|
Realized (gain) on investment in frontdoor, inc. |
|
|
— |
|
|
— |
|
|
— |
|
|
(40) |
|
Net earnings from discontinued operations |
|
|
(13) |
|
|
(17) |
|
|
(26) |
|
|
(34) |
|
Provision for income taxes |
|
|
18 |
|
|
14 |
|
|
16 |
|
|
17 |
|
Loss on extinguishment of debt |
|
|
— |
|
|
— |
|
|
— |
|
|
6 |
|
Interest expense |
|
|
22 |
|
|
18 |
|
|
45 |
|
|
45 |
|
Reportable Segment Adjusted EBITDA |
|
$ |
120 |
|
$ |
106 |
|
$ |
184 |
|
$ |
189 |
Note 16. 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 $1,723 million and $1,737 million, and the estimated fair value was $1,776 million and $1,841 million as of June 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019.
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 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.
Effective March 3, 2020, we entered into a fixed-to-fixed cross-currency interest rate swap to hedge foreign currency risk associated with the fixed-rate Swedish krona denominated intercompany debt at Nomor. The five year interest rate swap matures March 31, 2025 and has a notional amount of 725 million Swedish krona, or approximately $74 million, and swaps interest payments of 3.5 percent Swedish krona for interest receipts of 4.147 percent U.S. dollar. This hedge was entered into to mitigate foreign currency risk inherent in Swedish krona denominated debt and is not for speculative trading purposes. This contract has been designated as a cash flow hedge of a fixed rate borrowing and is recorded at fair value.
We also entered into a cross-currency swap agreement to hedge a portion of our net investment in Nomor against future volatility in the exchange rates between the Swedish krona and the U.S. dollar. The five year cross-currency swap has a fixed notional
amount of 1.275 billion Swedish krona, or approximately $131 million, at an annual rate of zero percent and a maturity date of March 31, 2025. At inception, the cross-currency swap was designated as a net investment hedge and is recorded at fair value.
Changes in the fair value of these contracts are recorded within Other comprehensive (loss) income on the Condensed Consolidated Statements of Financial Position. Interest accruals and coupon payments are recognized directly in interest expense, thus reflecting a Swedish krona fixed rate. Upon discontinuation of the net investment hedge, the changes in spot value and any amounts excluded from the assessment of hedge effectiveness that have not been recognized in earnings will remain within CTA until the hedged net investment is sold, diluted, or liquidated.
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, 2020 and 2019.
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 were as follows:
|
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Estimated Fair Value Measurements |
|||||||
|
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|
|
|
Quoted |
|
Significant |
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Prices In |
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Other |
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Significant |
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Active |
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Observable |
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Unobservable |
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|
Statement of Financial |
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Carrying |
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Markets |
|
Inputs |
|
Inputs |
||||
|
(In millions) |
|
Position Location |
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
||||
|
As of June 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation trust |
|
Long-term marketable securities |
|
$ |
13 |
|
$ |
13 |
|
$ |
— |
|
$ |
— |
|
Total financial assets |
|
|
|
$ |
13 |
|
$ |
13 |
|
$ |
— |
|
$ |
— |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency interest rate swap |
|
Other long-term obligations |
|
$ |
3 |
|
$ |
— |
|
$ |
3 |
|
$ |
— |
|
Net investment hedge |
|
Other long-term obligations |
|
|
5 |
|
|
— |
|
|
5 |
|
|
— |
|
Fuel swap contracts |
|
Accrued liabilities—Other and Other long-term obligations |
|
|
2 |
|
|
— |
|
|
— |
|
|
2 |
|
Interest rate swap contract |
|
Accrued liabilities—Other and Other long-term obligations |
|
|
38 |
|
|
— |
|
|
38 |
|
|
— |
|
Total financial liabilities |
|
|
|
$ |
47 |
|
$ |
— |
|
$ |
46 |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation trust assets |
|
Long-term marketable securities |
|
$ |
13 |
|
$ |
13 |
|
$ |
— |
|
$ |
— |
|
Fuel swap contracts |
|
Prepaid expenses and other assets and Other assets |
|
|
1 |
|
|
— |
|
|
— |
|
|
1 |
|
Interest rate swap contracts |
|
Other assets |
|
|
5 |
|
|
— |
|
|
5 |
|
|
— |
|
Total financial assets |
|
|
|
$ |
19 |
|
$ |
13 |
|
$ |
5 |
|
$ |
1 |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts |
|
Accrued liabilities—Other and Other long-term obligations |
|
$ |
1 |
|
$ |
— |
|
$ |
1 |
|
$ |
— |
|
Total financial liabilities |
|
|
|
$ |
1 |
|
$ |
— |
|
$ |
1 |
|
$ |
— |
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, 2019 |
|
$ |
1 |
|
|
|
Total gains (losses) (realized and unrealized) |
|
|
|
|
|
|
Included in earnings |
|
|
2 |
|
Cost of services rendered and products sold |
|
Included in other comprehensive income |
|
|
(4) |
|
|
|
Settlements |
|
|
— |
|
|
|
Balance as of June 30, 2020 |
|
$ |
(2) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2018 |
|
$ |
(4) |
|
|
|
Total gains (losses) (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 |
|
$ |
— |
|
|
The following tables present information relating to the significant unobservable inputs of our Level 3 financial instruments:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Valuation |
|
|
|
|
|
Weighted |
||
|
|
|
(in millions) |
|
Technique |
|
Unobservable Input |
|
Range |
|
Average |
||
|
As of June 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel swap contracts |
|
$ |
(2) |
|
Discounted Cash Flows |
|
Forward Unleaded Price per Gallon(1) |
|
$2.02 - $2.32 |
|
$ |
2.16 |
|
As of December 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel swap contracts |
|
$ |
1 |
|
Discounted Cash Flows |
|
Forward Unleaded Price per Gallon(1) |
|
$2.37 - $2.80 |
|
$ |
2.61 |
___________________________________
(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.
As of June 30, 2020, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $35 million, maturing through 2021. 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, 2020, 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 loss of $6 million, net of tax, as of June 30, 2020. 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.
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, with adjustments to arrive at fair value recognized in our Condensed Consolidated Statements of Operations and Comprehensive Income within Interest and net investment income. The investments are included within Other Assets on the Condensed Consolidated Statements of Financial Position. At June 30, 2020, the carrying amount of these investments was $4 million.
Note 17. 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) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Income from continuing operations |
|
$ |
40 |
|
$ |
42 |
|
$ |
41 |
|
$ |
95 |
|
Weighted-average common shares outstanding |
|
|
131.9 |
|
|
136.0 |
|
|
133.4 |
|
|
135.9 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs(1) |
|
|
0.1 |
|
|
0.2 |
|
|
0.1 |
|
|
0.2 |
|
Stock options(2) |
|
|
— |
|
|
0.3 |
|
|
— |
|
|
0.2 |
|
Weighted-average common shares outstanding—assuming dilution |
|
|
132.0 |
|
|
136.5 |
|
|
133.5 |
|
|
136.3 |
|
Basic earnings per share from continuing operations |
|
$ |
0.30 |
|
$ |
0.31 |
|
$ |
0.31 |
|
$ |
0.70 |
|
Diluted earnings per share from continuing operations |
|
$ |
0.30 |
|
$ |
0.30 |
|
$ |
0.31 |
|
$ |
0.70 |
___________________________________
(1)RSUs to purchase 0.1 million shares for the three and six months ended June 30, 2020 were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.
(2)Options to purchase 1.6 million shares for the three months ended June 30, 2020, and 1.4 million and 0.4 million shares for the six months ended June 30, 2020, and 2019, 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.”
On January 21, 2020, we announced we are exploring strategic alternatives relating to ServiceMaster Brands, including the potential sale of the business. As a result of this plan, the ServiceMaster Brands Divestiture Group is classified as held for sale and the financial results of the ServiceMaster Brands Divestiture Group as of and for the period ended June 30, 2020, and for all periods prior to June 30, 2020, have been reflected within the disclosures of this Management’s Discussion and Analysis of Financial Condition and Results of Operations as discontinued operations. See Note 5 to the condensed consolidated financial statements for further information.
Overview
Our reportable segment, Terminix, provides residential and commercial termite and pest control under the following leading brands: Terminix, Terminix Commercial, Copesan, Assured Environments, Gregory Pest Solutions and McCloud Services. Our European pest control operations, primarily operating under our Nomor and Terminix brands, are reported in European Pest Control and Other, in addition to our captive insurance subsidiary which provides automobile, workers’ compensation and general liability coverage to Terminix and our headquarters operations (substantially all of which costs are allocated to Terminix), which provide various technology, finance, legal and other support services to Terminix.
Our financial statements will include non-recurring costs incurred to evaluate, plan and execute the exploration of strategic alternatives related to ServiceMaster Brands, including the potential sale of the business. Costs are primarily related to third-party consulting and other incremental costs directly associated with the strategic alternatives exploration process. Net earnings from discontinued operations for the three months and six months ended June 30, 2020 included charges of $5 million and $9 million, respectively, related to the initiative. We expect to incur charges of $15 million to $20 million in 2020 related to the initiative. In addition, we expect incremental capital expenditures will be required to effect the initiative of $8 million to $12 million, principally reflecting costs to replicate information technology systems historically shared by our business units.
New CEO Appointment
On August 6, 2020, we announced the appointment of Brett T. Ponton as Chief Executive Officer of the Company and as a member of the board of directors of the Company, in each case, effective as of a date to be agreed upon between the Company and Mr. Ponton, with such date being on or around September 15, 2020 and no later than October 1, 2020.
