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 March 31, 2020, and for all periods prior to March 31, 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 brand, 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 our reportable segment and other headquarters operations (substantially all of which costs are allocated to our reportable segment), which provide various technology, finance, legal and other support services to the reportable segment.
Our financial statements will include non-recurring costs incurred to evaluate, plan and execute the exploration of strategic alternatives related to ServiceMaster Brands, including the potential sale of the business. Costs will primarily be related to third-party consulting and other incremental costs directly associated with the strategic alternatives process. Net earnings from discontinued operations for the three months ended March 31, 2020 included charges of $4 million related to the initiative. We expect to incur charges of $10 million to $15 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.
On January 21, 2020, Nikhil M. Varty resigned from his position as Chief Executive Officer and as a member of our board of directors. Our board of directors appointed our current Chairman of the Board, Naren K. Gursahaney, as interim Chief Executive Officer until a replacement Chief Executive Officer is identified.
Recent Events and 2020 Outlook
During the three months ended March 31, 2020, the effects of COVID-19 and related actions to attempt to control its spread negatively impacted our business, primarily 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 have mandated, and continue to introduce, orders to slow the transmission of the virus. States in the United States, including Tennessee, where we are headquartered, have declared states of emergency, and countries around the world, including the United States, have taken steps to restrict travel, instituted work from home policies, enacted temporary closures of businesses, issued quarantine orders and taken 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.
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, which allows us to continue to serve our customers while constantly 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.
We have three priorities while navigating through this period of volatility and uncertainty:
First, to ensure the health and safety of our employees and our customers.
Second, to continue to deliver essential services to our customers to maintain the financial strength of our business.
Third, to ensure ServiceMaster emerges stronger from this global event. We believe that we will emerge from this pandemic stronger by balancing short-term service interruptions with investments in our long-term strategies.
As of the date of this filing, we have 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 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 sanitation and disinfection services, which will help essential businesses maintain clean work areas while staying in compliance with federal, state, and local public health protocols and will help prepare shuttered businesses to reopen when we emerge from this event.
In the first quarter of 2020, we leveraged our strong cash flow position and cash flow generation profile to repurchase $103 million of common stock under our previously authorized share repurchase plan at an average price per share of $27.64. These purchases exhaust the authority for purchases under this program. In the first quarter of 2020, cash payments for acquisitions totaled $26 million, net of cash acquired. Our strong liquidity position may afford us the opportunity to gain market share through our acquisition program during this event. We expect to selectively continue our tuck-in acquisition program at Terminix and to periodically evaluate other acquisitions in the United States and internationally.
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 March 31, 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 months ended March 31, 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; (benefit) 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 months ended March 31, 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.”
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Three Months Ended
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Increase
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|
|
|
|
|
|
March 31,
|
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(Decrease)
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|
% of Revenue
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(In millions)
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2020
|
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2019
|
|
2020 vs. 2019
|
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2020
|
|
2019
|
Revenue
|
|
$
|
456
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|
$
|
419
|
|
9
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost of services rendered and products sold
|
|
|
279
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|
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236
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18
|
|
|
61
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|
|
56
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|
Selling and administrative expenses
|
|
|
140
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|
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123
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15
|
|
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31
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29
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|
Amortization expense
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9
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5
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|
89
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2
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|
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1
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|
Acquisition-related costs
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|
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1
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|
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1
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|
*
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|
|
—
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|
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—
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|
Fumigation related matters
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|
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—
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1
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*
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—
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—
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Restructuring and other charges
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4
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6
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*
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1
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1
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Realized (gain) on investment in frontdoor, inc.
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—
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(40)
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*
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—
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(10)
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Interest expense
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23
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|
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27
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|
(14)
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5
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6
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Interest and net investment income
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—
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(1)
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*
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—
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—
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Loss on extinguishment of debt
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|
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—
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6
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*
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|
|
—
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1
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|
(Loss) Income from Continuing Operations before Income Taxes
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(1)
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56
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*
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|
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—
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13
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(Benefit) provision for income taxes
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(2)
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|
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3
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*
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|
|
—
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|
|
1
|
|
Income from Continuing Operations
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|
$
|
1
|
|
$
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53
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|
*
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|
|
—
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%
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13
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%
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________________________________
* not meaningful
Revenue
We reported revenue from continuing operations of $456 million and $419 million for the three months ended March 31, 2020 and 2019, respectively. A summary of changes in revenue is included in the tables below. See “—Segment Review” for a discussion of the drivers of the year-over-year changes.
