2016 Annual Report
2016 Financial Summary
(in millions, except per share data)
As of and for the years ended December 31,
2016
2015 Change
Operating Results
Revenue
Net Income
Adjusted Net Income1
Adjusted EBITDA2
Adjusted earnings per share3
Financial Position
Total Assets
Total Debt
Shareholders’ Equity
Cash Flows
$2,746
155
281
667
2.04
$2,594
160
245
622
1.80
6%
(3%)
15%
7%
13%
$5,386
2,831
686
$5,098
2,752
545
Cash provided from operating activities
Free Cash Flow4
325
270
398
358
s
n
o
i
l
l
i
M
$
s
n
o
i
l
l
i
M
$
Revenue
4
1
2
,
2
3
9
2
,
2
7
5
4
,
2
4
9
5
,
2
6
4
7
,
2
2012
2013
2014
2015
2016
Adjusted EBITDA2
24%
24%
23%
19%
20%
i
5
n
g
r
a
M
A
D
T
B
E
I
3
1
4
0
5
4
7
5
5
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6
7
6
6
.
j
d
A
2012
2013
2014
2015
2016
1
Adjusted net income is defined as net income before: amortization
agreement termination fees; and other non-operating expenses.
expense; 401(k) plan corrective contribution; fumigation related
For a reconciliation of Adjusted EBITDA to net income (loss), see
matters; insurance reserve adjustment; restructuring charges; gain
“Item 6. Selected Financial Data” in our Annual Report on
on sale of Merry Maids branches; impairment of software and other
Form 10-K included in this annual report to stockholders.
related costs; loss from discontinued operations, net of income
taxes; loss on extinguishment of debt; and the tax impact of the
aforementioned adjustments.
2
Adjusted EBITDA means net income (loss) before: loss from
discontinued operations, net of income taxes; provision (benefit)
for income taxes; loss on extinguishment of debt; interest expense;
depreciation and amortization expense; 401(k) plan corrective
contribution; fumigation related matters; insurance reserve adjustment;
non-cash stock-based compensation expense; restructuring charges;
gain on sale of Merry Maids branches; non-cash impairment of
3
Adjusted earnings per share is defined as adjusted net income divided
by the weighted-average diluted common shares outstanding of 137.3
million in 2016 and 136.6 million in 2015.
4
Free Cash Flow means (i) net cash provided from operating activities
from continuing operations before cash paid for consulting agreement
termination fees; (ii) less property additions. For a reconciliation of net
cash provided from operating activities from continuing operations to
Free Cash Flow, see “Item 6. Selected Financial Data” in our Annual
Report on Form 10-K included in this annual report to stockholders.
software and other related costs; non-cash impairment of property
5
Adjusted EBITDA margin is defined as Adjusted EBITDA as a
and equipment; management and consulting fees; consulting
percentage of revenue.
“If we stay focused on our
customers and deliver the
convenience and exceptional
service they expect, nothing
can stop us.”
Dear Shareholders, Customers, Employees and Franchisees,
On behalf of our 13,000 employees, I’m delighted to
share with you our 2016 Annual Report. Inside you’ll
find stories that spotlight some of the trusted experts
who make 75,000 visits to homes and businesses
each day. You’ll also read about the many ways we’re
transforming our 88-year-old company, combining
the best aspects of our people-powered,
performance-driven culture with a digital-first mindset
that will bring greater access, more convenience and
an improved experience to customers.
While 2016 presented some challenges –
including slow organic growth at Terminix and
higher-than-expected claims costs in the first quarter
at American Home Shield – we’re not going to make
excuses for results that didn’t quite meet our high
expectations. Our company culture demands
performance, and we know our customers and
shareholders expect the same of us, too. While we
showed solid year-over-year improvement in many
key financial metrics, we know that in order to win the
loyalty and advocacy of customers, we must exceed
their expectations in every interaction, whether it’s in
a home or business, online or on the phone.
As you’ll read in this annual report, we made some
solid strides in 2016 to bring enhancements to our
customer service, so customers know they can
count on us to deliver what we promise. We also
continued to build a work environment – in a culture
of performance and accountability – to develop the
next generation of ServiceMaster leaders, spur
career growth, support diversity and inclusion, and
create opportunity for all employees.
In 2016, we:
• Grew revenue 6 percent to $2.7 billion, driven
by healthy 9 percent organic growth at American
Home Shield, stronger pricing in Terminix and
the impact of acquisitions in our pest control and
home warranty businesses;
• Increased Adjusted EBITDA to $667 million,
a year-over-year increase of 7 percent, and grew
adjusted earnings per share to $2.04, up 13
percent. In addition, we improved profit margins
while continuing to invest in ServSmartsm,
including deployment of new technology to our
field technicians and our customer care centers to
better engage and communicate with customers
and co-workers;
• Refinanced $2.4 billion in debt and instituted
a $300 million share repurchase program over
three years to return capital to shareholders;
• Completed two key acquisitions in American
Home Shield – OneGuard Home Warranties and
Landmark Home Warranty – adding more than
100,000 new customers and expanding our
footprint in six states;
• Surpassed $1 billion in annual revenue at
American Home Shield, becoming the first
home warranty company to reach that milestone;
• Completed the conversion of our Merry Maids
branches to franchises to improve profitability and
transition the nation’s largest professional home
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2016 Annual Report
1
cleaning services network to the hands of the
hundreds of passionate franchisees who care for
more than 160,000 homes a month;
• Launched a new corporate brand that symbolizes
ServiceMaster’s vision to combine our unparalleled
network of service providers with the convenience of
technology and service excellence to solve a common
dilemma: how to find and choose the trusted
professionals who can help protect and maintain
your home or business; and
• Announced the relocation of our corporate
headquarters to downtown Memphis by early 2018.
This move will bring 1,200 jobs into the heart of the
city’s revitalization and create a contemporary, more
collaborative work environment that will serve as a hub
for innovation and help accelerate our company’s growth.
ServSmartsm continued to shape our company’s
transformation in 2016. And while technology is the engine
driving ServSmartsm, it’s also the commitment we make to
deliver the speed, simplicity, efficiency and convenience
that customers expect. The fundamentals of our business
haven’t changed – more customers are outsourcing their
residential and commercial services to providers who will
“do it for me.” But in an age where speed and convenience
are highly valued, customers are willing to pay for services
they’re not trained in or able to perform – including pest
control, HVAC repairs, furniture restoration, appliance
repairs, home cleaning and disaster restoration.
In this environment, companies that respond quickly and
deliver consistent quality will emerge as winners, and we
believe we’re uniquely positioned to meet that challenge.
As we learn more about customers’ needs, and build the
processes and technology to support them, ServSmartsm
will make it easier for our customers to buy, schedule and
receive essential home and commercial services – when,
where and how they want them.
We know doing the right thing for our customers is also
the right thing to do for our business. When our customers
win, we’ll win, too. As a result, we’ll grow faster and more
profitably, create greater value for consumers and
shareholders, enhance opportunities for our employees
and make ServiceMaster an exciting place to work for years
to come.
As you read this annual report, I hope you’ll be as excited as
I am about the journey we’re on. Thank you for the confidence
in our leadership team and our company. We’re on the right
path and I am confident that together, we’ll win.
Rob Gillette
Chief Executive Officer
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2016 Annual Report
3
The ServiceMaster Vision
A consistently exceptional
experience that we can be
known for, built on
ServSmartsm
The ability to connect any
trusted essential service
provider (franchisees,
contractors, partners, M&A
targets) to ServSmartsm
The opportunity to build a
marketplace where we are not
just a matchmaker but also add
significant value to essential
services transactions
The opportunity to advertise
the ServiceMaster brand,
our marketplace of services
and the ServiceMaster
customer experience
Our ServSmartsm Approach
As the world changes, our customers will demand change, too. We must empower our employees and provide our
customers, franchisees and contractors with better technology and tools that make it easier to do business with us.
We call our new path forward ServSmartsm, and we believe it will revolutionize the way ServiceMaster protects and
maintains homes and businesses.
ServSmartsm combines technology with our unmatched network of trusted professionals – employees, technicians,
contractors and franchisees – who perform the essential services that protect and maintain 75,000 homes and
businesses each day. It’s also opening the door to better collaboration, customer insights and analytics, a more
robust database of customer preferences, communication and engagement across all of our businesses and a better
overall customer experience.
Our Focus: Building the ServiceMaster Network Advantage
Coming soon: One ServiceMaster Center in Downtown Memphis.
People Powered
Digitally Enabled
• Selection, onboarding
training and
management
• Consistent delivery –
on time and right the
first time
• Enabled, empowered
and driven to solve
problems
• Recognized and
rewarded for
customer results
Consistently
Easy Customer
Experience
• Speed and convenience
at every customer
touchpoint
• Self service-enabled to
meet customer preferences
• Repeatable
• Easy for the customer to
work with us
• Personalized service tailored
to customer needs
• Built to exceed
customer expectations
Convenience, improved customer experience and a path to growth
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Coming soon: One ServiceMaster Center in Downtown Memphis.
We’re on the Move
In June 2016, ServiceMaster cemented its
commitment to the city of Memphis by announcing
plans to convert the former Peabody Place Mall
located downtown into its new global headquarters.
ServiceMaster is repurposing the 340,000-square-foot
vacant building into Class A office space. It will
include an innovation and technology center and serve
as an incubator, allowing ServiceMaster to attract IT
talent and entrepreneurs to Memphis – and to our
team. ServiceMaster’s new innovation center
is scheduled to open in June 2017.
“We wanted to create an environment that would
help accelerate our transformation and spark the
company’s growth for years to come,” said CEO
Rob Gillette.
The new location allows the company to bring all
1,200 Memphis corporate employees and
independent contractors, currently located in several
buildings, under one roof. Teams working side-by-side
will open doors to further collaboration and
best-practice sharing across the business.
“This is the most significant corporate
headquarters announcement in Downtown
Memphis in a generation,” said Memphis Mayor
Jim Strickland at a news conference announcing the
move. The project is being heralded as a cornerstone
of the Memphis downtown revitalization and an
integral part of the transformation of ServiceMaster’s
culture and 88-year-old business.