Recent Events and 2020 Outlook
During the three and six months ended June 30, 2020, the effects of COVID-19 and related actions to attempt to control its spread negatively impacted our business, beginning in the last few weeks of March. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic, and governments around the world mandated orders to slow the transmission of the virus. States in the United States, including Tennessee, where we are headquartered, declared states of emergency, and countries around the world, including the United States, took steps to restrict travel, instituted work from home policies, enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. Uncertainty with respect to the economic effects of the pandemic and the restrictive policies to mitigate its spread have introduced significant volatility in the financial markets. The exact timing and pace of the recovery are uncertain as certain markets have reopened, while others remain closed or have closed again in an effort to control the spread of the virus. Although demand for our services improved through the second quarter, it remains marginally below prior year, particularly in our Terminix Commercial service line.
Within the United States, our residential and commercial pest control and cleaning and restore businesses have been designated an essential business by the U.S. Department of Homeland Security, has allowed us to continue to serve our customers while ensuring the health and safety of our employees and our customers. As the States have re-opened for business during the second quarter, all of our brands have been fully operational. We have also continued serving our customers in all of the international markets in which we operate.
In response to these developments, beginning in March and continuing through the second quarter of 2020, we implemented contingency planning designed to ensure the safety and productivity of our workforce. We have implemented technology to facilitate remote working, with most back-office and all call center employees working remotely and field support personnel working remotely where possible. We plan to leverage these new remote working capabilities to reduce ongoing operating costs once we emerge from this event. We have global and regional crisis teams in place monitoring the rapidly evolving situation and recommending risk mitigation actions that we have already implemented, including instituting travel restrictions as well as visitor protocols and developing and maintaining social distancing practices. We have assessed and are implementing continuity plans to provide customers
with continued service, including procuring and providing personal protective equipment to all front-line personnel. There has been no material impact on supply for most of our sourced materials and for those sourced materials that have been impacted to any degree, continuity plans have been activated. Additionally, we are taking additional actions to improve our liquidity, including capital expenditure and operating expense reductions.
In reaction to customer demands, Terminix and ServiceMaster Brands have launched one-time and recurring sanitization and disinfection services, which will help all businesses, including those deemed essential, maintain clean work areas while staying in compliance with federal, state, and local public health protocols.
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 business. 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 business. 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 business as well as the mix of services and products provided. The volume of our revenue in Terminix is impacted by new unit sales, the retention of our existing customers and acquisitions. Revenue results presented in European Pest Control and Other are primarily comprised of our pest control operations in Europe. We serve both residential and commercial customers, principally in the United States. As of June 30, 2020, approximately 95 percent of our revenue was generated by sales in the United States. Franchise fees from our Terminix franchisees represented less than one percent of revenue for the three and six months ended June 30, 2020.
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, personal protective equipment, 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: net earnings from discontinued operations; provision for income taxes; interest expense; depreciation and amortization expense; acquisition-related costs; fumigation related matters; non-cash stock-based compensation expense; restructuring and other 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.
We evaluate performance of the ServiceMaster Brands Divestiture Group based on ServiceMaster Brands Divestiture Group Adjusted EBITDA, which is defined as net earnings from discontinued operations before the following expenses directly attributable to the ServiceMaster Brands Divestiture Group and recorded in discontinued operations: depreciation and amortization expense; non-cash stock based compensation expense; restructuring and other charges; and provision for income taxes.
Organic Revenue Growth. We evaluate organic revenue growth to track the performance of Terminix, including the impacts of sales, pricing, new service offerings, customer retention and other growth initiatives. Organic revenue growth excludes revenue from acquired customers for 12 months following the acquisition date.
Seasonality
We have seasonality in our business, which drives fluctuations in revenue and Adjusted EBITDA for interim periods. In 2019, approximately 23 percent, 27 percent, 26 percent and 24 percent of our revenue and approximately 26 percent, 32 percent, 23 percent and 19 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.
Effect of Weather Conditions
The demand for our services and our results of operations are also affected by weather conditions, including the seasonal nature of our termite and pest control 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. 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.
Results of Operations
The following table shows the results of operations from continuing operations for the three and six months ended June 30, 2020 and 2019, which reflects the results of acquired businesses from the relevant acquisition dates. Results of the ServiceMaster Brands Divestiture Group are presented below in “—Discontinued Operations – ServiceMaster Brands Divestiture Group.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Increase |
|
|
|
|
|
|
|||||
|
|
|
June 30, |
|
(Decrease) |
|
% of Revenue |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2020 |
|
2019 |
|
2020 vs. 2019 |
|
2020 |
|
2019 |
|||||
|
Revenue |
|
$ |
534 |
|
$ |
494 |
|
8 |
% |
|
100 |
% |
|
100 |
% |
|
Cost of services rendered and products sold |
|
|
297 |
|
|
276 |
|
8 |
|
|
56 |
|
|
56 |
|
|
Selling and administrative expenses |
|
|
143 |
|
|
138 |
|
3 |
|
|
27 |
|
|
28 |
|
|
Amortization expense |
|
|
9 |
|
|
5 |
|
77 |
|
|
2 |
|
|
1 |
|
|
Acquisition-related costs |
|
|
— |
|
|
3 |
|
* |
|
|
— |
|
|
1 |
|
|
Fumigation related matters |
|
|
— |
|
|
(1) |
|
* |
|
|
— |
|
|
— |
|
|
Restructuring and other charges |
|
|
8 |
|
|
2 |
|
* |
|
|
1 |
|
|
— |
|
|
Interest expense |
|
|
22 |
|
|
18 |
|
18 |
|
|
4 |
|
|
4 |
|
|
Interest and net investment income |
|
|
(1) |
|
|
(3) |
|
* |
|
|
— |
|
|
(1) |
|
|
Income from Continuing Operations before Income Taxes |
|
|
57 |
|
|
56 |
|
* |
|
|
11 |
|
|
11 |
|
|
Provision for income taxes |
|
|
18 |
|
|
14 |
|
* |
|
|
3 |
|
|
3 |
|
|
Equity in earnings of joint venture |
|
|
1 |
|
|
— |
|
* |
|
|
— |
|
|
— |
|
|
Income from Continuing Operations |
|
$ |
40 |
|
$ |
42 |
|
* |
|
|
7 |
% |
|
8 |
% |
________________________________
* not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Increase |
|
|
|
|
|
|
|||||
|
|
|
June 30, |
|
(Decrease) |
|
% of Revenue |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2020 |
|
2019 |
|
2020 vs. 2019 |
|
2020 |
|
2019 |
|||||
|
Revenue |
|
|
990 |
|
|
913 |
|
8 |
% |
|
100 |
% |
|
100 |
% |
|
Cost of services rendered and products sold |
|
|
577 |
|
|
512 |
|
13 |
|
|
58 |
|
|
56 |
|
|
Selling and administrative expenses |
|
|
283 |
|
|
261 |
|
8 |
|
|
29 |
|
|
29 |
|
|
Amortization expense |
|
|
18 |
|
|
10 |
|
83 |
|
|
2 |
|
|
1 |
|
|
Acquisition-related costs |
|
|
1 |
|
|
4 |
|
* |
|
|
— |
|
|
— |
|
|
Realized (gain) on investment in frontdoor, inc. |
|
|
— |
|
|
(40) |
|
* |
|
|
— |
|
|
(4) |
|
|
Restructuring and other charges |
|
|
12 |
|
|
8 |
|
* |
|
|
1 |
|
|
1 |
|
|
Interest expense |
|
|
45 |
|
|
45 |
|
(1) |
|
|
5 |
|
|
5 |
|
|
Interest and net investment income |
|
|
(1) |
|
|
(4) |
|
* |
|
|
— |
|
|
— |
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
6 |
|
* |
|
|
— |
|
|
1 |
|
|
Income from Continuing Operations before Income Taxes |
|
|
56 |
|
|
112 |
|
* |
|
|
6 |
|
|
12 |
|
|
Provision for income taxes |
|
|
16 |
|
|
17 |
|
* |
|
|
2 |
|
|
2 |
|
|
Equity in earnings of joint venture |
|
|
1 |
|
|
— |
|
* |
|
|
— |
|
|
— |
|
|
Income from Continuing Operations |
|
|
41 |
|
|
95 |
|
* |
|
|
4 |
% |
|
10 |
% |
________________________________
* not meaningful
Revenue
We reported revenue of $534 million and $494 million for the three months ended June 30, 2020 and 2019, respectively and revenue of $990 million and $913 million for the six months ended June 30, 2020 and 2019, respectively. A summary of changes in revenue is included in the tables below. See “—Segment Review” for a discussion of the drivers of the year-over-year changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest |
|
|
|
|
|
(In millions) |
|
Terminix |
|
Control and Other |
|
Total |
|||
|
Three Months Ended June 30, 2019 |
|
$ |
495 |
|
$ |
— |
|
$ |
494 |
|
Residential Pest Control(1) |
|
|
— |
|
|
— |
|
|
— |
|
Commercial Pest Control(2) |
|
|
2 |
|
|
— |
|
|
2 |
|
Termite and Home Services(3) |
|
|
13 |
|
|
— |
|
|
13 |
|
Sale of Products and Other(4) |
|
|
7 |
|
|
— |
|
|
7 |
|
European Pest Control |
|
|
— |
|
|
17 |
|
|
17 |
|
Three Months Ended June 30, 2020 |
|
$ |
517 |
|
$ |
17 |
|
$ |
534 |
_________________________________
(1)Includes growth from acquisitions of approximately $2 million for the three months ended June 30, 2020.