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European Pest
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(In millions)
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Terminix
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Control and Other
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Total
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Three Months Ended March 31, 2019
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$
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419
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$
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—
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$
|
419
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Residential Pest Control(1)
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5
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|
|
—
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|
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5
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Commercial Pest Control(2)
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|
|
13
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|
|
—
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|
|
13
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Termite and Home Services(3)
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|
|
1
|
|
|
—
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|
|
1
|
Sale of Products and Other(4)
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|
|
2
|
|
|
—
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|
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2
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Fumigation
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|
|
(3)
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|
|
—
|
|
|
(3)
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European Pest Control
|
|
|
—
|
|
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18
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|
|
18
|
Three Months Ended March 31, 2020
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|
$
|
438
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|
$
|
18
|
|
$
|
456
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_________________________________
(1)Includes growth from acquisitions of approximately $2 million for the three months ended March 31, 2020.
(2)Includes growth from acquisitions of approximately $10 million for the three months ended March 31, 2020.
(3)Includes growth from acquisitions of approximately $2 million for the three months ended March 31, 2020.
(4)Includes growth from acquisitions of approximately $3 million for the three months ended March 31, 2020.
Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of $279 million and $236 million for the three months ended March 31, 2020 and 2019, respectively. The following tables provide a summary of changes in cost of services rendered and products sold:
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|
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European Pest
|
|
|
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(In millions)
|
|
Terminix
|
|
Control and Other
|
|
Total
|
Three Months Ended March 31, 2019
|
|
$
|
239
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|
$
|
(2)
|
|
$
|
236
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Impact of change in revenue(1)
|
|
|
15
|
|
|
12
|
|
|
28
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Damage claims
|
|
|
6
|
|
|
—
|
|
|
6
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Production labor
|
|
|
3
|
|
|
—
|
|
|
3
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Chemicals and materials
|
|
|
4
|
|
|
—
|
|
|
4
|
Insurance program
|
|
|
—
|
|
|
4
|
|
|
4
|
Fumigation services
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|
|
2
|
|
|
—
|
|
|
2
|
Other
|
|
|
(4)
|
|
|
—
|
|
|
(4)
|
Three Months Ended March 31, 2020
|
|
$
|
265
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|
$
|
14
|
|
$
|
279
|
_________________________________
(1)For Terminix, includes approximately $13 million for the three months ended March 31, 2020 from acquisitions. For European Pest Control and Other, includes approximately $12 million for the three months ended March 31, 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. The increase in production labor was driven, in part, by accelerated hiring in advance of the 2020 peak season, in addition to labor inefficiencies due to lower work order volume related to COVID-19 pressure in March 2020. The increase in chemicals and materials was driven, in part, by increased personal protective equipment and sanitation purchases in response to COVID-19. Fumigation services represents the reduced fumigation margin driven by the outsourcing of fumigation completion services.
For European Pest Control and Other, the three months ended March 31, 2020 were unfavorably impacted by a $2 million adjustment in our automobile, general liability and workers’ compensation program, as compared to a favorable $2 million adjustment in our automobile, general liability and workers’ compensation program in the three months ended March 31, 2019. Favorable adjustments related to our automobile, general liability and worker’s compensation program for the year ended December 31, 2019 amounted to $6 million. We are continuing to make progress on our safety initiatives.
Selling and Administrative Expenses
We reported selling and administrative expenses of $140 million and $123 million for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020 and 2019, selling and administrative expenses comprised general and administrative expenses of $80 million and $68 million, respectively, and selling and marketing expenses of $60 million and $54 million, respectively. The following tables provide a summary of changes in selling and administrative expenses:
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European Pest
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(In millions)
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|
Terminix
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Control and Other
|
|
Total
|
Three Months Ended March 31, 2019
|
|
$
|
110
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|
$
|
13
|
|
$
|
123
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Sales and marketing
|
|
|
2
|
|
|
—
|
|
|
2
|
Acquisition selling and administrative expenses
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|
|
4
|
|
|
5
|
|
|
9
|
Investments in growth
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|
|
3
|
|
|
—
|
|
|
3
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Other
|
|
|
4
|
|
|
—
|
|
|
4
|
Three Months Ended March 31, 2020
|
|
$
|
123
|
|
$
|
18
|
|
$
|
140
|
The increase in sales and marketing costs, comprised of sales commissions and marketing and promotional expenses, was driven by targeted investments to drive sales growth. Additionally, Terminix and European Pest Control and Other incurred incremental selling and administrative expenses as a result of acquisitions. The increase in investments in growth is 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 March 31, 2020 and 2019, respectively. The change in amortization expense primarily reflects the effect of recent acquisitions.