The new headquarters is being renovated steps away
from famous Beale Street and within a few blocks of
the Mississippi River. Employees won’t be able to walk
far from the office without tripping over multiple
downtown restaurants and shops – an attractive
feature for recruiting new employees.
Highlighting the importance of the project, Tennessee
Governor Bill Haslam said, “Having a healthy
Downtown Memphis is important, not just to
Memphis or Shelby County but to the entire state
of Tennessee.”
All renovations should be completed by the end
of 2017 with a full move into the new facility by
early 2018.
2016 Annual Report
5
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It’s just another way we’re
showcasing a company
that’s on the move.
The ServiceMaster Experience
• Made 31 stops across the U.S.
• Traveled more than 28,000 miles
• Welcomed approximately 8,700
visitors to the mobile experience
• Expands to 1,080 square feet
• Fully expands in 90 seconds
• Includes 14 interactive displays
• Uses 100% energy-efficient
interior LED lighting
On the Road to Winning
After nearly 90 years in business, ServiceMaster kicked
off 2016 with an exciting new brand purpose—to connect
our trusted professionals with customers to solve the
homeowner’s dilemma. Armed with a new corporate
brand identity, including a new logo, the new look of
ServiceMaster represents a stamp of quality—instilling
trust and driving empowerment for our customers.
A 2016 survey of U.S. homeowners showed that
while customers recognized our individual brands, they
weren’t aware that the brands were part of ServiceMaster.
In addition to visually rebranding the company, we
wanted to change the way we talk about ServiceMaster
in relationship to its sub-brands.
To do this, we needed a communication vehicle that
would clearly articulate our unique corporate identity and
communicate the total value we offer to our customers
and our employees. Simply producing a brochure, video
or presentation would not be enough to relay these ideas.
We needed to create a relatable experience.
So in early 2016, we unveiled The ServiceMaster Experience,
a state-of-the-art, double-expandable semi-trailer designed to
resemble the interior of a house. The company’s services are
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On the Road to Winning
The ServiceMaster Experience will hit the road again in
2017 to promote the company’s extensive portfolio of
home and commercial services. It’s just another way
we’re showcasing a company that’s on the move.
showcased in a digital and interactive way for visitors
and feature instructive, expert advice and helpful tips
for protecting and maintaining homes.
Taking cues from high-level trade shows and
museum builds, we chose to mix physical and
digital interactions to tell our brand story while
accommodating different learning styles. The content
—which includes text, photography, interactive digital
touch screens, video and physical appliances—is
designed to be informative, memorable and unique
to every visitor. By placing content in modular printed
panels and digital touchscreens, we’re able to update
the information inside the trailer as often as we’d like.
The ServiceMaster Experience rolled across the
United States to employees, customers, franchisees
and contractors alike, with more than 30 stops to
corporate offices, call centers, trade shows,
community events and college campuses.
The mobile exhibit was featured at the September
2016 California Association of REALTORS® EXPO
– the premier trade show for California’s real estate
industry – where American Home Shield was both a
sponsor and exhibitor. The ServiceMaster Experience
won Best in Show among hundreds of exhibitors.
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2016 Annual Report
7
Easier to Find, Easier to Buy
Nowhere in ServiceMaster is the shift to e-commerce
more pronounced than in American Home Shield.
By making it easier for customers to find us online
and simplifying the buying process, AHS is giving
customers more options to research home warranties
and, when they’re ready, to make their product
selections and purchasing decisions on their terms
– when, where and how they want.
Customer convenience is a major benefit of the
ServSmartsm approach, and it’s at the core of our
efforts to streamline customer communication, sales
and service at AHS. In fact, over the past three years,
the number of customers purchasing home warranties
in the direct-to-consumer channel has jumped
42 percent.
Simple changes that put more control in the
hands of consumers have resulted in significant
improvements in sales conversions, for example,
adding a real-time chat feature to emails, which in a
recent pilot resulted in a 53 percent lift in conversion
rates. We’re also working smarter in the digital
space by creating more intuitive websites and
customer-friendly processes, like “remembering”
consumers who start the quote process online, get
distracted or shut down their device, then later return
to complete the process.
And because not everyone is comfortable with
working online, our commitment to ServSmartsm
ensures that consumers who wish to speak to a
sales or service representative can do so – it’s all
part of focusing on what matters most to the
consumer. Best of all, we’re leveraging our learnings
AHS Direct-to-Consumer Sales
15%
15%
15%
26%
32%
37%
2014
2015
2016
Online Sales
Easier to Service, Easier to Stay
It’s about time—keeping up with it and delivering on it.
In 2016, thinking digitally first meant equipping our
Terminix sales and service teams with the latest smart
devices. The rollout was completed in December, and
it’s changed the way our people work, the way they
interact with customers, and the way they communicate.
Using iPads and iPhones, our field teams can access
emails, texts, appointments and notifications on the go.
Since the rollout, sales teams have enjoyed more
flexibility for researching prospects and an enhanced
presentation mode for potential customers.
On the service side, using the new device’s built-in
GPS capabilities has made scheduling and servicing
customers even more convenient. In current testing
pilot areas around the country, customers are notified
when technicians are on the way, then prompted to
rate the level of service they received after the visit.
They even receive a picture of the technician en route,
so they know who to expect on their doorstep.
Speaking of pictures, the process of capturing and
displaying trouble areas to current and potential
customers just got a whole lot easier. Using these
devices’ built-in cameras, showing potential
customers compelling images of conducive pest
conditions in residential and commercial settings are
just a quick swipe away.
All these features combined will enable Terminix
to be more agile than ever in 2017 and beyond.
Adopting the ServSmartsm approach ensures that
customer convenience remains our number
one priority.
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Bringing Technology to Franchisees is ServSmartsm
When it comes to disaster restoration, insurance
carriers depend on ServiceMaster Restore to meet
specific service levels to serve their customers.
And, with 40 percent of the company’s disaster
restoration work originating with insurance carriers,
it’s important that everyone, from franchise field
technicians to company leaders, have the tools they
need to ensure that nothing slips through the cracks.
Building off a platform launched in 2015 to help manage
insurance-generated work, the company now has
better insight than ever into the work that’s being done,
as it’s being done. This year, franchisees who meet
the qualifications to perform work on behalf of national
insurance carriers expanded the use of the tool to
include all of their locally generated jobs, too, allowing
technicians to provide status updates, photos and other
data from the job site using their smartphones. As a
result, franchise owners and ServiceMaster Restore
management are equipped to more effectively monitor
progress as milestones are met, be alert to any claims
that are potentially at risk, intervene if necessary, and
identify trends within the network.
This people-powered, digitally driven tool is helping
reshape the company’s culture, too.
For instance, the increased transparency is fueling
data-driven conversations and stronger competition,
as franchisees now know how their performance ranks
against state and national averages. Franchise
employee training can be targeted to address recurring
deficiencies, and accountability for performance has
never been greater.
2016 Annual Report
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“We are pleased with Tyrone’s
professionalism, friendliness,
and kindness. He serves us so
well and I am proud to be a
Terminix customer.”
Tyrone Hollingsworth, Terminix technician
for 11 years, with customer Leslie Mooty
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Meet Some of Our People
Keeping Customers Happy is the Best Part of Her Job
Brenda Bell, a Terminix service technician, knows
what it means to take care of someone.
She’s been doing just that over the course of her
10-year career at Terminix, where she services about
200 homes a month. “Keeping my customers happy
is the best part of my job,” says Brenda. “If I can’t
resolve a problem, I always take the next step.”
If customer feedback is any indication, Brenda’s
commitment and attitude don’t go unnoticed. Like
other ServiceMaster employees, Brenda
understands that earning the trust and confidence
of her customers is paramount to success.
But that level of commitment doesn’t end when
Brenda takes off her Terminix cap for the day. She
lives with her 80-year-old mother, who is blind and
relies on Brenda’s care in the evenings. So make
that caring for 201 homes a month.
After attending to her mother, Brenda gets back
to Terminix—calling customers to confirm the next
day’s visits.
“It keeps me young,” Brenda says with a smile. “I’ll
keep caring for customers until they take the truck
away from me.”
"I’ll keep caring for customers until
they take my truck away from me."
Brenda Bell, a Terminix service technician, is
committed to her customers.
When People-Powered Service Meets Technology
After borrowing a truck from his grandfather in 2001,
Richard Flournoy started A-Total Plumbing. He knew
becoming a contractor for American Home Shield
(AHS) would be good for business. So following his
initial success, he quickly applied to be a contractor
with the company.
“When the approval came from American Home Shield,
we were excited to join the team,” Richard said.
A-Total started out with approval for four AHS calls a
day. But soon that progressed to 1,000 a year. Then
1,500 in 2002. The business has steadily grown, and
today, the company is one of AHS’ top-performing
contractors, with a total of 10,364 dispatches in 2016.
To help make that many service calls, A-Total
Plumbing leverages dispatching software, which was
made available to AHS contractors in 2016. The
software allows contractors to truly think digital first
—utilizing smartphone technology to handle customer
issues and transactions in real-time.
That digital-first mindset also helps our people balance
work and life.
“Thanks to American Home Shield, we’re able to
care for our customers and our son every day. So
the company is like family to us,” said Richard.
2016 Annual Report
11
Richard and Felicia Flournoy at A-Total Plumbing
work together as a top-performing American Home
Shield contractor.
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The Baton Rouge Terminix branch mobilized to help their community combat mosquitos after historic flooding in August 2016.
Serving Customers and Our Communities
Serving customers isn’t our only passion. When it
comes to service, our employees also have a long
history of giving back to the communities where they
live and work. And while community service,
volunteerism and philanthropy are year-round
activities for our employees, there’s one special day
each year when giving back to others takes center
stage for ServiceMaster.
Each August, ServiceMaster deploys hundreds of
employees across North America to local nonprofit
organizations with one common goal: to build
stronger communities.
This signature program – We Serve Day – supports
our We Serve community platform for giving and
volunteerism. We Serve Day is held the third Friday
in August and, in 2016, our employee volunteers
exceeded every expectation.
Employee participation almost tripled from the
previous year. Our employees and many others
employed by our franchisees participated in 65 We
Serve Day activities in 2016, volunteering more than
6,800 hours in more than 30 events that supported
a wide array of nonprofit organizations.