(2)Includes growth from acquisitions of approximately $11 million for the three months ended June 30, 2020.
(3)Includes growth from acquisitions of approximately $1 million for the three months ended June 30, 2020.
(4)Includes growth from acquisitions of approximately $9 million for the three months ended June 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest |
|
|
|
|
|
(In millions) |
|
Terminix |
|
Control and Other |
|
Total |
|||
|
Six Months Ended June 30, 2019 |
|
$ |
914 |
|
$ |
— |
|
$ |
913 |
|
Residential Pest Control (1) |
|
|
6 |
|
|
— |
|
|
6 |
|
Commercial Pest Control (2) |
|
|
15 |
|
|
— |
|
|
15 |
|
Termite and Home Services(3) |
|
|
12 |
|
|
— |
|
|
12 |
|
Sale of Products and Other(4) |
|
|
9 |
|
|
— |
|
|
9 |
|
European Pest Control |
|
|
— |
|
|
35 |
|
|
35 |
|
Six Months Ended June 30, 2020 |
|
$ |
955 |
|
$ |
35 |
|
$ |
990 |
(1)Includes growth from acquisitions of approximately $4 million for the six months ended June 30, 2020.
(2)Includes growth from acquisitions of approximately $21 million for the six months ended June 30, 2020.
(3)Includes growth from acquisitions of approximately $3 million for the six months ended June 30, 2020.
(4)Includes growth from acquisitions of approximately $13 million for the six months ended June 30, 2020.
Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of $297 million and $276 million for the three months ended June 30, 2020 and 2019, respectively, and $577 million and $512 million for the six months ended June 30, 2020 and 2019, respectively. The following tables provide a summary of changes in cost of services rendered and products sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest |
|
|
|
|
|
(In millions) |
|
Terminix |
|
Control and Other |
|
Total |
|||
|
Three Months Ended June 30, 2019 |
|
$ |
277 |
|
$ |
(1) |
|
$ |
276 |
|
Impact of change in revenue(1) |
|
|
15 |
|
|
12 |
|
|
27 |
|
Damage claims |
|
|
8 |
|
|
— |
|
|
8 |
|
Production labor |
|
|
(5) |
|
|
— |
|
|
(5) |
|
Chemicals and materials |
|
|
(2) |
|
|
— |
|
|
(2) |
|
Vehicle and fuel |
|
|
(4) |
|
|
— |
|
|
(4) |
|
Other |
|
|
(4) |
|
|
1 |
|
|
(3) |
|
Three Months Ended June 30, 2020 |
|
$ |
286 |
|
$ |
12 |
|
$ |
297 |
_________________________________
(1)For Terminix, includes approximately $16 million for the three months ended June 30, 2020 from acquisitions. For European Pest Control and Other, includes approximately $12 million for the three months ended June 30, 2020 from acquisitions.
For Terminix, the increase in damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the Mobile Bay Area, as well as the costs related to mitigation efforts in the Mobile Bay Area intended to reduce future damage claims. The decrease in production labor was driven by improved employee retention and labor management. The decrease in chemicals and materials was driven by a favorable shift in the mix of services performed. The decrease in vehicle and fuel was driven by improvements in fleet management and lower fuel prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest |
|
|
|
|
|
(In millions) |
|
Terminix |
|
Control and Other |
|
Total |
|||
|
Six Months Ended June 30, 2019 |
|
$ |
516 |
|
$ |
(3) |
|
$ |
512 |
|
Impact of change in revenue(1) |
|
|
28 |
|
|
25 |
|
|
53 |
|
Damage claims |
|
|
14 |
|
|
— |
|
|
14 |
|
Production labor |
|
|
(1) |
|
|
— |
|
|
(1) |
|
Chemicals and materials |
|
|
1 |
|
|
— |
|
|
1 |
|
Vehicle and fuel |
|
|
(3) |
|
|
— |
|
|
(3) |
|
Insurance program |
|
|
— |
|
|
5 |
|
|
5 |
|
Other |
|
|
(4) |
|
|
— |
|
|
(4) |
|
Six Months Ended June 30, 2020 |
|
$ |
551 |
|
$ |
26 |
|
$ |
577 |
_________________________________
(1)For Terminix, includes approximately $28 million for the six months ended June 30, 2020 from acquisitions. For European Pest Control and Other, includes approximately $25 million for the six months ended June 30, 2020 from acquisitions.
For Terminix, the increase in damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the Mobile Bay Area, as well as the costs related to mitigation efforts in the Mobile Bay Area intended to reduce future damage claims. The decrease in production labor was driven, in part, by improved employee retention and labor management. The increase in chemicals and materials was driven by increased personal protective equipment and sanitization purchases in response to COVID-19, offset by a decrease driven by a favorable shift in the mix of services performed. The decrease in vehicle and fuel was driven by improvements in fleet management and lower fuel prices.
For European Pest Control and Other, the six months ended June 30, 2020 were unfavorably impacted by $1 million of adjustments in our automobile, general liability and workers’ compensation program, as compared to favorable adjustments of $3 million in the six months ended June 30, 2019.
Selling and Administrative Expenses
We reported selling and administrative expenses of $143 million and $138 million for the three months ended June 30, 2020 and 2019, respectively, and $283 million and $261 million for the six months ended June 30, 2020, and 2019, respectively. For the three months ended June 30, 2020 and 2019, selling and administrative expenses comprised general and administrative expenses of $73 million and $71 million, respectively, and selling and marketing expenses of $70 million and $68 million, respectively. For the six months ended June 30, 2020 and 2019, selling and administrative expenses comprised general and administrative expenses of $153 million and $139 million, respectively, and selling and marketing expenses of $130 million and $122 million, respectively. The following tables provide a summary of changes in selling and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest |
|
|
|
|
|
(In millions) |
|
Terminix |
|
Control and Other |
|
Total |
|||
|
Three Months Ended June 30, 2019 |
|
$ |
124 |
|
$ |
14 |
|
$ |
138 |
|
Sales and marketing |
|
|
(1) |
|
|
— |
|
|
(1) |
|
Acquisition selling and administrative expenses |
|
|
3 |
|
|
5 |
|
|
8 |
|
Corporate administrative expenses |
|
|
(4) |
|
|
— |
|
|
(4) |
|
Other |
|
|
3 |
|
|
(1) |
|
|
2 |
|
Three Months Ended June 30, 2020 |
|
$ |
124 |
|
$ |
19 |
|
$ |
143 |
Terminix and European Pest Control and Other reflect higher selling and administrative expenses as a result of acquisitions. The decrease in corporate administrative expenses was driven by actions taken to reduce the cost of our corporate headquarters operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Pest |
|
|
|
|
|
(In millions) |
|
Terminix |
|
Control and Other |
|
Total |
|||
|
Six Months Ended June 30, 2019 |
|
$ |
234 |
|
$ |
27 |
|
$ |
261 |
|
Sales and marketing costs |
|
|
1 |
|
|
— |
|
|
1 |
|
Acquisition selling and administrative expenses |
|
|
7 |
|
|
10 |
|
|
17 |
|
Investments in growth |
|
|
4 |
|
|
— |
|
|
4 |
|
Other |
|
|
2 |
|
|
(1) |
|
|
1 |
|
Six Months Ended June 30, 2020 |
|
$ |
248 |
|
$ |
36 |
|
$ |
283 |
Terminix and European Pest Control and Other reflect higher selling and administrative expenses as a result of acquisitions. The increase in investments in growth was primarily related to our investment in a new customer experience platform.
Amortization Expense
Amortization expense was $9 million and $5 million in the three months ended June 30, 2020 and 2019, respectively, and $18 million and $10 million in the six months ended June 30, 2020 and 2019, respectively. The increase in amortization expense primarily reflects the effect of recent acquisitions.
Acquisition-Related Costs
There were no acquisition-related costs in the three months ended June 30, 2020. Acquisition-related costs were $3 million in the three months ended June 30, 2019, and $1 million and $4 million in the six months end June 30, 2020 and 2019, respectively.
Fumigation Related Matters
There were no charges accrued for fumigation related matters in the three and six months ended June 30, 2020. We reversed a previously accrued $1 million charge for fumigation related matters due to favorable activity in the three months ended June 30, 2019, and there was no charge for fumigation related matters in the six months ended June 30, 2019.
Restructuring and Other Charges
We incurred restructuring charges of approximately $8 million and $2 million in the three months ended June 30, 2020 and 2019, respectively, and $12 million and $8 million in the six months ended June 30, 2020 and 2019, respectively. Restructuring charges were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Terminix(1) |
|
$ |
4 |
|
$ |
1 |
|
$ |
5 |
|
$ |
3 |
|
European Pest Control and Other(2) |
|
|
4 |
|
|
1 |
|
|
7 |
|
|
4 |
|
Global Service Center relocation(3) |
|
|
— |
|
|
— |
|
|
— |
|
|
1 |
|
Total restructuring charges |
|
$ |
8 |
|
$ |
2 |
|
$ |
12 |
|
$ |
8 |
_________________________________
(1)For the three and six months ended June 30, 2020, these charges included $2 million of severance and other costs and $2 million of impairment charges on our call center right of use assets which we exited during the second quarter. For the three and six months ended June 30, 2019, these charges included $1 million and $3 million, respectively, of severance and other costs.