Acquisition-Related Costs
Acquisition-related costs were $1 million in each of the three months ended March 31, 2020 and 2019.
Fumigation Related Matters
There were $1 million of charges for fumigation related matters in the three months ended March 31, 2019.
Restructuring and Other Charges
We incurred restructuring charges of approximately $4 million and $6 million in the three months ended March 31, 2020 and 2019, respectively. Restructuring charges were comprised of the following:
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|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(In millions)
|
|
2020
|
|
2019
|
Terminix(1)
|
|
$
|
1
|
|
$
|
2
|
European Pest Control and Other(2)
|
|
|
3
|
|
|
4
|
Total restructuring charges
|
|
$
|
4
|
|
$
|
6
|
_________________________________
(1)For the three months ended March 31, 2020 and 2019, these charges included $1 million and $2 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 months ended March 31, 2020 and 2019, these charges included $2 million and $1 million, respectively, of severance and other costs, including accelerated depreciation on systems we are replacing with the implementation of our new customer experience platform, and $1 million and $3 million, respectively, of other 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, respectively.
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 three months ended March 31, 2019.
Interest Expense
Interest expense was $23 million and $27 million in the three months ended March 31, 2020 and 2019, respectively. The decrease in interest expense was driven by lower interest rates under the new debt agreements as refinanced in November 2019.
Interest and Net Investment Income
Interest and net investment income was $1 million for the three months ended March 31, 2019. 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 three months ended March 31, 2019. No similar loss was recognized in the three months ended March 31, 2020. See Note 12 to the condensed consolidated financial statements for more details.
(Loss) Income from Continuing Operations before Income Taxes
(Loss) Income from continuing operations before income taxes was a $1 million loss and $56 million income for the three months ended March 31, 2020 and 2019, respectively. The change in (loss) income from continuing operations before income taxes primarily reflects the net effect of year-over-year changes in the following items:
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|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(In millions)
|
|
2020 vs. 2019
|
Income from continuing operations before income taxes, March 31, 2019
|
|
$
|
56
|
Reportable segments and European Pest Control and Other(1)
|
|
|
(23)
|
Depreciation expense(2)
|
|
|
1
|
Amortization expense(3)
|
|
|
(4)
|
Restructuring and other charges(4)
|
|
|
2
|
Loss on extinguishment of debt(5)
|
|
|
6
|
Realized (gain) on investment in frontdoor, inc.(6)
|
|
|
(40)
|
Interest Expense(7)
|
|
|
4
|
Other(8)
|
|
|
(2)
|
Loss from continuing operations before income taxes, March 31, 2020
|
|
$
|
(1)
|
___________________________________
(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 restructuring and other charges as described in “—Restructuring and Other Charges.”
(5)Represents the net change in the loss on extinguishment of debt as described in “—Loss on Extinguishment of Debt.”
(6)Represents the net change in the investment in frontdoor, inc. as described in “—Realized (Gain) on Investment in frontdoor, inc.”
(7)Primarily represents the net change in interest expense, as described in “—Interest Expense.”
(8)Primarily represents the net change in stock-based compensation.
(Benefit) Provision for Income Taxes
The effective tax rate on income from continuing operations was 227.3 percent and 5.5 percent for the three months ended March 31, 2020 and 2019, respectively. The effective tax rate on loss from continuing operations for the three months ended March 31, 2020 was favorably impacted by the release of a federal reserve that was recorded discretely in the quarter. The effective tax rate on income from continuing operations for the three months ended March 31, 2019 was affected by the disposition of the Frontdoor retained shares in a non-taxable debt-for-equity exchange pursuant to the private letter ruling from the IRS that was recorded discretely.
Net Earnings from Discontinued Operations
In January 2020, we announced that our board of directors decided to explore strategic alternatives related to our ServiceMaster Brands segment, including a potential sale of the business. Net earnings from discontinued operations was $13 million and $16 million for the three months ended March 31, 2020 and 2019, and reflects the results of the ServiceMaster Brands Divestiture Group.