Partial List
of Our
Community
Partners:
• Advance Memphis
• Alpha Omega Veterans Services
• American Red Cross
• Ave Maria
• Bridges
• Christian Community Action Center
(Dallas, TX)
• DeNeuville Learning Center
• Disabled American Veterans (Tampa, FL)
• Elderbridge Agency on Aging (Carroll, IA)
• Family Resource Center (Carroll, IA)
• FedEx Family House
• Girl Scouts of the USA
• Habitat for Humanity
• Helen’s Hope Chest (Phoenix, AZ)
• Hope House
• Humane Society
• Junior Achievement
• Latino Memphis
• LeBonheur Children’s Hospital
• Madonna Learning Center
• Make-A-Wish Foundation
• Memphis Gay & Lesbian Community
Center
• Mid-South Food Bank
• MIFA (Metropolitan Inter-Faith Association)
• National Civil Rights Museum
• New Hope Bargain Shop (Carroll, IA)
• New Memphis Institute
• Ronald McDonald House
• Salvation Army
• Shelby Farms
• St. Jude Children’s Research Hospital
• United Way of the Mid-South
• Youth Villages
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Joining a Former President to Build a New Future
Joining former President Jimmy Carter and former
First Lady Rosalynn Carter, more than 75
ServiceMaster employees helped kick off the 33rd
annual Carter Work Project in Memphis in August.
ServiceMaster was a corporate partner of the Habitat
for Humanity International week-long build, which took
place in the Uptown neighborhood, just north of the
company’s future headquarters in Downtown Memphis.
The week included new home construction,
beautification projects and home modifications to
enhance accessibility and mobility for senior citizens.
Volunteers also got to work hand-in-hand with country
music stars Garth Brooks and Trisha Yearwood,
passionate Habitat for Humanity volunteers and
spokespeople who were also on site to lend a hand.
Habitat for Humanity’s commitment to providing a safe
place to call home for families in need complements
ServiceMaster’s We Serve commitment to enrich the
communities where our employees live and work.
Our partnership with the Carter Work Project and
Habitat for Humanity is just one of many ways
we’re making an impact on Memphis and other
communities.
2016 Volunteer Hours
10k
Valued at over $214,000
Annual We Serve Day
10 Cities
• 30+ organizations
• 1,000+ volunteers
• Over $250,000 in donations
ServiceMaster employees measure up when it comes to
supporting community efforts, like Habitat for Humanity.
Exclusive Sponsor of American Red Cross Emergency App
In 2016, ServiceMaster announced its partnership with the American Red Cross and its
plans to be the exclusive sponsor of the Red Cross Emergency App, which alerts people
to significant weather events and provides expert safety advice on disaster preparedness.
ServiceMaster Restore, part of the ServiceMaster network, is well-known for working with
communities and businesses devastated by severe weather events.
ServiceMaster also sponsors the American Red Cross Tornado, Earthquake and
Hurricane apps.
Consumers can download the Emergency app by texting "GETEMERGENCY" to 90999,
searching "American Red Cross" in their app store or by going to redcross.org/apps.
2016 Annual Report
13
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Board of
Directors
Mark E. Tomkins
Chairman of the Board
Robert J. Gillette
Chief Executive Officer
Peter L. Cella
John B. Corness
Jerri L. DeVard
Richard P. Fox
Laurie Ann Goldman
Stephen J. Sedita
Rob Gillette
Chief Executive Officer
Tony DiLucente
Senior Vice President and
Chief Financial Officer
Marvin Davis
Chief Marketing and
Strategy Officer
Tim Haynes
President,
American Home Shield
Susan Hunsberger
Senior Vice President,
Human Resources
Jim Lucke
Senior Vice President and
General Counsel
Jamie Smith
Senior Vice President and
Chief Information Officer
Peter Tosches
Senior Vice President,
Corporate Communications
Mary Kay Wegner
President,
Franchise Services Group
Marty Wick
Chief Operating Officer,
Terminix
Executive
Leadership
2016 Annual Report
15
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Non-GAAP Reconciliations
The following table reconciles net income to adjusted net income for the periods presented.
(in millions, except per share data)
As of and for the years ended December 31,
Net Income
Amortization expense
401(k) Plan corrective contribution
Fumigation related matters
Insurance reserve adjustment
Restructuring charges
Gain on sale of Merry Maids branches
Loss from discontinued operations, net of income taxes
Impairment of software and other related costs
Loss on extinguishment of debt
Tax impact of adjustments
Adjusted Net Income
2016
2015
$155
33
2
93
23
17
(2)
1
1
32
(73)
$281
$160
38
23
9
-
5
(7)
-
2
58
(42)
$245
Weighted-average diluted common shares outstanding
Adjusted earnings per share
137.3
$2.04
136.6
$1.80
For reconcilliations of Adjusted EBITDA to net income and net cash provided from operating activities from continuing
operations to free cash flow, see “Item 6. Selected Financial Data” in our Annual Report on Form 10-K included in this
annual report to stockholders on pages 44-47.
ServiceMaster Helps Solve the
Homeowner’s Dilemma Every
Step of the Waysm
Home Warranties
Floor & Upholstery Cleaning
Pest Control
Furniture Restoration
Home Inspections
Home Cleaning Services
Disaster Restoration Services
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-K
________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission file number 001-36507
________________________________________________
ServiceMaster Global Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
20-8738320
(IRS Employer Identification No.)
860 Ridge Lake Boulevard, Memphis, Tennessee 38120
(Address of principal executive offices) (Zip Code)
901-597-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Common stock, par value $0.01 per share
(Title of Each Class)
Securities registered pursuant to Section 12 (g) of the Act:
New York Stock Exchange
(Name of Each Exchange on which Registered)
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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
and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
Yes No
2701784_Text_1cPages.indd 1
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Large accelerated filer
Accelerated filer
(Do not check if a smaller reporting company)
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
Yes No
As of June 30, 2016, there were 135,442,846 shares of the registrant’s common stock outstanding, and the aggregate market value of the voting stock held by non-
affiliates (assuming only for purposes of this computation that individuals then serving as our directors and executive officers may be affiliates) was
approximately $5,360 million based on the closing price of common stock on the NYSE on June 30, 2016 of $39.80 per share.
As of June 30, 2016, there were 135,442,846 shares of the registrant’s common stock outstanding, and the aggregate market value of the voting stock held by non-
affiliates (assuming only for purposes of this computation that individuals then serving as our directors and executive officers may be affiliates) was
approximately $5,360 million based on the closing price of common stock on the NYSE on June 30, 2016 of $39.80 per share.
The number of shares of the registrant’s common stock outstanding as of February 17, 2017: 134,157,101 shares of common stock, par value $0.01 per share.
The number of shares of the registrant’s common stock outstanding as of February 17, 2017: 134,157,101 shares of common stock, par value $0.01 per share.
Documents incorporated by reference:
Documents incorporated by reference:
Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2017 annual meeting of
stockholders (the “Proxy Statement”) are incorporated by reference into Part III hereof. Such Proxy Statement will be filed within 120 days of the registrant’s
fiscal year ended December 31, 2016.
Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2017 annual meeting of
stockholders (the “Proxy Statement”) are incorporated by reference into Part III hereof. Such Proxy Statement will be filed within 120 days of the registrant’s
fiscal year ended December 31, 2016.
2016 Annual Report 18
2016 Annual Report 18
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TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
Exhibit Index
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
20
29
39
40
40
41
42
44
48
70
72
108
108
108
109
109
109
109
109
109
110
116
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2016 Annual Report 19
Form 10-K.
Overview
ITEM 1. BUSINESS
ITEM 1. BUSINESS
PART I
PART I
The following discussion of our business contains “forward-looking statements,” as discussed in Part II, Item 7 below. Our
The following discussion of our business contains “forward-looking statements,” as discussed in Part II, Item 7 below. Our
business, operations and financial condition are subject to various risks as set forth in Part I, Item 1A below. The following
information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of
Operations, the Consolidated Financial Statements and related notes and the Risk Factors included elsewhere in this Annual Report on
business, operations and financial condition are subject to various risks as set forth in Part I, Item 1A below. The following
information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of
Operations, the Consolidated Financial Statements and related notes and the Risk Factors included elsewhere in this Annual Report on
Form 10-K.
Overview
ServiceMaster Global Holdings, Inc. and its majority-owned subsidiary partnerships, limited liability companies and
ServiceMaster Global Holdings, Inc. and its majority-owned subsidiary partnerships, limited liability companies and
corporations (collectively, “ServiceMaster,” the “Company,” “we,” “us” and “our”) is a leading provider of essential residential and
commercial services, operating through an extensive service network of more than 8,000 company-owned locations and franchise and
license agreements. Our mission is to simplify and improve the quality of our customers’ lives by delivering services that help them
protect and maintain their homes or businesses, typically their most highly valued assets. We have leading market positions across the
majority of the markets we serve, as measured by customer-level revenue. Our portfolio of well-recognized brands includes Terminix
(termite and pest control), American Home Shield (home warranties), ServiceMaster Restore (disaster restoration), ServiceMaster
Clean (janitorial), Merry Maids (residential cleaning), Furniture Medic (cabinet and wood furniture repair) and AmeriSpec (home
inspection). Our strategy is to provide a differentiated service offering by promoting convenient service through the increasing use of
our digital and mobile platform. We serve our residential and commercial customers through an employee base of approximately
13,000 company associates, 14,000 contractors and 34,000 employees of licensed franchisors.
corporations (collectively, “ServiceMaster,” the “Company,” “we,” “us” and “our”) is a leading provider of essential residential and
commercial services, operating through an extensive service network of more than 8,000 company-owned locations and franchise and
license agreements. Our mission is to simplify and improve the quality of our customers’ lives by delivering services that help them
protect and maintain their homes or businesses, typically their most highly valued assets. We have leading market positions across the
majority of the markets we serve, as measured by customer-level revenue. Our portfolio of well-recognized brands includes Terminix
(termite and pest control), American Home Shield (home warranties), ServiceMaster Restore (disaster restoration), ServiceMaster
Clean (janitorial), Merry Maids (residential cleaning), Furniture Medic (cabinet and wood furniture repair) and AmeriSpec (home
inspection). Our strategy is to provide a differentiated service offering by promoting convenient service through the increasing use of
our digital and mobile platform. We serve our residential and commercial customers through an employee base of approximately
13,000 company associates, 14,000 contractors and 34,000 employees of licensed franchisors.