(2)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, 2020 and 2019, these charges were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
|
June 30, |
|
June 30, |
||||||||
|
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
|
Severance |
|
$ |
2 |
|
$ |
— |
|
$ |
3 |
|
$ |
1 |
|
|
Other costs(a) |
|
|
2 |
|
|
1 |
|
|
4 |
|
|
4 |
|
|
Total European Pest Control and Other |
|
$ |
4 |
|
$ |
1 |
|
$ |
7 |
|
$ |
4 |
___________________________________
(a)Represents costs incurred in connection with our CEO transition, charges associated with the marketing of our corporate aircraft for sale and accelerated depreciation on systems we are replacing with the implementation of our new customer experience platform.
(3)For the six months ended June 30, 2019, these charges included lease termination and other charges of $1 million related to our headquarter 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, with no similar gain recorded in the other periods presented.
Interest Expense
Interest expense was $22 million and $18 million in the three months ended June 30, 2020 and 2019, respectively, and $45 million and $45 million in the six months ended June 30, 2020 and 2019, respectively. The increase in interest expense was due to an increase in our average long-term debt balance to fund acquisitions completed in the fourth quarter of 2019.
Interest and Net Investment Income
Interest and net investment income was $1 million and $3 million for the three months ended June 30, 2020 and 2019, respectively, and $1 million and $4 million in the six months ended June 30, 2020 and 2019, 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, 2020 and 2019 or the six months ended June 30, 2020. See Note 11 to the condensed consolidated financial statements for more details.
Income from Continuing Operations before Income Taxes
Income from continuing operations before income taxes was $57 million and $56 million income for the three months ended June 30, 2020 and 2019, respectively, and $56 million and $112 million for the six months ended June 30, 2020 and 2019, 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) |
|
2020 vs. 2019 |
|
2020 vs. 2019 |
||
|
Income from continuing operations before income taxes, June 30, 2019 |
|
$ |
56 |
|
$ |
112 |
|
Reportable segment and European Pest Control and Other(1) |
|
|
15 |
|
|
(8) |
|
Depreciation expense(2) |
|
|
(1) |
|
|
(2) |
|
Amortization expense(3) |
|
|
(4) |
|
|
(8) |
|
Acquisition-related costs(4) |
|
|
3 |
|
|
3 |
|
Restructuring and other charges(5) |
|
|
(6) |
|
|
(4) |
|
Loss on extinguishment of debt(6) |
|
|
— |
|
|
6 |
|
Realized (gain) on investment in frontdoor, inc.(7) |
|
|
— |
|
|
(40) |
|
Interest expense(8) |
|
|
(3) |
|
|
— |
|
Other(9) |
|
|
(3) |
|
|
(3) |
|
Income from continuing operations before income taxes, June 30, 2020 |
|
$ |
57 |
|
$ |
56 |
___________________________________
(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 Charges.”
(5)Represents the net change in restructuring and other charges as described in “—Restructuring and Other 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 and interest and net investment income.
Provision for Income Taxes
The effective tax rate on income from continuing operations was 31.0 percent and 25.8 percent for the three months ended June 30, 2020 and 2019, respectively, and 28.5 percent and 15.5 percent for the six months ended June 30, 2020 and 2019, respectively. The effective tax rates 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.
Net Earnings from Discontinued Operations
In January 2020, we announced we are exploring strategic alternatives related to ServiceMaster Brands, including a potential sale of the business. Net earnings from discontinued operations were $13 million and $17 million for the three months ended June 30, 2020 and 2019, respectively, and $26 million and $34 million for the six months ended June 30, 2020 and 2019, respectively, and reflect the results of the ServiceMaster Brands Divestiture Group. Net earnings from discontinued operations for the three and six months ended June 30, 2020 include costs related to third-party consulting and other incremental costs directly associated with the strategic alternatives exploration process of $5 million and $9 million, respectively.
Net Income
Net income was $53 million and $59 million for the three months ended June 30, 2020 and 2019, respectively, which was primarily driven by a $1 million increase in income from continuing operations before income taxes offset by $4 million lower net earnings from discontinued operations in the three months ended June 30, 2020. Net income was $67 million and $129 million in the six months ended June 30, 2020 and 2019, respectively, which was primarily driven by a $56 million decrease in income from continuing operations before income taxes and $8 million lower net earnings from discontinued operations in the six months ended June 30, 2020.
Segment Review
The following discussion of our business segment results should be read in conjunction with the footnote disclosures presented in the notes to the condensed consolidated financial statements included in this report.
Revenue and Adjusted EBITDA were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Six Months Ended |
|
|
||||||||||
|
|
|
June 30, |
|
Increase |
|
June 30, |
|
Increase |
||||||||||
|
(In millions) |
|
2020 |
|
2019 |
|
(Decrease) |
|
2020 |
|
2019 |
|
(Decrease) |
||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix |
|
$ |
517 |
|
$ |
495 |
|
5 |
% |
|
$ |
955 |
|
$ |
914 |
|
5 |
% |
|
European Pest Control and Other |
|
|
17 |
|
|
— |
|
* |
|
|
|
35 |
|
|
— |
|
* |
|
|
Total Revenue: |
|
$ |
534 |
|
$ |
494 |
|
8 |
% |
|
$ |
990 |
|
$ |
913 |
|
8 |
% |
|
Adjusted EBITDA:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminix Reportable Segment Adjusted EBITDA |
|
$ |
120 |
|
$ |
106 |
|
14 |
% |
|
$ |
184 |
|
$ |
189 |
|
(3) |
% |
|
European Pest Control and Other(2) |
|
|
2 |
|
|
1 |
|
16 |
|
|
|
1 |
|
|
4 |
|
(65) |
|
|
Costs historically allocated to ServiceMaster Brands(3) |
|
|
(3) |
|
|
(3) |
|
* |
|
|
|
(6) |
|
|
(6) |
|
* |
|
|
Total Adjusted EBITDA |
|
$ |
119 |
|
$ |
104 |
|
15 |
% |
|
$ |
179 |
|
$ |
187 |
|
(4) |
% |
___________________________________
* not meaningful
(1)See Note 15 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 results from our pest control operations in Europe and unallocated corporate gains, net of expenses, primarily related to our automobile, general liability and workers’ compensation insurance program.
(3)Includes amounts historically allocated to the ServiceMaster Brands Divestiture Group not permitted to be classified as discontinued operations under GAAP.
Terminix Segment
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
The Terminix segment, which provides termite and pest control services to residential and commercial customers and distributes pest control products, reported a five percent increase in revenue and a 14 percent increase in Adjusted EBITDA for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
Revenue
Revenue by service line was as follows:
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|
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|
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Three Months Ended |
|
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||||
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June 30, |
|
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|
|
|
|
|
|
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|
|
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|
||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2020 |
|
2019 |
|
Growth |
|
Acquired |
|
Organic |
||||||||||||||
|
Residential Pest Control |
|
$ |
182 |
|
$ |
182 |
|
$ |
— |
|
— |
% |
|
$ |
2 |
|
1 |
% |
|
$ |
(1) |
|
(1) |
% |
|
Commercial Pest Control |
|
|
107 |
|
|
105 |
|
|
2 |
|
2 |
% |
|
|
11 |
|
11 |
% |
|
|
(10) |
|
(9) |
% |
|
Termite and Home Services |
|
|
196 |
|
|
183 |
|
|
13 |
|
7 |
% |
|
|
1 |
|
1 |
% |
|
|
12 |
|
7 |
% |
|
Other |
|
|
32 |
|
|
25 |
|
|
7 |
|
29 |
% |
|
|
9 |
|
38 |
% |
|
|
(2) |
|
(9) |
% |
|
Total revenue |
|
$ |
517 |
|
$ |
495 |
|
$ |
22 |
|
5 |
% |
|
$ |
23 |
|
5 |
% |
|
$ |
(1) |
|
— |
% |
Residential pest control revenue was flat. The organic revenue decline of one percent was driven by lower summer sales units, bed bug and other one-time sales and service postponements in recurring pest, all driven by COVID-19. Service postponements peaked in April, but moderated throughout the rest of the second quarter as customers became comfortable with the safety protocols we implemented in response to COVID-19, but remain higher than the second quarter of 2019. New one-time sales, such as bed bug services, declined by approximately $3 million in the quarter due to COVID-19. The delayed start and reduction in scope of our summer sales program also resulted in an approximately $3 million revenue decline in the quarter. These declines were offset by improved price realization. Residential pest control revenue in the quarter also increased one percent from acquisitions completed during the last 12 months.
Commercial pest control revenue growth was two percent, reflecting growth from acquisitions of 11 percent, offset by organic revenue declines of nine percent. The commercial pest control organic revenue decline was driven by lower sales of non-recurring services and service postponements due to business closures from COVID-19. Our new sanitization and disinfection services, which may be one-time or recurring services, did not have a meaningful impact on the second quarter of 2020. Commercial
pest control revenue in the quarter also increased 11 percent from acquisitions completed during the last 12 months, including Gregory Pest Solutions and McCloud Services which were completed during the fourth quarter of 2019.
Termite revenue, including wildlife exclusion, crawl space encapsulation and attic insulation, which are managed as a component of our termite line of business, growth was seven percent. The growth in this service line reflects an increase in core termite new unit sales driven by the launch of a new monthly pay tiered product offering and a strong termite swarm season in certain markets.
In the three months ended June 30, 2020, termite renewal revenue comprised 43 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.