Net Income
Net income was $14 million and $70 million for the three months ended March 31, 2020 and 2019, respectively, and was primarily driven by a $57 million decrease in income from continuing operations before income taxes and $4 million lower net earnings from discontinued operations.
Segment Review
The following business segment reviews should be read in conjunction with the required footnote disclosures presented in the notes to the condensed consolidated financial statements included in this report.
Revenue and Adjusted EBITDA are as follows:
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
Increase
|
(In millions)
|
|
2020
|
|
2019
|
|
(Decrease)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Terminix
|
|
$
|
438
|
|
$
|
419
|
|
5
|
%
|
European Pest Control and Other
|
|
|
18
|
|
|
—
|
|
*
|
|
Total Revenue:
|
|
$
|
456
|
|
$
|
419
|
|
9
|
%
|
Adjusted EBITDA:(1)
|
|
|
|
|
|
|
|
|
|
Terminix Reportable Segment Adjusted EBITDA
|
|
$
|
63
|
|
$
|
83
|
|
(24)
|
%
|
European Pest Control and Other(2)
|
|
|
—
|
|
|
3
|
|
*
|
|
Costs historically allocated to ServiceMaster Brands(3)
|
|
|
(3)
|
|
|
(3)
|
|
*
|
|
Total Adjusted EBITDA
|
|
$
|
60
|
|
$
|
83
|
|
(28)
|
%
|
___________________________________
* not meaningful
(1)See Note 16 to the condensed consolidated financial statements for our definition of Adjusted EBITDA and a reconciliation of Net Income to Reportable Segment Adjusted EBITDA.
(2)Represents 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 March 31, 2020 Compared to Three Months Ended March 31, 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 24 percent decrease in Adjusted EBITDA for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Revenue
Revenue by service line is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
Growth
|
|
Acquired
|
|
Organic
|
Residential Pest Control
|
|
$
|
159
|
|
$
|
154
|
|
$
|
5
|
|
3
|
%
|
|
$
|
2
|
|
1
|
%
|
|
$
|
3
|
|
2
|
%
|
Commercial Pest Control
|
|
|
107
|
|
|
94
|
|
|
13
|
|
14
|
%
|
|
|
10
|
|
11
|
%
|
|
|
3
|
|
3
|
%
|
Termite and Home Services
|
|
|
148
|
|
|
146
|
|
|
1
|
|
1
|
%
|
|
|
2
|
|
1
|
%
|
|
|
—
|
|
—
|
%
|
Other
|
|
|
18
|
|
|
16
|
|
|
2
|
|
14
|
%
|
|
|
3
|
|
21
|
%
|
|
|
(1)
|
|
(7)
|
%
|
|
|
$
|
431
|
|
$
|
409
|
|
$
|
22
|
|
5
|
%
|
|
$
|
17
|
|
4
|
%
|
|
$
|
5
|
|
1
|
%
|
Fumigation
|
|
|
7
|
|
|
10
|
|
|
(3)
|
|
(27)
|
%
|
|
|
—
|
|
—
|
%
|
|
|
(3)
|
|
(27)
|
%
|
Total revenue
|
|
$
|
438
|
|
$
|
419
|
|
$
|
19
|
|
5
|
%
|
|
$
|
17
|
|
4
|
%
|
|
$
|
2
|
|
—
|
%
|
Residential pest control revenue increased three percent reflecting organic revenue growth of two percent, comprised of four percent growth in the two months ended February 29, 2020, and a three percent decline in March as a result of COVID-19. Organic growth in January and February was driven by improved price realization and an improvement in customer retention, despite the impact of COVID-19. The decline in March was driven by temporary service cancellations as a result of COVID-19. Residential pest control revenue in the quarter also increased one percent from acquisitions completed during the last 12 months.
Commercial pest control revenue increased 14 percent reflecting organic revenue growth of three percent, comprised of five percent growth in the two months ended February 29, 2020, and a one percent decline in March as a result of COVID-19. Organic growth in January and February was driven by higher price realization, particularly in recurring services. The decline in March was driven by lower sales of non-recurring services and service postponements due to business closures in response to COVID-19. 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, increased two percent in the two months ended February 29, 2020, driven by improved retention rates, and a four percent decline in March 2020 as a result of lower home services sales and, to a lesser extent, lower new unit sales in core termite completions, due to COVID-19.