For the year ended December 31, 2016, we had revenue, net income and Adjusted EBITDA of $2,746 million, $155 million
For the year ended December 31, 2016, we had revenue, net income and Adjusted EBITDA of $2,746 million, $155 million
and $667 million, respectively. In 2016, Terminix, our largest segment, represented approximately 55 percent of our revenue, while
American Home Shield represented approximately 37 percent of our revenue and Franchise Services Group represented
approximately 7 percent of our revenue. For a reconciliation of Adjusted EBITDA to net income, see “Selected Historical Financial
Data.”
and $667 million, respectively. In 2016, Terminix, our largest segment, represented approximately 55 percent of our revenue, while
American Home Shield represented approximately 37 percent of our revenue and Franchise Services Group represented
approximately 7 percent of our revenue. For a reconciliation of Adjusted EBITDA to net income, see “Selected Historical Financial
Data.”
Approximately 98 percent of our 2016 revenue was generated by sales in the United States. A significant portion of our
Approximately 98 percent of our 2016 revenue was generated by sales in the United States. A significant portion of our
assets is located in the United States, and the consolidated book value of all assets located outside of the United States is not material.
Organized in Delaware in 2007, ServiceMaster is the successor to various entities dating back to 1929. Financial information for each
reportable segment and Corporate for 2016, 2015 and 2014 is contained in Note 3 to the consolidated financial statements.
assets is located in the United States, and the consolidated book value of all assets located outside of the United States is not material.
Organized in Delaware in 2007, ServiceMaster is the successor to various entities dating back to 1929. Financial information for each
reportable segment and Corporate for 2016, 2015 and 2014 is contained in Note 3 to the consolidated financial statements.
We believe that our customers understand the financial and reputational risks associated with inadequate maintenance of their
We believe that our customers understand the financial and reputational risks associated with inadequate maintenance of their
homes or businesses and that our high-quality, professional services are low-cost expenditures when compared to the alternative of
failing to perform essential maintenance. We strive to be the service provider of choice and believe our customers have recognized our
value proposition, as evidenced by our long-standing customer relationships and the high rate at which our customers renew their
contracts from year to year.
homes or businesses and that our high-quality, professional services are low-cost expenditures when compared to the alternative of
failing to perform essential maintenance. We strive to be the service provider of choice and believe our customers have recognized our
value proposition, as evidenced by our long-standing customer relationships and the high rate at which our customers renew their
contracts from year to year.
We have significant size and scale, which we believe give us a number of competitive advantages. Terminix is one of the
We have significant size and scale, which we believe give us a number of competitive advantages. Terminix is one of the
largest termite and pest control business in the United States, as measured by customer-level revenue, and serves approximately
2.8 million customers across 47 states and the District of Columbia through approximately 300 company-owned locations and
approximately 25 franchise agreements. Additionally, we estimate American Home Shield to be approximately four times larger than
its nearest competitor, as measured by revenue. American Home Shield serves approximately 1.9 million residential customers across
all 50 states and the District of Columbia through a network of more than 14,000 licensed, independent home service contractor firms.
Our Franchise Services Group serves both residential and commercial customers across all 50 states and the District of Columbia
through approximately 4,600 franchise agreements. We believe our significant size and scale provide a competitive advantage in our
purchasing power, route density, and marketing and operating efficiencies compared to smaller local and regional competitors. Our
scale also facilitates the standardization of processes, shared learning and talent development across our entire organization.
largest termite and pest control business in the United States, as measured by customer-level revenue, and serves approximately
2.8 million customers across 47 states and the District of Columbia through approximately 300 company-owned locations and
approximately 25 franchise agreements. Additionally, we estimate American Home Shield to be approximately four times larger than
its nearest competitor, as measured by revenue. American Home Shield serves approximately 1.9 million residential customers across
all 50 states and the District of Columbia through a network of more than 14,000 licensed, independent home service contractor firms.
Our Franchise Services Group serves both residential and commercial customers across all 50 states and the District of Columbia
through approximately 4,600 franchise agreements. We believe our significant size and scale provide a competitive advantage in our
purchasing power, route density, and marketing and operating efficiencies compared to smaller local and regional competitors. Our
scale also facilitates the standardization of processes, shared learning and talent development across our entire organization.
We believe our businesses are strategically positioned to benefit from a number of favorable demographic and secular trends.
We believe our businesses are strategically positioned to benefit from a number of favorable demographic and secular trends.
These trends include growth in population, household formation and new and existing home sales. In addition, we believe there is
increasing demand for outsourced services, fueled by a trend toward “do-it-for-me” as a result of an aging population and shifts in
household structure and behaviors, such as dual-income families and consumers with “on-the-go” lifestyles.
These trends include growth in population, household formation and new and existing home sales. In addition, we believe there is
increasing demand for outsourced services, fueled by a trend toward “do-it-for-me” as a result of an aging population and shifts in
household structure and behaviors, such as dual-income families and consumers with “on-the-go” lifestyles.
Ownership
Ownership
On July 24, 2007, we were taken private pursuant to a merger transaction, and, following the completion of the merger and
On July 24, 2007, we were taken private pursuant to a merger transaction, and, following the completion of the merger and
other subsequent transactions, the significant majority of our outstanding common stock was owned by investment funds managed by,
or affiliated with, Clayton, Dubilier & Rice, LLC (“CD&R”), JPMorgan Chase Funding Inc. (“JPMorgan”), StepStone Group LP
(“StepStone”), the investment funds managed by StepStone and Ridgemont Partners Secondary Fund I, L.P. (“Ridgemont”)
(collectively, the “Equity Sponsors”).
other subsequent transactions, the significant majority of our outstanding common stock was owned by investment funds managed by,
or affiliated with, Clayton, Dubilier & Rice, LLC (“CD&R”), JPMorgan Chase Funding Inc. (“JPMorgan”), StepStone Group LP
(“StepStone”), the investment funds managed by StepStone and Ridgemont Partners Secondary Fund I, L.P. (“Ridgemont”)
(collectively, the “Equity Sponsors”).
On June 25, 2014, our registration statement on Form S-1 for our initial public offering was declared effective by the U.S.
On June 25, 2014, our registration statement on Form S-1 for our initial public offering was declared effective by the U.S.
Securities and Exchange Commission (the “SEC”). On July 1, 2014, we completed the offering of 41,285,000 shares of our common
stock at a price of $17.00 per share. During 2015, through secondary public offerings of our common stock, the selling stockholders
Securities and Exchange Commission (the “SEC”). On July 1, 2014, we completed the offering of 41,285,000 shares of our common
stock at a price of $17.00 per share. During 2015, through secondary public offerings of our common stock, the selling stockholders
2016 Annual Report 20
2016 Annual Report 20
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completed the offering of an additional 80,711,763 shares of common stock. Since completion of the secondary public offerings in
2015, the Equity Sponsors have not held a significant amount of our common stock.
Refinancing of Indebtedness
On November 8, 2016, we entered into a $1,650 million term loan facility maturing November 8, 2023 (the “Term Loan
Facility”) and a $300 million revolving credit facility maturing November 8, 2021 (the “Revolving Credit Facility”) (together with the
Term Loan Facility, the “Credit Facilities”) and sold $750 million of 5.125% senior notes due November 15, 2024 (the “2024 Notes”).
Borrowings under the Term Loan Facility and the 2024 Notes were used to repay the remaining outstanding $2,356 million in
aggregate principal amount of the $2,400 million term loan facility maturing July 1, 2021 (the “Old Term Loan Facility”) (together
with the $300 million revolving credit facility maturing July 1, 2019 (the “Old Revolving Credit Facility”), the “Old Credit
Facilities”). In connection with the repayment, we recorded a loss on extinguishment of debt of $32 million in the year ended
December 31, 2016, which includes the write-off of $14 million of original issue discount and $18 million of debt issuance costs.
Our Reportable Segments
Our operations are organized into three reportable segments: Terminix, American Home Shield and the Franchise Services
Group (which includes ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec).
Terminix
Terminix is a leading provider of termite and pest control services in the United States, with approximately 22 percent market
share, as measured by customer-level revenue. In addition, Terminix is the most recognized brand in the industry with approximately
1.5x the unaided brand awareness of our next-largest competitor, based on a study by Decision Analyst, Inc. periodically
commissioned by us as part of our ongoing marketing efforts. Terminix specializes in protection against termite damage, rodents,
insects and other pests, including cockroaches, spiders, wood-destroying ants, ticks, fleas and bed bugs. Our services include termite
remediation, annual termite inspection and prevention treatments with termite damage repair guarantees, periodic pest control
services, insulation services, mosquito control, crawlspace encapsulation and wildlife exclusion.
For the year ended December 31, 2016, Terminix recorded revenue of $1,524 million and Adjusted EBITDA of $371 million.
In 2016, 57 percent of Terminix revenue was generated from pest control services, which includes mosquito control, and 38 percent
was generated from termite and other services, which includes crawlspace encapsulation, wildlife exclusion and insulation services,
with the remaining five percent primarily from the distribution of pest control products. In 2016, 71 percent and 29 percent of pest
control revenue was related to residential services and commercial services, respectively, and 92 percent and eight percent of revenue
from termite and other services was related to residential and commercial services, respectively.
Approximately 80 percent of Terminix revenue comes from customers who enter into contracts with the option to
renew annually. Typically, termite services require an initial inspection and the installation of a protective liquid barrier or bait
stations surrounding the home. The protection plan contracts provide a guarantee for the repair of new damage resulting from
termite infestation. After the first year, a customer has the option to renew the contract at a significantly reduced cost that
extends the guarantee. Consequently, revenue generated from a renewal customer is less then revenue generated from a first-
year termite customer.
We believe that the strength of the Terminix brand, along with our history of providing a high level of consistent service,
allows us to enjoy a competitive advantage in attracting, retaining and growing our customer base. We believe our investments in
systems and processes, such as routing and scheduling optimization, robust reporting capabilities and mobile customer management
solutions, enable us to deliver a higher level of customer service when compared to smaller regional and local competitors.