Adjusted EBITDA
The following table provides a summary of changes in the Terminix’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Three Months Ended June 30, 2019 |
|
$ |
106 |
|
Impact of organic revenue growth |
|
|
1 |
|
Damage claims |
|
|
(8) |
|
Production labor |
|
|
5 |
|
Chemicals and materials |
|
|
2 |
|
Vehicle and fuel |
|
|
4 |
|
Sales and marketing |
|
|
1 |
|
Corporate administrative expenses |
|
|
4 |
|
Other |
|
|
2 |
|
Impact of acquisitions |
|
|
4 |
|
Three Months Ended June 30, 2020 |
|
$ |
120 |
The increase in termite damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the Mobile Bay Area, as well as the costs of the termite damage claim mitigation program in the Mobile Bay Area. The decrease in production labor was driven, in part, by improved employee retention and improved labor management. The decrease in chemicals and materials was driven by a favorable shift in the mix of services performed. The decrease in vehicle and fuel was driven by improvements in fleet management and lower fuel prices. The decrease in corporate administrative expenses was driven by actions taken to reduce the cost of our corporate headquarters operations.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The Terminix segment reported a five percent increase in revenue and a three percent decrease in Adjusted EBITDA for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
Revenue
Revenue by service line is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
2020 |
|
2019 |
|
Growth |
|
Acquired |
|
Organic |
||||||||||||||
|
Residential Pest Control |
|
$ |
341 |
|
$ |
335 |
|
$ |
6 |
|
2 |
% |
|
$ |
4 |
|
1 |
% |
|
$ |
1 |
|
— |
% |
|
Commercial Pest Control |
|
|
213 |
|
|
199 |
|
|
15 |
|
7 |
% |
|
|
21 |
|
11 |
% |
|
|
(6) |
|
(3) |
% |
|
Termite and Home Services |
|
|
351 |
|
|
339 |
|
|
12 |
|
4 |
% |
|
|
3 |
|
1 |
% |
|
|
9 |
|
3 |
% |
|
Other |
|
|
50 |
|
|
41 |
|
|
9 |
|
23 |
% |
|
|
13 |
|
31 |
% |
|
|
(3) |
|
(8) |
% |
|
Total revenue |
|
$ |
955 |
|
$ |
914 |
|
$ |
42 |
|
5 |
% |
|
$ |
41 |
|
4 |
% |
|
$ |
1 |
|
— |
% |
Residential pest control revenue increased two percent reflecting flat organic growth. Residential pest control revenue also increased one percent from acquisitions completed during the last 12 months. Organic revenue was flat, driven by lower new summer sales units, bed bug and other one-time sales and temporary service postponements in recurring pest, principally driven by the impact of COVID-19 on second quarter results.
Commercial pest control revenue increased seven percent. The commercial pest control organic revenue decline of three percent was driven by lower sales of non-recurring services and service postponements due to business closures from COVID-19. Commercial pest control revenue also increased 11 percent from acquisitions completed during the last 12 months, including Gregory Pest Solutions and McCloud Services which were completed during the fourth quarter of 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 four percent compared to prior year, primarily reflecting an increase in core
termite new unit sales and improved price realization. In the six months ended June 30, 2020, termite renewal revenue comprised 48 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.
Adjusted EBITDA
The following table provides a summary of changes in Terminix’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Six Months Ended June 30, 2019 |
|
$ |
189 |
|
Impact of change in revenue |
|
|
3 |
|
Damage claims |
|
|
(14) |
|
Production labor |
|
|
1 |
|
Chemicals and materials |
|
|
(1) |
|
Vehicle and fuel |
|
|
3 |
|
Sales and marketing |
|
|
(1) |
|
Investments in growth |
|
|
(4) |
|
Other |
|
|
3 |
|
Impact of acquisitions |
|
|
5 |
|
Six Months Ended June 30, 2020 |
|
$ |
184 |
The increase in termite damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the Mobile Bay Area, as well as the costs of the termite damage claim mitigation program in the Mobile Bay Area. The decrease in production labor was driven, in part, by improved employee retention and labor management, partially offset by labor inefficiencies incurred in the first quarter of 2020 due to the impact of COVID-19. The increase in chemicals and materials was driven by increased personal protective equipment and sanitization purchases in response to COVID-19, offset, in part, by a favorable shift in the mix of services performed. The decrease in vehicle and fuel was driven by improvements in fleet management and lower fuel prices. The increase in investments in growth was primarily related to our investment in a new customer experience platform.
Termite Damage Claims
A summary of Litigated Claims and Non-Litigated Claims for the six months ended June 30, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigated Claims |
|
Non-Litigated Claims |
||||||||||||||
|
|
|
Mobile Bay |
|
All Other |
|
|
|
|
Mobile Bay |
|
All Other |
|
|
|
||||
|
|
|
Area |
|
Regions |
|
Total |
|
Area |
|
Regions |
|
Total |
||||||
|
Outstanding claims as of December 31, 2018 |
|
|
31 |
|
|
17 |
|
|
48 |
|
|
264 |
|
|
602 |
|
|
866 |
|
New claims filed |
|
|
12 |
|
|
— |
|
|
12 |
|
|
135 |
|
|
623 |
|
|
758 |
|
Claims resolved |
|
|
(2) |
|
|
(1) |
|
|
(3) |
|
|
(122) |
|
|
(497) |
|
|
(619) |
|
Outstanding claims as of March 31, 2019 |
|
|
41 |
|
|
16 |
|
|
57 |
|
|
277 |
|
|
728 |
|
|
1,005 |
|
New claims filed |
|
|
9 |
|
|
— |
|
|
9 |
|
|
269 |
|
|
869 |
|
|
1,138 |
|
Claims resolved |
|
|
(2) |
|
|
(2) |
|
|
(4) |
|
|
(180) |
|
|
(685) |
|
|
(865) |
|
Outstanding claims as of June 30, 2019 |
|
|
48 |
|
|
14 |
|
|
62 |
|
|
366 |
|
|
912 |
|
|
1,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding claims as of December 31, 2019 |
|
|
56 |
|
|
11 |
|
|
67 |
|
|
376 |
|
|
618 |
|
|
994 |
|
New claims filed |
|
|
6 |
|
|
2 |
|
|
8 |
|
|
127 |
|
|
505 |
|
|
632 |
|
Claims resolved |
|
|
(6) |
|
|
— |
|
|
(6) |
|
|
(183) |
|
|
(546) |
|
|
(729) |
|
Outstanding claims as of March 31, 2020 |
|
|
56 |
|
|
13 |
|
|
69 |
|
|
320 |
|
|
577 |
|
|
897 |
|
New claims filed |
|
|
8 |
|
|
5 |
|
|
13 |
|
|
147 |
|
|
669 |
|
|
816 |
|
Claims resolved |
|
|
(1) |
|
|
(2) |
|
|
(3) |
|
|
(168) |
|
|
(501) |
|
|
(669) |
|
Outstanding claims as of June 30, 2020 |
|
|
63 |
|
|
16 |
|
|
79 |
|
|
299 |
|
|
745 |
|
|
1,044 |
Litigated Claims exclude a number of claims in which the only material issue in dispute is the actual amount of repair costs, which are simpler to resolve and less volatile (“Non-Complex Litigated Claims”). There were no Non-Complex Litigated Claims filed in the three and six months ended June 30, 2020 in the Mobile Bay Area, and none in the three months ended June 30, 2020 and eight in the six months ended June 30, 2020 in our branches outside of the Mobile Bay Area (“All Other Regions”) which are excluded from this table. The financial impacts of these Non-Complex Litigated Claims are included in the summary of Litigated and Non-Litigated Reserve Activity below and are not material to our financial condition or the results of our operations.
A summary of Litigated Claims and Non-Litigated Claims reserve activity for the six months ended June 30, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigated Claims |
|
Non-Litigated Claims |
||||||||||||||
|
|
|
Mobile Bay |
|
All Other |
|
|
|
|
Mobile Bay |
|
All Other |
|
|
|
||||
|
(In millions) |
|
Area |
|
Regions |
|
Total |
|
Area |
|
Regions |
|
Total |
||||||
|
Reserves as of December 31, 2018 |
|
$ |
4 |
|
$ |
4 |
|
$ |
8 |
|
$ |
7 |
|
$ |
13 |
|
$ |
20 |
|
Expense |
|
|
(1) |
|
|
2 |
|
|
1 |
|
|
2 |
|
|
3 |
|
|
5 |
|
Payments |
|
|
(2) |
|
|
(2) |
|
|
(4) |
|
|
(2) |
|
|
(4) |
|
|
(6) |
|
Reserves as of March 31, 2019 |
|
$ |
1 |
|
$ |
4 |
|
$ |
5 |
|
$ |
6 |
|
$ |
12 |
|
$ |
19 |
|
Expense |
|
|
3 |
|
|
— |
|
|
3 |
|
|
2 |
|
|
4 |
|
|
7 |
|
Payments |
|
|
(1) |
|
|
(3) |
|
|
(4) |
|
|
(3) |
|
|
(6) |
|
|
(8) |
|
Reserves as of June 30, 2019 |
|
$ |
3 |
|
$ |
1 |
|
$ |
4 |
|
$ |
6 |
|
$ |
11 |
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves as of December 31, 2019 |
|
$ |
40 |
|
$ |
12 |
|
$ |
52 |
|
$ |
15 |
|
$ |
13 |
|
$ |
28 |
|
Expense |
|
|
3 |
|
|
3 |
|
|
5 |
|
|
2 |
|
|
4 |
|
|
6 |
|
Payments |
|
|
(3) |
|
|
(1) |
|
|
(3) |
|
|
(3) |
|
|
(5) |
|
|
(8) |
|
Reserves as of March 31, 2020 |
|
$ |
40 |
|
$ |
14 |
|
$ |
54 |
|
$ |
15 |
|
$ |
12 |
|
$ |
27 |
|
Expense |
|
|
7 |
|
|
2 |
|
|
9 |
|
|
2 |
|
|
4 |
|
|
6 |
|
Payments |
|
|
(4) |
|
|
(1) |
|
|
(5) |
|
|
(3) |
|
|
(5) |
|
|
(8) |
|
Reserves as of June 30, 2020 |
|
$ |
43 |
|
$ |
15 |
|
$ |
58 |
|
$ |
14 |
|
$ |
11 |
|
$ |
25 |
In addition, our results of operations for the three and six months ended June 30, 2020 include charges for legal fees associated with Litigated Claims of $2 million and $4 million, respectively, and costs related to mitigation efforts in the Mobile Bay Area of $2 million and $3 million, respectively. Our results of operations for the three and six months ended June 30, 2019 include charges for legal fees associated with Litigated Claims of $1 million and $3 million, respectively.