In the three months ended March 31, 2020, termite renewal revenue comprised 55 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 segment’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
Three Months Ended March 31, 2019
|
|
$
|
83
|
Impact of organic revenue growth
|
|
|
2
|
Damage claims
|
|
|
(6)
|
Production labor
|
|
|
(3)
|
Chemicals and materials
|
|
|
(4)
|
Sales and marketing
|
|
|
(2)
|
Investments in growth
|
|
|
(3)
|
Fumigation services
|
|
|
(2)
|
Other
|
|
|
(2)
|
Impact of acquisitions
|
|
|
1
|
Three Months Ended March 31, 2020
|
|
$
|
63
|
The increase in termite damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the Mobile Bay Area. The increase in production labor was driven, in part, by accelerated hiring in advance of the 2020 peak season, in addition to labor inefficiencies due to lower work order volume related to COVID-19 pressure in March 2020. The increase in chemicals and materials was driven, in part, by increased personal protective equipment and sanitation purchases in response to COVID-19. The increase in sales and marketing costs was driven by targeted investments to drive sales growth. The increase in investments in growth is primarily related to our investment in a new customer experience platform. The decrease in fumigation services represents margin compression driven by the impact of outsourcing our fumigation services.
Termite Damage Claims
A summary of Litigated Claims and Non-Litigated Claims for the three months ended March 31, 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
|
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
|
|
|
1005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
We restated previously reported Non-Litigated Claims to include claims that were received and settled without payment, which is consistent with our current period presentation. 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 months ended March 31, 2020 in the Mobile Bay Area, and eight in the three months ended March 31, 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 three months ended March 31, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Our results of operations for the three months ended March 31, 2020 include charges for legal fees associated with Litigated Claims of $2 million.
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 March 31, 2020 Compared to Three Months Ended March 31, 2019
Revenue
Our European pest control operations reported revenue of $18 million for the three months ended March 31, 2020.
Adjusted EBITDA
The following table provides a summary of changes in European Pest Control and Other’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
Three Months Ended March 31, 2019
|
|
$
|
3
|
European pest control
|
|
|
1
|
Insurance program
|
|
|
(4)
|
Three Months Ended March 31, 2020
|
|
$
|
—
|
European Pest Control and Other includes Adjusted EBITDA of approximately $2 million from 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 three months ended March 31, 2020 were also unfavorably impacted by a $2 million adjustment in our automobile, general liability and workers’ compensation program, as compared to a favorable $2 million adjustment in our automobile, general liability and workers’ compensation program in the three months ended March 31, 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 in each of the three months ended March 31, 2020 and 2019, and are included in European Pest Control and Other.
Discontinued Operations – ServiceMaster Brands Divestiture Group
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 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, is classified as held for sale as of March 31, 2020.
Revenue
Revenue by service line for the ServiceMaster Brands Divestiture Group is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
% of
|
|
% of
|
|
|
March 31,
|
|
Revenue
|
|
Revenue
|
(In millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Royalty Fees
|
|
$
|
32
|
|
$
|
34
|
|
49
|
%
|
|
55
|
%
|
Commercial Cleaning and other National Accounts
|
|
|
20
|
|
|
17
|
|
30
|
|
|
28
|
|
Sales of Products
|
|
|
3
|
|
|
3
|
|
4
|
|
|
6
|
|
Other
|
|
|
11
|
|
|
8
|
|
16
|
|
|
12
|
|
Total revenue
|
|
$
|
65
|
|
$
|
63
|
|
100
|
%
|
|
100
|
%
|
The ServiceMaster Brands Divestiture Group reported $65 million in revenue, an increase of three percent over the prior year. Revenue growth in national accounts and owned branch operations more than exceeded revenue declines in royalty fees in the period. A mild winter coupled with a decline in area-wide events year-over-year in ServiceMaster Restore, and the late March COVID-19 related shutdown of Merry Maids locations and, to a lesser extent, customers of ServiceMaster Clean, 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 March 31, 2019
|
|
$
|
26
|
Impact of change in revenue
|
|
|
(2)
|
Other
|
|
|
(1)
|
Three Months Ended March 31, 2020
|
|
$
|
23
|
The ServiceMaster Brands Divestiture Group generated Adjusted EBITDA of $23 million as a result of a decrease in high margin royalty revenue offset, in part, by an increase in lower margin national accounts and owned branch operations.