Our focus on attracting and retaining customers begins with our associates in the field, who interact with our customers every
day. Our associates bring a strong level of passion and commitment to the Terminix brand, as evidenced by the 10-year and 8-year
average tenure of our branch managers and technicians, respectively. Our field organization is supported by dedicated customer
service and call center personnel. Our culture of continuous improvement drives an intense focus on the quality of the services
delivered, which we believe produces high levels of customer satisfaction and, ultimately, customer retention and referrals.
The Terminix national branch structure includes approximately 300 company-owned locations and approximately
25 franchise agreements, which serve approximately 2.8 million customers in 47 states and the District of Columbia. Terminix’s over
9,500 employees made a daily average of 50,000 visits to residential and commercial customer locations during 2016. Terminix also
provides termite and pest control services through subsidiaries in Canada, Mexico, the Caribbean and Central America, as well as a
joint venture in India. In addition, licensees of Terminix provide these services in Japan, South Korea, Southeast Asia, Central
America, the Caribbean and the Middle East. In 2016, substantially all Terminix revenue was generated in the United States, with
approximately two percent derived from international markets, with a presence in a total of 19 countries outside the United States
through subsidiaries, a joint venture and licensing arrangements. Franchise fees from Terminix franchisees represented less than one
percent of Terminix revenue in 2016. We estimate that customer-level revenue for this segment was $1,847 million for the year ended
December 31, 2016. Customer-level revenue represents the total of our estimate of sales generated by our franchisees, a portion of
which is included in our reported revenue from royalty fees, and sales generated by our company-owned operations. More
specifically, customer level revenue means: Terminix revenue of $1,524 million, less royalty fees of $10 million, plus estimated sales
generated by our franchisees of $333 million.
2016 Annual Report 21
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•
•
•
•
•
•
•
•
•
•
•
Terminix Competitive Strengths
Terminix Competitive Strengths
#1 recognized brand in U.S. termite and pest control services
Track record of high customer retention
Passionate and committed associates focused on delivering superior customer service
Expansive scale and deep market presence across a national footprint
Effective multi-channel customer acquisition strategy
History of innovation leadership and introducing new products and services
•
•
•
•
•
•
#1 recognized brand in U.S. termite and pest control services
Track record of high customer retention
Passionate and committed associates focused on delivering superior customer service
Expansive scale and deep market presence across a national footprint
Effective multi-channel customer acquisition strategy
History of innovation leadership and introducing new products and services
American Home Shield
American Home Shield
American Home Shield founded the home warranty industry in 1971 and remains the leading provider of home warranty
American Home Shield founded the home warranty industry in 1971 and remains the leading provider of home warranty
plans for household systems and appliances in the United States, with approximately 44 percent market share in 2016, as measured by
revenue. We estimate American Home Shield to be approximately four times larger than its nearest competitor, as measured by
revenue. We believe that, as the market leader, American Home Shield can drive increasing use of home warranties given the low
industry household penetration of approximately four percent. American Home Shield provides home warranty plans that cover the
repair or replacement of major components of up to 21 household systems and appliances, including electrical, plumbing, central
heating and air conditioning (HVAC) systems, water heaters, refrigerators, dishwashers and ovens/cook tops. Our warranty plans are
generally structured as one-year contracts with annual renewal options and, as a result, a significant portion of our revenue base in this
segment is recurring.
plans for household systems and appliances in the United States, with approximately 44 percent market share in 2016, as measured by
revenue. We estimate American Home Shield to be approximately four times larger than its nearest competitor, as measured by
revenue. We believe that, as the market leader, American Home Shield can drive increasing use of home warranties given the low
industry household penetration of approximately four percent. American Home Shield provides home warranty plans that cover the
repair or replacement of major components of up to 21 household systems and appliances, including electrical, plumbing, central
heating and air conditioning (HVAC) systems, water heaters, refrigerators, dishwashers and ovens/cook tops. Our warranty plans are
generally structured as one-year contracts with annual renewal options and, as a result, a significant portion of our revenue base in this
segment is recurring.
For the year ended December 31, 2016, American Home Shield recorded revenue of $1,020 million and Adjusted EBITDA
For the year ended December 31, 2016, American Home Shield recorded revenue of $1,020 million and Adjusted EBITDA
of $220 million. In 2016, 66 percent of American Home Shield revenue was derived from existing contract renewals, while 20 percent
and 14 percent were derived from sales made in conjunction with existing home resale transactions and direct-to-consumer sales,
respectively. In total, approximately 56 percent of our revenue base in 2016 represents customers in the direct-to-consumer sales
market. We estimate that our share of the new sales market for contracts written in connection with existing home resales and
direct-to-consumer sales in 2016 was 30 percent and 55 percent, respectively.
of $220 million. In 2016, 66 percent of American Home Shield revenue was derived from existing contract renewals, while 20 percent
and 14 percent were derived from sales made in conjunction with existing home resale transactions and direct-to-consumer sales,
respectively. In total, approximately 56 percent of our revenue base in 2016 represents customers in the direct-to-consumer sales
market. We estimate that our share of the new sales market for contracts written in connection with existing home resales and
direct-to-consumer sales in 2016 was 30 percent and 55 percent, respectively.
We believe that we have one of the largest contractor networks in the United States, comprised of more than 14,000
We believe that we have one of the largest contractor networks in the United States, comprised of more than 14,000
independent home service contractor firms. We carefully screen our contractors and closely monitor their performance based on a
number of criteria, including feedback from customer satisfaction surveys. On an annual basis, our contractors respond to
approximately four million service requests from approximately 1.9 million customers across all 50 states and the District of
Columbia. Additionally, American Home Shield operates and takes service calls 24 hours a day, seven days a week. Furthermore, as a
result of our large contractor network and sophisticated IT systems, we are able to promptly assign contractors to a job.
independent home service contractor firms. We carefully screen our contractors and closely monitor their performance based on a
number of criteria, including feedback from customer satisfaction surveys. On an annual basis, our contractors respond to
approximately four million service requests from approximately 1.9 million customers across all 50 states and the District of
Columbia. Additionally, American Home Shield operates and takes service calls 24 hours a day, seven days a week. Furthermore, as a
result of our large contractor network and sophisticated IT systems, we are able to promptly assign contractors to a job.
American Home Shield Competitive Strengths
American Home Shield Competitive Strengths
#1 market position in the industry with 44 percent market share, estimated to be four times the size of the next largest
competitor
Track record of high customer retention
Large, licensed national contractor network
Strong partnerships with leading national residential real estate firms
Core competency around direct-to-consumer marketing and lead generation
•
•
•
•
•
#1 market position in the industry with 44 percent market share, estimated to be four times the size of the next largest
competitor
Track record of high customer retention
Large, licensed national contractor network
Strong partnerships with leading national residential real estate firms
Core competency around direct-to-consumer marketing and lead generation
Franchise Services Group
Franchise Services Group
ServiceMaster’s Franchise Services Group consists of the ServiceMaster Restore (disaster restoration), ServiceMaster Clean
ServiceMaster’s Franchise Services Group consists of the ServiceMaster Restore (disaster restoration), ServiceMaster Clean
(janitorial), Merry Maids (residential cleaning), Furniture Medic (cabinet and wood furniture repair) and AmeriSpec (home
inspection) businesses. Our businesses in this segment operate principally through franchisees. In 2014, we began converting
company-owned Merry Maids locations to franchises. As of October 10, 2016, the branch conversion process was complete.
(janitorial), Merry Maids (residential cleaning), Furniture Medic (cabinet and wood furniture repair) and AmeriSpec (home
inspection) businesses. Our businesses in this segment operate principally through franchisees. In 2014, we began converting
company-owned Merry Maids locations to franchises. As of October 10, 2016, the branch conversion process was complete.
For the year ended December 31, 2016, Franchise Services Group recorded revenue of $200 million and Adjusted EBITDA
of $79 million. In 2016, approximately 60 percent of our revenue in this segment consisted of ongoing monthly royalty fees. Royalty
fees are the amounts paid to us by our franchisees and are based upon a percentage of our franchisees’ customer-level revenue. We
estimate that the customer-level revenue for this segment was $2,519 million for the year ended December 31, 2016. Customer level
revenue means: Franchise Services Group revenue of $200 million, less royalty fees of $120 million, plus estimated sales generated by
our franchisees of $2,439 million.
For the year ended December 31, 2016, Franchise Services Group recorded revenue of $200 million and Adjusted EBITDA
of $79 million. In 2016, approximately 60 percent of our revenue in this segment consisted of ongoing monthly royalty fees. Royalty
fees are the amounts paid to us by our franchisees and are based upon a percentage of our franchisees’ customer-level revenue. We
estimate that the customer-level revenue for this segment was $2,519 million for the year ended December 31, 2016. Customer level
revenue means: Franchise Services Group revenue of $200 million, less royalty fees of $120 million, plus estimated sales generated by
our franchisees of $2,439 million.
We believe that each business holds a leading market position in its respective category and that our scale and national
We believe that each business holds a leading market position in its respective category and that our scale and national
presence create competitive advantages for us in attracting and retaining franchisees. We are able to invest in best-in-class systems,
training and process development, provide multiple levels of marketing support and direct new business leads to our franchisees
presence create competitive advantages for us in attracting and retaining franchisees. We are able to invest in best-in-class systems,
training and process development, provide multiple levels of marketing support and direct new business leads to our franchisees
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through our relationships with major insurance carriers and national account customers. The depth of our franchisee support is
evidenced by the long average tenure of our franchisees, many of whom have partnered with ServiceMaster for over 25 years. Our
Franchise Services Group serves both residential and commercial customers across all 50 states and the District of Columbia through
approximately 4,600 franchise agreements, with additional locations in nine other countries.
Franchise Services Group Competitive Strengths
•
•
•
•
•
•
Strong and trusted brands with leading market positions in their respective categories
Attractive value proposition to franchisees
Exceptional focus on customer service
Infrastructure and scale supporting our ability to service national accounts
National network and 24/7/365 service availability supports mission-critical nature of the ServiceMaster Restore business
Long-standing and strong relationships with the majority of the top 20 insurance carriers
Our Market Opportunity
Termite and Pest Control Industry
The outsourced market for residential and commercial termite and pest control services in the United States was
approximately $7.8 billion in 2015, according to Specialty Consultants, LLC. We estimate that there are approximately 20,000 U.S.
termite and pest control companies, nearly all of which have fewer than 100 employees.