European Pest Control and Other
European Pest Control and Other includes our pest control operations in Europe, our captive insurance subsidiary which provides automobile, workers’ compensation and general liability coverage to our reportable segment and our headquarters functions (whose costs are allocated to Terminix or previously allocated to ServiceMaster Brands which is now classified as discontinued operations).
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Revenue
Our European pest control operations reported revenue of $17 million for the three months ended June 30, 2020. Revenue from European pest control operations was impacted by COVID-19 related business closures, including severe disruptions in the UK.
Adjusted EBITDA
The following table provides a summary of changes in European Pest Control and Other’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Three Months Ended June 30, 2019 |
|
$ |
1 |
|
European pest control |
|
|
2 |
|
Other |
|
|
(1) |
|
Three Months Ended June 30, 2020 |
|
$ |
2 |
The increase in Adjusted EBITDA from European Pest Control and Other was driven by the acquisition of Nomor, partially offset by additional optimization expenses incurred by Terminix UK as part of our efforts to separate it from its former owner’s operations and systems.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenue
Our European pest control operations reported revenue of $35 million for the six months ended June 30, 2020.
Adjusted EBITDA
The following table provides a summary of changes in European Pest Control and Other’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Six Months Ended June 30, 2019 |
|
$ |
4 |
|
European pest control |
|
|
3 |
|
Insurance program |
|
|
(5) |
|
Other |
|
|
(1) |
|
Six Months Ended June 30, 2020 |
|
$ |
1 |
The increase in Adjusted EBITDA from European Pest Control and Other was driven by the acquisition of Nomor, partially offset by additional optimization expenses incurred by Terminix UK as part of our efforts to separate it from its former owner’s operations and systems. The six months ended June 30, 2020 were also impacted by an unfavorable adjustment of $1 million in our automobile, general liability and workers’ compensation program, as compared to a favorable $3 million adjustment in our automobile, general liability and workers’ compensation program in the six months ended June 30, 2019.
Costs Historically Allocated to ServiceMaster Brands
We have historically incurred the cost of certain corporate-level activities which we performed on behalf of our businesses, including ServiceMaster Brands, 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, facilities, information technology and other general corporate support services. The costs of such activities were historically allocated to our segments, including ServiceMaster Brands. Certain corporate expenses which were historically allocated to the ServiceMaster Brands segment are not permitted to be classified as discontinued operations under GAAP (“Historically Allocated Services”). Such Historically Allocated Services amounted to $3 million and $6 million in each of the three months and six months ended June 30, 2020 and 2019 respectively, and are included in European Pest Control and Other.
Discontinued Operations – ServiceMaster Brands Divestiture Group
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
The ServiceMaster Brands Divestiture Group, 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, as well as our financing subsidiary which provides financing to franchisees that was historically reported within European Pest Control and Other, was classified as held for sale as of June 30, 2020.
Revenue
Revenue by service line for the ServiceMaster Brands Divestiture Group was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
% of |
|
% of |
||||||
|
|
|
June 30, |
|
Revenue |
|
Revenue |
||||||
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Royalty Fees |
|
$ |
30 |
|
$ |
35 |
|
47 |
% |
|
53 |
% |
|
Commercial Cleaning and other National Accounts |
|
|
21 |
|
|
19 |
|
32 |
|
|
29 |
|
|
Sales of Products |
|
|
3 |
|
|
3 |
|
6 |
|
|
5 |
|
|
Other |
|
|
9 |
|
|
9 |
|
15 |
|
|
14 |
|
|
Total revenue |
|
$ |
63 |
|
$ |
66 |
|
100 |
% |
|
100 |
% |
The ServiceMaster Brands Divestiture Group reported $63 million in revenue, a decrease of four percent over the prior year. A mild winter and decline in area-wide events year-over-year in ServiceMaster Restore, as well as the COVID-19 related shutdown of Merry Maids locations at the beginning of the second quarter, drove lower royalty revenue.
Adjusted EBITDA
The following table provides a summary of changes in the ServiceMaster Brands Divestiture Group’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
Three Months Ended June 30, 2019 |
|
$ |
27 |
|
Impact of change in revenue |
|
|
(3) |
|
Three Months Ended June 30, 2020 |
|
$ |
24 |
The ServiceMaster Brands Divestiture Group generated Adjusted EBITDA of $24 million reflects a decrease of $3 million year over year. The flow through impact of COVID-19 related royalty revenue reductions at Merry Maids accounted for approximately $2 million of the decline, while the impact of a mild winter and fewer area-wide events at ServiceMaster Restore contributed the remaining decline.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenue
Revenue by service line for the ServiceMaster Brands Divestiture Group was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
% of |
|
% of |
||||||
|
|
|
June 30, |
|
Revenue |
|
Revenue |
||||||
|
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Royalty Fees |
|
$ |
62 |
|
$ |
69 |
|
48 |
% |
|
54 |
% |
|
Commercial Cleaning and other National Accounts |
|
|
40 |
|
|
36 |
|
31 |
|
|
28 |
|
|
Sales of Products |
|
|
6 |
|
|
6 |
|
5 |
|
|
5 |
|
|
Other |
|
|
20 |
|
|
17 |
|
16 |
|
|
13 |
|
|
Total revenue |
|
$ |
128 |
|
$ |
128 |
|
100 |
% |
|
100 |
% |
The ServiceMaster Brands Divestiture Group reported $128 million in revenue, which was consistent with prior year. A mild winter and decline in area-wide events year over year in ServiceMaster Restore, as well as the COVID-19 related shutdown of Merry Maids locations through the beginning of the second quarter, drove lower royalty revenue.
Adjusted EBITDA
The following table provides a summary of changes in the ServiceMaster Brands Divestiture Group’s Adjusted EBITDA:
|
|
|
|
|
|
(In millions) |
|
|
|
|
Six Months Ended June 30, 2019 |
|
$ |
53 |
|
Impact of change in revenue |
|
|
(3) |
|
Other |
|
|
(3) |
|
Six Months Ended June 30, 2020 |
|
$ |
47 |
The ServiceMaster Brands Divestiture Group generated Adjusted EBITDA of $47 million reflects a decrease of $5 million year over year. The flow through impact of COVID-19 related royalty revenue reductions at Merry Maids accounted for approximately half of the decline, while the impact of a mild winter and fewer area-wide events at ServiceMaster Restore contributed the remaining decline.
Presented below is a reconciliation of Net earnings from discontinued operations to the ServiceMaster Brands Divestiture Group’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
||||||
|
|
|
|
June 30, |
|
|
June 30, |
||||||
|
(In millions) |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
Net earnings from discontinued operations |
|
$ |
13 |
|
$ |
17 |
|
$ |
26 |
|
$ |
34 |
|
Depreciation and amortization expense |
|
|
— |
|
|
2 |
|
|
1 |
|
|
4 |
|
Non-cash stock-based compensation expense |
|
|
1 |
|
|
— |
|
|
1 |
|
|
1 |
|
Restructuring and other charges |
|
|
5 |
|
|
1 |
|
|
9 |
|
|
2 |
|
Provision for income taxes |
|
|
5 |
|
|
7 |
|
|
9 |
|
|
12 |
|
ServiceMaster Brands Divestiture Group Adjusted EBITDA |
|
$ |
24 |
|
$ |
27 |
|
$ |
47 |
|
$ |
53 |
Liquidity and Capital Resources
Liquidity
A portion of our liquidity needs are due to service requirements on our indebtedness. The Credit Facilities contain covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As of June 30, 2020, we were in compliance with the covenants under the agreements that were in effect on such date.
Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as required, borrowings under the Credit Facilities. As of June 30, 2020, we had $677 million of immediate liquidity, which consisted of available cash and cash equivalents and available borrowings under our Existing Revolving Credit Facility.
As previously described, the impact of COVID-19 is highly uncertain and far reaching. We took actions to improve our liquidity, including capital expenditure and operating expense reductions and enhancements to our working capital management practices. Based on these actions and assumptions regarding the impact of COVID-19, we expect to be able to generate sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants for the next twelve months prior to giving effect to any additional financing that may occur.
We have a covenant-lite debt structure and as such has no maintenance financial covenants in place unless its Revolving Credit Facility is drawn by more than 30 percent, or $120 million. We currently have no cash drawn under the Revolving Credit Facility. In the event more than 30 percent of the Revolving Credit Facility is drawn, the applicable maintenance financial covenant is 4.0x net first lien debt to Consolidated EBITDA, as defined in our credit agreement, for the most recently completed four-quarter period. With the inclusion of EBITDA from discontinued operations, our first lien net debt leverage ratio was approximately 1.0x Adjusted EBITDA at quarter end, with total net debt leverage at approximately 3.6x Adjusted EBITDA.
At June 30, 2020, there were $25 million of letters of credit outstanding and $375 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. We also have $89 million of cash collateral under our automobile, general liability and workers’ compensation insurance program that is included as Restricted cash on the Condensed Consolidated Statements of Financial Position as of June 30, 2020. 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 new 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 new Revolving Credit Facility.