Presented below is a reconciliation of Net earnings from discontinued operations to the ServiceMaster Brands Divestiture Group’s Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
(In millions)
|
|
|
2020
|
|
|
2019
|
Net earnings from discontinued operations
|
|
$
|
13
|
|
$
|
16
|
Depreciation and amortization expense
|
|
|
1
|
|
|
2
|
Non-cash stock-based compensation expense
|
|
|
1
|
|
|
1
|
Restructuring and other charges
|
|
|
4
|
|
|
1
|
Provision for income taxes
|
|
|
5
|
|
|
6
|
ServiceMaster Brands Divestiture Group Adjusted EBITDA
|
|
$
|
23
|
|
$
|
26
|
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 March 31, 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 March 31, 2020, we had $556 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 are taking 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.
The Company has 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. The Company currently has 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 the credit agreement, for the most recently completed four-quarter period. With the inclusion of EBITDA from discontinued operations, the Companies first lien net debt leverage ratio was approximately 1.3x Adjusted EBITDA at quarter end, with total net debt leverage at approximately 4.0x Adjusted EBITDA.
At March 31, 2020, there were $30 million of letters of credit outstanding and $370 million of available borrowing capacity under the Revolving Credit Facility. The letters of credit are posted to satisfy collateral requirements under our automobile, general liability and workers’ compensation insurance program and fuel swap contracts. 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 March 31, 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 three months ended March 31, 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 March 31, 2020, the estimated fair value of our fuel swap contracts was $8 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 three months ended March
31, 2020, we acquired $5 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 three months ended March 31, 2020, an immaterial amount of property and equipment that 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.
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Three Months Ended
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March 31,
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(In millions)
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2020
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2019
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Net cash provided from (used for):
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Operating activities
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$
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55
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$
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73
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Investing activities
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(31)
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(93)
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Financing activities
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|
|
(126)
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|
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31
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Discontinued operations
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10
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|
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19
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Effect of exchange rate changes on cash
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(2)
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|
|
—
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Cash (decrease) increase during the period
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$
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(94)
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$
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31
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Operating Activities
Net cash provided from operating activities from continuing operations decreased $18 million to $55 million for the three months ended March 31, 2020 compared to $73 million for three months ended March 31, 2019.
Net cash provided from operating activities for the three months ended March 31, 2020 comprised $44 million in earnings adjusted for non-cash charges, offset, in part, by $1 million in payments related to restructuring and other and fumigation matters and a $12 million decrease in cash required for working capital (a $5 million decrease excluding the working capital impact of accrued interest and taxes). For the three months ended March 31, 2019, working capital requirements were favorably impacted by seasonal activity and the timing of interest and income tax payments.
Net cash provided from operating activities for the three months ended March 31, 2019 comprised $73 million in earnings adjusted for non-cash charges, offset, in part, by $6 million in payments related to restructuring and other and fumigation matters, and a $6 million decrease in cash required for working capital (a $4 million increase excluding the working capital impact of accrued interest and taxes). For the three months ended March 31, 2019, working capital requirements were favorably impacted by seasonal activity and the timing of income tax payments.
Investing Activities
Net cash used for investing activities from continuing operations was $31 million for the three months ended March 31, 2020, compared to $93 million for the three months ended March 31, 2019.
Cash paid for business acquisitions, which decreased to $26 million, for the three months ended March 31, 2020, from $100 million, for the three months ended March 31, 2019. We expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions.
Capital expenditures were $9 million for the three months ended March 31, 2020 and 2019 and included recurring capital needs, information technology projects and a reduction in Global Service Center relocation costs. We anticipate capital expenditures for the full year 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 three months ended March 31, 2020 totaled $5 million. Cash flows received for notes receivable, net, for the three months ended March 31, 2019 totaled $16 million. This was a result of a net increase in financing provided by our financing subsidiary to our franchisees and retail customers of our operating units and collections from other long-term financing arrangements.
Financing Activities
Net cash used for financing activities from continuing operations was $126 million for the three months ended March 31, 2020. Net cash provided from financing activities from continuing operations was $31 million for the three months ended March 31, 2019.
During the three months ended March 31, 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 $25 million of debt. During the three months ended March 31, 2019, we repurchased $2 million of common stock and received $5 million from the issuance of common stock through the exercise of stock options.
During the first quarter of 2019, we completed a debt-for-equity exchange which resulted in $600 million of borrowings of debt under a short-term credit facility, $434 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 $23 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 March 31, 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 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.