Termites are responsible for an estimated $5 billion in home damage in the United States annually, according to the National
Pest Management Association. The termite control industry provides treatment and inspection services to residential and commercial
property owners for the remediation and prevention of termite infestations. We believe homeowners value quality and reliability over
price in choosing professional termite control services, as the cost of most professional treatments is well below the potential cost of
inaction or ineffective treatment. As a result, we believe the demand for termite remediation services is relatively insulated from
changes in consumer spending. In addition to remediation services, the termite control industry offers periodic termite inspections and
preventative treatments to residential and commercial property owners in areas with high termite activity, typically through annual
contracts. These annual contracts may carry guarantees that protect the property owner against the cost of structural damage caused by
a termite infestation. Termites can cause significant damage to a structure before becoming visible to the untrained eye, highlighting
the value proposition of professional preventative termite services. As a result, the termite control industry experiences high renewal
rates on annual preventative inspection and treatment contracts, and revenues from such contracts are generally stable and recurring.
Pest infestations may damage a home or business while also carrying the risk of the spread of diseases. Moreover, for many
commercial facilities, pest control is essential to regular operations and regulatory compliance (e.g., hotels, restaurants and healthcare
facilities). As a result of these dynamics, the pest control industry experiences high rates of renewal for its pest inspection and
treatment contracts. Pest control services are often delivered on a contracted basis through regularly scheduled service visits, which
include an inspection of premises and application of pest control materials. We estimate that approximately 35 percent of targeted U.S.
households currently use a professional pest exterminator.
Both termite and pest activity are affected by weather. Termite activity increases during the spring and summer months, the
intensity of which varies based on weather. Similarly, pest activity tends to accelerate in the spring months when warmer temperatures
arrive in many U.S. regions. However, the high proportion of termite and pest control services which are contracted and recurring, as
well as the high renewal rates for those services, limit the effect of weather anomalies on the termite and pest control industry in any
given year.
Home Warranty Industry
We estimate that the U.S. home warranty market was approximately $2.3 billion in 2016. The home warranty market is
characterized by low household penetration, which we estimate to be approximately four percent. The home warranty industry offers
plans that protect a homeowner against costly repairs or replacement of covered household systems and appliances. Typically having a
one-year term, coverage varies based on a menu of plan options. The most commonly covered items include major components of
electrical, plumbing, central heating and air conditioning (HVAC) systems, water heaters, refrigerators, dishwashers and ovens/cook
tops. The home warranty industry is characterized by a high level of customer interaction and service requirements. This combination
of a high-touch/high-service business model and the protection from unexpected repair expenses it provides to the customer has led to
high renewal rates in the home warranty industry.
As consumer demand shifts towards more outsourced services, we believe that there is an opportunity for American Home
Shield, a reliable, scaled service provider with a national, licensed contractor network, to increase market share and household
penetration. Additionally, we believe that increasingly complex household systems and appliances may further highlight the value
proposition of professional repair services and, accordingly, the coverage offered by a home warranty.
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2016 Annual Report 23
have five or fewer employees.
national companies.
Our Competitive Strengths
directly to existing home resale transactions.
Key Franchise Services Group Industries
One of the drivers of sales of new home warranties is the number of existing homes sold in the United States, since a home
warranty is often recommended by a real estate sales professional or offered by the seller of a home in conjunction with a real estate
resale transaction. According to the National Association of Realtors, existing home resales, as measured in units, increased by
approximately three percent in 2016 compared to 2015. Approximately 20 percent of American Home Shield revenue in 2016 was tied
One of the drivers of sales of new home warranties is the number of existing homes sold in the United States, since a home
warranty is often recommended by a real estate sales professional or offered by the seller of a home in conjunction with a real estate
resale transaction. According to the National Association of Realtors, existing home resales, as measured in units, increased by
approximately three percent in 2016 compared to 2015. Approximately 20 percent of American Home Shield revenue in 2016 was tied
directly to existing home resale transactions.
Key Franchise Services Group Industries
Disaster Restoration (ServiceMaster Restore). We estimate that the U.S. disaster restoration market was approximately
Disaster Restoration (ServiceMaster Restore). We estimate that the U.S. disaster restoration market was approximately
$15 billion in 2016, approximately two-thirds of which is related to residential customers and the remainder related to commercial
customers. Most emergency response work results from emergency situations for residential and commercial customers, such as fires
and flooding. Extreme weather events and natural disasters also provide demand for emergency response work. Critical factors in the
selection of an emergency response firm are the firm’s reputation, relationships with insurers, available resources, proper insurance
and credentials, quality of service, timeliness and responsiveness. This market is highly fragmented, with two large players, including
ServiceMaster Restore, and we believe there are opportunities for growth for scaled service providers.
$15 billion in 2016, approximately two-thirds of which is related to residential customers and the remainder related to commercial
customers. Most emergency response work results from emergency situations for residential and commercial customers, such as fires
and flooding. Extreme weather events and natural disasters also provide demand for emergency response work. Critical factors in the
selection of an emergency response firm are the firm’s reputation, relationships with insurers, available resources, proper insurance
and credentials, quality of service, timeliness and responsiveness. This market is highly fragmented, with two large players, including
ServiceMaster Restore, and we believe there are opportunities for growth for scaled service providers.
Janitorial (ServiceMaster Clean). We estimate that the U.S. janitorial services market was approximately $53 billion in 2016.
The market is highly fragmented with more than 900,000 companies competing in the janitorial space, a significant majority of which
Janitorial (ServiceMaster Clean). We estimate that the U.S. janitorial services market was approximately $53 billion in 2016.
The market is highly fragmented with more than 900,000 companies competing in the janitorial space, a significant majority of which
have five or fewer employees.
Residential Cleaning (Merry Maids). We estimate that the U.S. residential professional cleaning services market was
Residential Cleaning (Merry Maids). We estimate that the U.S. residential professional cleaning services market was
approximately $3 billion in 2016. Competition in this market comes mainly from local, independently-owned firms, and from a few
approximately $3 billion in 2016. Competition in this market comes mainly from local, independently-owned firms, and from a few
national companies.
Our Competitive Strengths
#1 Market Positions in Large, Fragmented and Growing Markets. We are the leading provider of essential residential and
#1 Market Positions in Large, Fragmented and Growing Markets. We are the leading provider of essential residential and
commercial services in the majority of markets in which we operate. Our markets are generally large, growing and highly fragmented,
and we believe we have significant advantages over smaller local and regional competitors. We have spent decades developing a
reputation built on reliability and superior quality and service. As a result, we enjoy high unaided brand awareness and a reputation for
high-quality customer service, which serve as key drivers of our customer acquisition efforts. Our nationwide presence also allows our
brands to effectively serve both local residential customers and large national commercial accounts and to capitalize on lead
generation sources that include large real estate agencies, financial institutions and insurance carriers. We believe our significant size
and scale also provide a competitive advantage in our purchasing power, route density, and marketing and operating efficiencies
compared to smaller local and regional competitors. Our scale also facilitates the standardization of processes, shared learning and
talent development across our entire organization.
commercial services in the majority of markets in which we operate. Our markets are generally large, growing and highly fragmented,
and we believe we have significant advantages over smaller local and regional competitors. We have spent decades developing a
reputation built on reliability and superior quality and service. As a result, we enjoy high unaided brand awareness and a reputation for
high-quality customer service, which serve as key drivers of our customer acquisition efforts. Our nationwide presence also allows our
brands to effectively serve both local residential customers and large national commercial accounts and to capitalize on lead
generation sources that include large real estate agencies, financial institutions and insurance carriers. We believe our significant size
and scale also provide a competitive advantage in our purchasing power, route density, and marketing and operating efficiencies
compared to smaller local and regional competitors. Our scale also facilitates the standardization of processes, shared learning and
talent development across our entire organization.
Diverse Revenue Streams across Customers and Geographies. ServiceMaster is diversified in terms of customers and
Diverse Revenue Streams across Customers and Geographies. ServiceMaster is diversified in terms of customers and
geographies. We operate in all 50 states and the District of Columbia. Our Terminix business, which accounted for 55 percent of our
revenue in 2016, served approximately 2.8 million customers. American Home Shield, which accounted for 37 percent of our revenue
in 2016, responded to approximately four million service requests from approximately 1.9 million customers. Our diverse customer
base and geographies help to mitigate the effect of adverse market conditions and other risks in any particular geography or customer
segment we serve. We therefore believe the size and scale of our company provide us with added protection from risk relative to our
smaller local and regional competitors.
geographies. We operate in all 50 states and the District of Columbia. Our Terminix business, which accounted for 55 percent of our
revenue in 2016, served approximately 2.8 million customers. American Home Shield, which accounted for 37 percent of our revenue
in 2016, responded to approximately four million service requests from approximately 1.9 million customers. Our diverse customer
base and geographies help to mitigate the effect of adverse market conditions and other risks in any particular geography or customer
segment we serve. We therefore believe the size and scale of our company provide us with added protection from risk relative to our
smaller local and regional competitors.
High-Value Service Offerings Resulting in High Retention and Recurring Revenues. We believe our high annual customer
High-Value Service Offerings Resulting in High Retention and Recurring Revenues. We believe our high annual customer
retention demonstrates the highly valued nature of the services we offer and the high level of execution and customer service that we
provide. Many of our technicians have built long-standing, personal relationships with their customers. We believe these personal
bonds, often forged over decades, help to drive customer loyalty and retention. As a result of our high retention and long-standing
customer relationships, we enjoy significant visibility and stability in our business, and these factors limit the effect of adverse
economic cycles on our revenue base. We experienced these advantages during the most recent economic downturn, when we were
able to grow revenue in each year from 2008 to 2016.
retention demonstrates the highly valued nature of the services we offer and the high level of execution and customer service that we
provide. Many of our technicians have built long-standing, personal relationships with their customers. We believe these personal
bonds, often forged over decades, help to drive customer loyalty and retention. As a result of our high retention and long-standing
customer relationships, we enjoy significant visibility and stability in our business, and these factors limit the effect of adverse
economic cycles on our revenue base. We experienced these advantages during the most recent economic downturn, when we were
able to grow revenue in each year from 2008 to 2016.