On February 19, 2019, our board of directors approved a three-year extension of a previously authorized share repurchase plan allowing for $150 million of repurchases of our common stock through February 19, 2022. We utilized all remaining authority under this program and repurchased $103 million of shares in the first quarter of 2020, at an average share price of $27.64, using cash from operations.
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, 2020, the estimated fair value of our fuel swap contracts was $2 million, and we had posted $2 million in letters of credit as collateral under our fuel hedging program, which were also issued under the old 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 new 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.
Long-Term Debt
On November 5, 2019, the Company closed on an amended $600 million Term Loan B due 2026, as well as a $400 million revolving credit agreement due 2024. Concurrently with the refinancing, we entered into a seven year interest rate swap agreement with a notional amount of $550 million. During the term on the agreement, the effective interest rate on $550 million of the new Term Loan B is fixed at a rate of 1.615 percent, plus the incremental borrowing margin of 1.75 percent, or 3.365 percent.
Fleet and Equipment Financing Arrangements
Our Fleet Agreement allows us to obtain fleet vehicles through a leasing program, among other things. 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, 2020, we acquired $16 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, 2020, an immaterial amount of 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 2020 will range from $40 million to $50 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.
We previously considered the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. The Tax Cuts and Jobs Act (the “Act” or “U.S. Tax Reform”) 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||
|
|
|
June 30, |
||||
|
(In millions) |
|
2020 |
|
2019 |
||
|
Net cash provided from (used for): |
|
|
|
|
|
|
|
Operating activities |
|
$ |
172 |
|
$ |
124 |
|
Investing activities |
|
|
(36) |
|
|
(119) |
|
Financing activities |
|
|
(140) |
|
|
(32) |
|
Discontinued operations |
|
|
28 |
|
|
30 |
|
Effect of exchange rate changes on cash |
|
|
(1) |
|
|
— |
|
Cash increase during the period |
|
$ |
22 |
|
$ |
3 |
Operating Activities
Net cash provided from operating activities from continuing operations increased $48 million to $172 million for the six months ended June 30, 2020 compared to $124 million for six months ended June 30, 2019.
Net cash provided from operating activities for the six months ended June 30, 2020 comprised $115 million in earnings adjusted for non-cash charges and $62 million decrease in cash required for working capital (a $26 million decrease excluding the working capital impact of accrued interest and taxes), offset, in part, by $6 million in payments related to restructuring. For the six months ended June 30, 2020, working capital requirements were favorably impacted by the deferral of payroll and income tax payments under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and the collection of a federal income tax refund.
Net cash provided from operating activities for the six months ended June 30, 2019 comprised $129 million in earnings adjusted for non-cash charges and a $5 million decrease in cash required for working capital (a $1 million increase excluding the working capital impact of accrued interest and taxes), offset, in part, by $11 million in payments related to restructuring and other and fumigation matters. 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.
Investing Activities
Net cash used for investing activities from continuing operations was $36 million for the six months ended June 30, 2020, compared to $119 million for the six months ended June 30, 2019.
Cash paid for business acquisitions was $24 million for the six months ended June 30, 2020, compared to $115 million for the six months ended June 30, 2019. We expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions.
Capital expenditures were $15 million and $13 million for the six months ended June 30, 2020 and 2019, respectively, and included recurring capital needs and information technology projects. We anticipate capital expenditures for the full year 2020 will range from $40 million to $50 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 for notes receivable, net, for the six months ended June 30, 2020 totaled $3 million. Cash flows received for notes receivable, net, for the six months ended June 30, 2019 totaled $8 million. Reductions in the volume of notes receivable originated in the 2020 period were driven by the launch of a new monthly pay tiered product offering in our termite line of business and declines in new one-time sales, such as bed bug and bird services, in our pest control line of business.
Financing Activities
Net cash used for financing activities from continuing operations was $140 million for the six months ended June 30, 2020 compared to $32 million for the six months ended June 30, 2019.
During the six months ended June 30, 2020, we repurchased $103 million of common stock and received $3 million from the issuance of common stock through the exercise of stock options. In addition, we repaid $40 million of debt. 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 first quarter of 2019, we also 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 $38 million of other debt.
Contractual Obligations
Our 2019 Form 10-K includes disclosures of our contractual obligations and commitments as of December 31, 2019. We continue to make the contractually required payments, and, therefore, the 2019 obligations and commitments as listed in our 2019 Form 10-K have been reduced by the required payments.
Off-Balance Sheet Arrangements
As of June 30, 2020, 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; impact from COVID-19; growth strategies or expectations; the continuation of acquisitions, including the integration of any acquired company and risks relating to any such acquired company; fuel prices; attraction and retention of key personnel; the impact of fuel swaps; the valuation of marketable securities; estimates of accruals for self-insured claims related to workers’ compensation, auto and general liability risks; expected termite damage claims costs; estimates of future payments under operating and finance leases; estimates on current and deferred tax provisions; the outcome (by judgment or 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 2019 Form 10-K, in our quarterly report on Form 10-Q for the quarter ended March 31, 2020 (the “2020 Q1 10-Q”) 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:
Any financial impact from the COVID-19 pandemic, including a global recession or a recession in the U.S., credit and capital markets volatility and an economic or financial crisis, or otherwise, which could affect our financial performance or operations, the health of our employees or the health and operations and our customers;
Weakening general economic conditions, especially as they may affect unemployment and consumer confidence or discretionary spending levels, all of which could impact the demand for our services;
the possibility that the review of strategic alternatives for our ServiceMaster Brands businesses will not result in a transaction or that the anticipated benefits will not be realized;
the diversion of management time and other business disruption during the review of strategic alternatives for our ServiceMaster Brands businesses;
the impact of reserves attributable to pending Litigated Claims and Non-Litigated Claims for termite damages;
lawsuits, enforcement actions and other claims by third parties or governmental authorities;
compliance with, or violation of, environmental, health and safety laws and regulations;
cyber security breaches, disruptions or failures in our information technology systems and our failure to protect the security of personal information about our customers;
our ability to attract and retain key personnel, including our ability to attract, retain and maintain positive relations with trained workers and third-party contractors;
adverse weather conditions;
our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations;
our ability to successfully implement our business strategies;
increase in prices for fuel and raw materials, and in minimum wage levels;
changes in the source and intensity of competition in our segments;
our franchisees, subcontractors, third-party distributors and vendors taking actions that harm our business;
changes in our services or products;
our ability to protect our intellectual property and other material proprietary rights;
negative reputational and financial impacts resulting from future acquisitions or strategic transactions;
laws and governmental regulations increasing our legal and regulatory expenses;
increases in interest rates increasing the cost of servicing our substantial indebtedness;
increased borrowing costs due to lowering or withdrawal of the ratings, outlook or watch assigned to our debt securities;
restrictions contained in our debt agreements;
the effects of our indebtedness and the limitations contained in the agreements governing such indebtedness; and
other factors described in this report and from time to time in documents that we file with the 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, 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.
On November 5, 2019, we repaid approximately $171 million of debt outstanding under the existing Term Loan B due 2023, $120 million outstanding under the existing Revolving Credit Agreement due 2021, and $150 million from a recent short-term borrowing entered on October 4, 2019. We repaid the approximately $441 million in debt with the proceeds from a new $600 million Term Loan B due 2026, and also entered into a $400 million revolving credit facility due 2024. In conjunction with the debt refinancing, we entered into a seven year interest rate swap agreement with a notional amount of $550 million. During the term of the agreement, the effective interest rate on $550 million of the new Term Loan B is fixed at a rate of 3.365%.
We have hedged substantially all of our variable rate debt under our interest rate swap and, therefore, we believe our exposure to interest rate fluctuations, when viewed on a net basis, is not material to our overall results of operations. Assuming all revolving loans were fully drawn as of June 30, 2020, each one percentage point change in interest rates would result in an approximate $4 million change in annual interest expense on our Revolving Credit Facility.
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 13 million gallons of fuel in 2020. As of June 30, 2020, 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, 2020, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $35 million, maturing through 2021. The estimated fair value of these contracts as of June 30, 2020 was a net liability of $2 million. These fuel swap contracts provide a fixed price for approximately 75 percent and 84 percent of our estimated fuel usage for the remainder of 2020 and 2021 respectively.
Foreign Currency Risk
We are principally exposed to foreign currency exchange risk in Swedish krona and Norwegian krone, but also have foreign currency exchange risk related to the euro, British pound, Canadian dollar, Mexican peso and Chinese yuan. A strengthening of the U.S. dollar relative to the currencies of the foreign countries in which we operate can have an impact on our operating results.
Effective March 3, 2020, we entered into a cross currency interest rate swap and a net investment hedge to mitigate the financial impact of fluctuations in foreign currency exchange rates between the U.S. dollar and Swedish Krone, our largest foreign currency exposure. The estimated fair value of these contracts as of June 30, 2020 was a net liability of $8 million. These instruments provide a fixed translation rate on our approximately $200 million investment in Nomor. As of June 30, 2020, a 10 percent change in average exchange rates would not have a material impact on our results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our Interim Chief Executive Officer, Naren K. Gursahaney, 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. Gursahaney and DiLucente have concluded that both the design and operation of our disclosure controls and procedures were effective as of June 30, 2020.