Capital-Light Business Model. Our business model is characterized by strong Adjusted EBITDA margins, negative working
Capital-Light Business Model. Our business model is characterized by strong Adjusted EBITDA margins, negative working
capital and limited capital expenditure requirements. For the year ended December 31, 2016, 2015 and 2014, our net cash provided
from operating activities from continuing operations was $325 million, $398 million and $289 million, respectively, and our property
additions were $56 million, $40 million and $35 million, respectively. Free Cash Flow was $270 million, $358 million and
$274 million for the year ended December 31, 2016, 2015 and 2014, respectively. For a reconciliation of Free Cash Flow to net cash
provided from operating activities from continuing operations, which we consider to be the most directly comparable financial
measure presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), see
“Selected Historical Financial Data.”
capital and limited capital expenditure requirements. For the year ended December 31, 2016, 2015 and 2014, our net cash provided
from operating activities from continuing operations was $325 million, $398 million and $289 million, respectively, and our property
additions were $56 million, $40 million and $35 million, respectively. Free Cash Flow was $270 million, $358 million and
$274 million for the year ended December 31, 2016, 2015 and 2014, respectively. For a reconciliation of Free Cash Flow to net cash
provided from operating activities from continuing operations, which we consider to be the most directly comparable financial
measure presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), see
“Selected Historical Financial Data.”
Resilient Financial Model with Track Record of Consistent Performance.
Resilient Financial Model with Track Record of Consistent Performance.
Solid revenue and Adjusted EBITDA growth through business cycles. Our consolidated revenue and Adjusted EBITDA
Solid revenue and Adjusted EBITDA growth through business cycles. Our consolidated revenue and Adjusted EBITDA
compound annual growth rates from 2011 through 2016 were five percent and 11 percent, respectively. We believe that our strong
compound annual growth rates from 2011 through 2016 were five percent and 11 percent, respectively. We believe that our strong
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performance through the recent economic and housing downturns is attributable to the essential nature of our services, our strong
value proposition and our management’s focus on driving results.
Solid margins with attractive operating leverage and productivity improvement initiatives. Our business model enjoys
inherent operating leverage stemming from route density and fixed investments in infrastructure and technology, among other factors.
We have demonstrated our ability to expand our margins through a variety of initiatives, including metric-driven continuous
improvement in our customer call centers, application of consistent process guidelines at the branch level, leveraging size and scale to
improve the sourcing of labor and materials, and driving productivity in centralized services. We have also deployed mobility
solutions and routing and scheduling systems across many of our businesses in order to enhance overall efficiency and reduce
operating costs.
Multi-Channel Marketing Approach Supported by Sophisticated Customer Analytic Modeling Capabilities. Our
multi-channel marketing approach focuses on building the value of our brands and generating revenue by understanding the decisions
customers make at each stage in the purchase of residential and commercial services. The effectiveness of our marketing efforts is
demonstrated by an increase in lead generation and online sales, as well as an improvement in close rates over the last few years. For
example, in our direct-to-consumer channel at American Home Shield, new home warranty lead generation, marketing yield and close
rates have benefited from increased spending on marketing as well as improved digital marketing. We have also been deploying
increasingly sophisticated customer analytics models that allow us to more effectively segment our prospective customers and tailor
campaigns towards them. In addition, we are seeing success with newer ways of reaching and marketing to consumers via content
marketing, promotions and social media channels.
Operational and Customer Service Excellence Driven by Superior People Development. We are constantly focused on
improving customer service. The customer experience is at the foundation of our business model, and we believe that each employee
is an extension of ServiceMaster’s reputation. We employ rigorous hiring and training practices and continuously analyze our
operating metrics to identify potential improvements in service and productivity. Technicians in our Terminix branches have an
average tenure of eight years, creating continuity in customer relationships and ensuring the development of best practices based on
on-the-ground experience. We also provide our field personnel with access to sophisticated data management and mobility tools which
enable them to drive efficiencies, improve customer service and ultimately grow our customer base and profitability.
Experienced Management Team. We have assembled a management team of highly experienced leaders with significant
industry expertise. Our senior leaders have track records of producing profitable growth in a wide variety of industries and economic
conditions. We also believe that we have a deep bench of talent across each of our business units, including long-tenured individuals
with significant expertise and knowledge of the businesses they operate. Our management team is highly focused on execution and
driving growth and profitability across our company. Our compensation structure, including incentive compensation, is tied to key
performance metrics and is designed to incentivize senior management to seek the long-term success of our business.
Our Strategy
Grow Our Customer Base. We are focused on the growth of our businesses through the introduction and delivery of
high-value services to new and existing customers. We deliver our services through three primary channels:
•
•
•
Direct-to-consumer through our company-owned branches;
Indirectly through partnerships with high-quality contractors in our home warranty business; and
Through trusted service providers who are franchisees.
To accelerate new customer growth, we make strategic investments in sales, marketing and advertising to drive new business
leads, brand awareness and market penetration. In addition, we are executing multiple initiatives to improve customer satisfaction and
service delivery, which we believe will lead to improved retention and growth in our customer base across our business segments.
Develop and Expand New Service Offerings. We intend to continue to leverage our existing sales channels and local
coverage to deliver additional value-added services to our customers. Our product development teams draw upon the experience of
our technicians in the field, combined with in-house scientific expertise, to create innovative customer solutions for both our existing
customer base and identified service/category adjacencies. We have a strong history of new product introductions, such as Terminix’s
crawlspace encapsulation, mosquito control and wildlife exclusion services, that we believe will appeal to new potential customers as
well as our existing customer base. Mosquito, wildlife exclusion and crawl space encapsulation are being offered in substantially all
U.S. geographic markets where we believe substantial market opportunity exists. We are now focusing our efforts on increasing our
market share in these product lines.
Expand Our Geographic Markets. Through detailed assessments of local economic conditions and demographics, we have
identified target markets for expansion, both in existing markets, where we have capacity to increase our local market position, and in
new markets, where we see opportunities. In addition to geographic expansion opportunities within the United States, we may also
grow our international presence through strategic franchise expansions and additional licensing agreements.
Grow Our Commercial Business. Our revenue from commercial customers comprised approximately 13 percent of our 2016
revenue. We believe we are well positioned to leverage our national coverage, brand strength and broad service offerings to target
large multi-regional accounts. We believe these capabilities provide us with a meaningful competitive advantage, especially compared
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to smaller local and regional competitors. We recognize that many of these large accounts seek to outsource or reduce the number of
vendors used for certain services, and, accordingly, we have reenergized our marketing approach in this channel. At Terminix, for
example, we have hired a dedicated sales team to focus on the development of commercial sales. Our commercial expansion strategy
targets industries with a demonstrated need for our services, including healthcare, manufacturing, warehouses, hotels and commercial
real estate.
to smaller local and regional competitors. We recognize that many of these large accounts seek to outsource or reduce the number of
vendors used for certain services, and, accordingly, we have reenergized our marketing approach in this channel. At Terminix, for
example, we have hired a dedicated sales team to focus on the development of commercial sales. Our commercial expansion strategy
targets industries with a demonstrated need for our services, including healthcare, manufacturing, warehouses, hotels and commercial
real estate.
Enhance Our Profitability. We have and will continue to invest in initiatives designed to improve our margins and drive
Enhance Our Profitability. We have and will continue to invest in initiatives designed to improve our margins and drive
profitable growth. We have been able to increase productivity across our segments through actions such as continuous process
improvement, targeted systems investments, sales force initiatives and technician mobility tools. We also focus on strategically
capitalizing on our purchasing power to achieve more favorable pricing and terms. In addition, we have rolled out tools and processes
to centralize and systematize pricing decisions. These tools and processes enable us to optimize pricing at the geographic market and
product level while creating a flexible and scalable pricing architecture that can grow with the business. We intend to leverage these
investments as well as identify further opportunities to enhance profitability across our businesses.
profitable growth. We have been able to increase productivity across our segments through actions such as continuous process
improvement, targeted systems investments, sales force initiatives and technician mobility tools. We also focus on strategically
capitalizing on our purchasing power to achieve more favorable pricing and terms. In addition, we have rolled out tools and processes
to centralize and systematize pricing decisions. These tools and processes enable us to optimize pricing at the geographic market and
product level while creating a flexible and scalable pricing architecture that can grow with the business. We intend to leverage these
investments as well as identify further opportunities to enhance profitability across our businesses.
Pursue Selective Acquisitions. From 2012 through 2016, we have completed over 120 acquisitions. On June 27, 2016, we
Pursue Selective Acquisitions. From 2012 through 2016, we have completed over 120 acquisitions. On June 27, 2016, we
acquired OneGuard Home Warranties (“OneGuard”) for a total purchase price of $61 million, and on November 30, 2016, we
acquired Landmark Home Warranty, LLC (“Landmark”) for a total purchase price of $39 million. In 2016, we completed several pest
control and termite acquisitions for a total purchase price of $43 million. We anticipate that the highly fragmented nature of our
markets will continue to create opportunities for further consolidation. As we have in the past, we will continue to take advantage of
tuck-in as well as strategic acquisition opportunities, particularly in underserved markets where we can enhance and expand our
service capabilities. We seek to use acquisitions to cost-effectively grow our customer count and enter high-growth geographies. We
may also pursue acquisitions as vehicles for strategic international expansion.
acquired OneGuard Home Warranties (“OneGuard”) for a total purchase price of $61 million, and on November 30, 2016, we
acquired Landmark Home Warranty, LLC (“Landmark”) for a total purchase price of $39 million. In 2016, we completed several pest
control and termite acquisitions for a total purchase price of $43 million. We anticipate that the highly fragmented nature of our
markets will continue to create opportunities for further consolidation. As we have in the past, we will continue to take advantage of
tuck-in as well as strategic acquisition opportunities, particularly in underserved markets where we can enhance and expand our
service capabilities. We seek to use acquisitions to cost-effectively grow our customer count and enter high-growth geographies. We
may also pursue acquisitions as vehicles for strategic international expansion.