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 and six months ended June 30, 2020 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
Our Terminix business is subject to a significant number of damage claims related to termite activity in homes for which we provide termite control services, often accompanied by a termite damage warranty. Our termite damage warranty is a differentiator in the industry that has enabled us to become the market leader of this product line. Damage claims include Non-litigated Claims and Litigated Claims. Recently we have experienced higher Non-Litigated Claims activity concentrated in the Mobile Bay Area of the United States related to Formosan termites, an invasive species, which has driven higher Non-Litigated Claims expense. In addition, since the beginning of 2017, we have been served with an increasing number of Litigated Claims, again primarily concentrated in the Mobile Bay Area and related to Formosan termite activity, which has driven higher Litigated Claim expense. Some plaintiffs have sought to demonstrate a pattern and practice of fraud in connection with Litigated Claims and have sought awards, in addition to repair costs, which included punitive damages and damages for mental anguish. We defend these Litigated Claims vigorously, and we are taking decisive actions to mitigate increasing claims costs, however, we cannot give assurance that these mitigation actions will be effective in reducing claims or costs related thereto, nor can we give assurance that lawsuits or other proceedings related to termite damage claims will not materially affect our reputation, business, financial position, results of operations and cash flows.
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 matters 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, shareholder 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 2019 Form 10-K and our 2020 Q1 10-Q 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 2019 Form 10-K and the 2020 Q1 10-Q. The materialization of any risks and uncertainties identified in Forward-Looking Statements contained in this report, together with those previously disclosed in the 2019 Form 10-K and the 2020 Q1 10-Q 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 6. EXHIBITS
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Exhibit
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Description |
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10.1#* |
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Separation Agreement and General Release entered into with Pratip Dastidar, dated June 30, 2020. |
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31.1* |
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31.2* |
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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* |
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Cover Page Interactive Data File (embedded within the Inline XBRL document and contained 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 7, 2020
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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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Exhibit 10.1
SEPARATION AGREEMENT AND GENERAL RELEASE
This Separation Agreement and General Release (“Agreement”) is entered into by you, Pratip Dastidar, on behalf of yourself, your heirs, executors, administrators, successors, assigns and anyone else who may sue on your behalf (collectively, “you”) and The ServiceMaster Company, LLC, on behalf of itself, past and present subsidiaries, parent companies, affiliated entities, predecessors, successors, assigns, and their respective past and present 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: Your employment at ServiceMaster will end, effective June 30, 2020 (“Separation Date”) and you will no longer hold any other position as officer or director with ServiceMaster or any of its subsidiaries or affiliates.
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. Salary Continuation. You will receive payments in the total gross amount of $400,000.00 (the “Salary Continuation Payments”), which equals 52 weeks of your current base salary.
b. Target Bonus. You will receive payments totaling $240,000.00 (the “Target Bonus”), which equals your target bonus under the ServiceMaster Annual Bonus Plan (“ABP”) for the 2020 Plan year.
c. COBRA Subsidy. If you participate in ServiceMaster’s Health and Welfare Benefit Plan and elect to continue your medical coverage under the Plan pursuant to the Consolidated Omnibus Reconciliation Act (COBRA), you will receive a one-time lump sum payment of $8,703.00, which equals the difference between your monthly COBRA premiums and your premiums as an active employee for 12 months. This payment will be made on the first practicable regularly scheduled pay date after the Company receives notice of your election to continue coverage under COBRA.
d. Career Transition Assistance. The Company will pay for executive-level career transition services for you with its outplacement services provider for up to 12 months, subject to its normal outplacement services program. If you wish to initiate career transition services, you must do so within 60 days of your Separation Date by calling 1-877-700-7220, ext. 888 or go to www.lhh.com/register.
The Salary Continuation Payments and Target Bonus will be aggregated as a single sum and paid in 24 equal semi-monthly installments, starting on the first practicable regularly scheduled pay date 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. In addition to any other remedies which may be available at law, the Company may suspend, cancel and/or seek the refund of any payments contemplated by this Agreement upon any violation by you of any representation, warranty or covenant set forth herein.
3. 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 last day of employment. You will become eligible for continuation of coverage under COBRA on the first day following the last day of employment. You are solely responsible for the payment of any premiums for COBRA coverage.
b. Accrued unpaid wages. You will be paid any accrued, unpaid wages through your Separation Date (including any accrued, unused vacation time as reflected in ServiceMaster’s HRIS system) on the first regularly scheduled pay date following your Separation Date or within the time period required by applicable law.
c. PSRP/401K. 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. Any amounts to be paid, distributed, rolled over, or held under the PSRP will be paid, distributed, rolled over, or held in accordance with the terms of the PSRP and applicable rules and regulations.
d. DCP. If you participate in the ServiceMaster Deferred Compensation Plan (“DCP”), your eligibility to participate in the DCP will end on your Separation Date. Any balance in your DCP account will be distributed or held in accordance with your prior elections, subject to the terms of the DCP and applicable rules and regulations.
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.
4. 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 known and unknown 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 Disabilities Act, the Age Discrimination in Employment Act, the Worker Adjustment and Retraining Notification Act, the Employee Retirement Income Security Act, and any applicable 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. 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, such as claims for workers’ compensation or unemployment benefits or any claims that may arise after the Effective Date.
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.
d. Representations: You represent that you (i) have been provided all benefits due under the Family and Medical Leave Act and any applicable state or local law; (ii) have received all wages due, including any overtime pay, bonus pay and commissions; (iii) that you have received all meals and rest breaks to which you were entitled under the Fair Labor Standards Act and any applicable state and local law; and (iv) that you have not had any work-related accidents or injuries that you have not previously reported in writing to the Company.
5. 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 a valid 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.
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6. Restrictive Covenants. For a period of 12 months following your Separation Date, you shall not, either personally or in concert with any other person (a) induce or encourage any ServiceMaster employee to terminate his/her employment or seek employment or association with any other person, business or entity; (b) own (other than as a passive shareholder of less than 1% of publicly traded stock), manage, operate, become employed by or provide service to any company that competes with ServiceMaster; (c) solicit or sale any product or service in competition with ServiceMaster to any person, business or other entity that is a customer of ServiceMaster; or (d) interfere with ServiceMaster’s relations with any of its customers, franchisees, subcontractors, consultants, vendors or business partners. This Agreement is in addition to and does not supersede any other agreements prohibiting non-interference or competition with ServiceMaster.
7. Code of Ethics and Business Conduct. You previously have been provided or have access through the Company intranet site to the Company 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 available legal remedies, including the suspension and recoupment of any payments made or due under this Agreement and any other agreements between the parties.
8. 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.
9. Assistance. You agree to provide information to ServiceMaster as requested 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. You further agree to notify ServiceMaster’s General Counsel or designee immediately in the event you are asked to assist or supply information to any person or entity regarding any such matters.
10. Non-Disparagement. You agree that you will refrain from taking actions or making statements, written or oral, which criticize, disparage or defame the business, goodwill or reputation of ServiceMaster (including its products and services), its directors, officers, executives, subsidiaries, parent entities, and/or employees or making statements which could adversely affect the morale of other 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 or 1.800.367.5690; company code “12319”), an on-line employment verification service operated by Equifax Workforce Solutions. Nothing in this Agreement precludes either party 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 a valid subpoena.
11. 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.
12. 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.
13. Notices. All notices required or permitted pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) if to ServiceMaster, when sent by electronic mail with confirmation of delivery; (b), if to you, (i) upon personal delivery, (ii) when sent by electronic mail with confirmation of delivery, (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) 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:
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If to ServiceMaster: The ServiceMaster Company, LLC Attn: VP & Deputy General Counsel marcus.mcdaniel@servicemaster.com legal@servicemaster.com |
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If to you, at the most recent address listed in the Company’s human resources information system.
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14. Governing Law and Venue. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Tennessee without regard to the principle of conflicts of laws. Subject to the dispute resolution provisions herein, any judicial proceeding arising from and relating to this Agreement shall be brought in courts having competent jurisdiction located in the State of Tennessee, which shall be the exclusive forum for resolving such disputes. Both parties consent to the personal jurisdiction of such courts for the purposes of this Agreement. The parties shall stipulate in any proceeding that this Agreement is considered for all purposes to have been executed and delivered in the State of Tennessee.
15. 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.
16. 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.
17. OWBPA Notice. Pursuant to the federal Older Workers Benefit Protection Act, you are advised as follows:
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This Agreement includes a waiver of claims of age discrimination under the federal Age Discrimination in Employment Act; |
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You are advised to consult with your personal attorney before signing this Agreement; |
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You have 21 days from your receipt of this Agreement to consider the Agreement (the “Review Period”); |
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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; |
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You have seven days after you sign this Agreement to revoke the Agreement. |
18. Effective Date: This Agreement becomes effective on the 8th day after you sign, provided you do not revoke the Agreement as provided above.
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 YOUR PERSONAL ATTORNEY (OR HAVE HAD AN OPPORTUNITY TO DO SO) REGARDING THE TERMS AND LEGAL EFFECT OF THIS AGREEMENT.
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/s/ Pratip Dastidar |
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/s/ David Dart |
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Pratip Dastidar |
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David Dart |
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SVP & Chief Human Resources Officer |
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The ServiceMaster Company, LLC |
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Date: 6-30-2020 |
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Date: 6-30-2020 |
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CERTIFICATIONS
I, Naren K. Gursahaney, 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 7, 2020 |
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/s/ Naren K. Gursahaney |
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Naren K. Gursahaney |
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Interim 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 7, 2020 |
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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, Naren K. Gursahaney, the Interim Chief Executive Officer of ServiceMaster Global Holdings, Inc., certify that (i) the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, 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/ Naren K. Gursahaney |
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Naren K. Gursahaney |
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August 7, 2020 |
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, 2020, 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 7, 2020 |