Sales and Marketing
Sales and Marketing
We market our services to both homeowners and businesses on a national and local level through various means, including
the internet, direct mail, television and radio advertising, print advertisements, marketing partnerships, telemarketing, various social
media channels and through national sales teams. Additionally, in our American Home Shield segment, we partner with various
participants in the residential real estate marketplace, such as real estate brokerages and some financial institutions and insurance
We market our services to both homeowners and businesses on a national and local level through various means, including
the internet, direct mail, television and radio advertising, print advertisements, marketing partnerships, telemarketing, various social
media channels and through national sales teams. Additionally, in our American Home Shield segment, we partner with various
participants in the residential real estate marketplace, such as real estate brokerages and some financial institutions and insurance
carriers.
Service Marks, Trademarks and Trade Names
We hold various service marks, trademarks and trade names, such as ServiceMaster, Terminix, American Home Shield,
We hold various service marks, trademarks and trade names, such as ServiceMaster, Terminix, American Home Shield,
ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec, that we deem particularly important to
the advertising activities conducted by each of our reportable segments as well as the franchising activities conducted by certain
reportable segments. As of December 31, 2016, we had marks that were protected by registration (either by direct registration or by
treaty) in the United States and approximately 90 other countries.
ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec, that we deem particularly important to
the advertising activities conducted by each of our reportable segments as well as the franchising activities conducted by certain
reportable segments. As of December 31, 2016, we had marks that were protected by registration (either by direct registration or by
treaty) in the United States and approximately 90 other countries.
Franchises
Franchises
Franchises are important to the Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and
Franchises are important to the Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and
AmeriSpec businesses. In 2016, 2015 and 2014, total franchise fees (monthly royalty fees as well as initial fees from sales of
franchises and licenses) were $135 million, $132 million and $132 million, respectively, related franchise operating expenses were
$52 million, $57 million and $61 million, respectively, and total profits from our franchised operations were $83 million, $75 million
and $71 million, respectively. Nearly all of the franchise fees received by our Franchise Services Group segment are derived from the
ServiceMaster Restore, ServiceMaster Clean and Merry Maids businesses. Franchise fees from our Terminix franchisees represented
less than one percent of Terminix revenue for each of those years. We evaluate the performance of our franchise businesses based
primarily on operating profit before corporate general and administrative expenses, interest expense and amortization of intangible
assets. Franchise agreements entered into in the course of these businesses are generally for a term of five years. The majority of these
franchise agreements are renewed prior to expiration. Internationally, we have license agreements, whereby licensees provide services
under our brand names that would ordinarily be provided by franchisees in the United States. The majority of international licenses are
AmeriSpec businesses. In 2016, 2015 and 2014, total franchise fees (monthly royalty fees as well as initial fees from sales of
franchises and licenses) were $135 million, $132 million and $132 million, respectively, related franchise operating expenses were
$52 million, $57 million and $61 million, respectively, and total profits from our franchised operations were $83 million, $75 million
and $71 million, respectively. Nearly all of the franchise fees received by our Franchise Services Group segment are derived from the
ServiceMaster Restore, ServiceMaster Clean and Merry Maids businesses. Franchise fees from our Terminix franchisees represented
less than one percent of Terminix revenue for each of those years. We evaluate the performance of our franchise businesses based
primarily on operating profit before corporate general and administrative expenses, interest expense and amortization of intangible
assets. Franchise agreements entered into in the course of these businesses are generally for a term of five years. The majority of these
franchise agreements are renewed prior to expiration. Internationally, we have license agreements, whereby licensees provide services
under our brand names that would ordinarily be provided by franchisees in the United States. The majority of international licenses are
for 10-year terms.
carriers.
Service Marks, Trademarks and Trade Names
We have no single customer that accounts for more than two percent of our consolidated revenue. Additionally, no reportable
We have no single customer that accounts for more than two percent of our consolidated revenue. Additionally, no reportable
segment has a single customer that accounts for more than five percent of its revenue. None of our reportable segments is dependent
on a single customer or a few customers, the loss of which would have a material adverse effect on the segment.
segment has a single customer that accounts for more than five percent of its revenue. None of our reportable segments is dependent
on a single customer or a few customers, the loss of which would have a material adverse effect on the segment.
A significant percentage of our revenue is concentrated in the southern and western regions of the United States. In our
A significant percentage of our revenue is concentrated in the southern and western regions of the United States. In our
Terminix and American Home Shield segments, California, Texas and Florida collectively accounted for approximately one-third of
Terminix and American Home Shield segments, California, Texas and Florida collectively accounted for approximately one-third of
the revenue in 2016.
Customers and Geographies
We compete in residential and commercial services industries, focusing on termite and pest control, home warranties, disaster
We compete in residential and commercial services industries, focusing on termite and pest control, home warranties, disaster
restoration, janitorial, residential cleaning, cabinet and wood furniture repair and home inspection. We compete with many other
restoration, janitorial, residential cleaning, cabinet and wood furniture repair and home inspection. We compete with many other
Competition
for 10-year terms.
Customers and Geographies
the revenue in 2016.
Competition
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companies in the sale of our services, franchises and products. The principal methods of competition in our businesses include quality
and speed of service, name recognition and reputation, customer satisfaction, brand awareness, pricing and promotions, professional
sales forces and referrals. While we compete with a broad range of competitors in each discrete segment, we do not believe that any of
our competitors provides all of the services we provide in all of the market segments we serve. All of the primary segments in which
we operate are highly fragmented.
Termite and Pest Control
Competition in the segment for professional termite and pest control services in the United States comes primarily from
smaller regional and local, independently-owned firms, as well as from Orkin, Inc. (a subsidiary of Rollins, Inc.), Ecolab, Inc. and
Rentokil Initial, plc., all of which compete nationally.
Home Warranties
Competition for home warranties that cover household systems and appliances comes mainly from regional providers. Our
two largest competitors are First American Financial Corporation and Old Republic International Corporation.
Disaster Restoration, Emergency Response and Related Services
Competition in the markets for disaster restoration, emergency response and related services comes mainly from local,
independently-owned firms and a few national professional cleaning companies, such as Servpro Industries, Inc., Belfor, a subsidiary
of Belfor Europe GmbH, BMS CAT, Inc. and Stanley Steemer International, Inc.
Janitorial
Competition in the market for janitorial services comes mainly from local, independently-owned firms and a few national
professional janitorial firms such as ABM Industries Incorporated, Jani-King International, Inc., Aramark and Jan-Pro Franchise
International, Inc.
Residential Cleaning
Competition in the market segment for residential cleaning services comes mainly from local, independently-owned firms,
and from a few national companies such as The Maids International, Inc., Molly Maid, Inc. and The Cleaning Authority, LLC.
Insurance
We maintain insurance coverage that we believe is appropriate for our business, including workers’ compensation, auto
liability, general liability, umbrella and property insurance. In addition, we provide various insurance coverages, including deductible
reimbursement policies, to our business units through our wholly-owned captive insurance company, which was domiciled in Vermont
through 2015 and since 2016 has been domiciled in Tennessee.
Information Technology
We have invested in information systems and software packages designed to allow us to grow efficiently, deliver and
implement nationally, while retaining local and regional flexibility. We believe this provides us with a competitive advantage in our
operations. Our sophisticated IT systems enable us to provide a high level of convenience and service to our customers. In 2016,
Terminix launched a new sales mobility platform to enhance the customer sales experience and allow sales professionals to more
easily bundle diverse product offerings. Similarly, American Home Shield’s call centers, which operate and take service calls 24 hours
a day, seven days a week, are able to promptly assign contractors to a job.
Employees
The average number of persons employed by us during 2016 was approximately 13,000. None of our employees in the
United States are represented by collective bargaining agreements.
Regulatory Compliance
Our businesses are subject to various international, federal, state, provincial and local laws and regulations, compliance with
which increases our operating costs, limits or restricts the services provided by our reportable segments or the methods by which our
businesses offer, sell and fulfill those services or conduct their respective businesses, or subjects us and our reportable segments to the
possibility of regulatory actions or proceedings. Noncompliance with these laws and regulations can subject us to fines or various
forms of civil or criminal prosecution, any of which could have a material adverse effect on our reputation, business, financial
position, results of operations and cash flows.
These international, federal, state, provincial and local laws and regulations include laws relating to consumer protection,
wage and hour, deceptive trade practices, permitting and licensing, state contractor laws, real estate settlements, workers’ safety, tax,
healthcare reforms, franchise-related issues, collective bargaining and other labor matters, environmental and employee benefits. The
Terminix business must also meet certain Department of Transportation and Federal Motor Carrier Safety Administration
requirements with respect to certain vehicles in its fleet. Terminix is regulated by federal, state and local laws, ordinances and
regulations which are enforced by pest control boards, environmental protection agencies and similar government entities. American
Home Shield is regulated in certain states by the applicable state insurance regulatory authority and by the Real Estate Commission in
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inspection laws and regulations.
Environmental, Health and Safety Matters
Texas. Terminix, ServiceMaster Clean and Merry Maids use products containing ingredients regulated by the U.S. Environmental
Protection Agency (the “EPA”), and ServiceMaster Clean is subject to licensing and certification requirements for applying
disinfectants, sanitizers and other EPA registered products in certain states. AmeriSpec is regulated by various state and local home
Texas. Terminix, ServiceMaster Clean and Merry Maids use products containing ingredients regulated by the U.S. Environmental
Protection Agency (the “EPA”), and ServiceMaster Clean is subject to licensing and certification requirements for applying
disinfectants, sanitizers and other EPA registered products in certain states. AmeriSpec is regulated by various state and local home
inspection laws and regulations.
Environmental, Health and Safety Matters
Our businesses are subject to various international, federal, state and local laws and regulations regarding environmental,
Our businesses are subject to various international, federal, state and local laws and regulations regarding environmental,
health and safety matters. Among other things, these laws regulate the emission or discharge of materials into the environment, govern
the use, storage, treatment, disposal, transportation and management of hazardous substances and wastes and protect the health and
safety of our employees. These laws also impose liability for the costs of investigating and remediating, and damages resulting from,
present and past releases of hazardous substances, including releases by prior owners or operators of sites we currently own or operate.
health and safety matters. Among other things, these laws regulate the emission or discharge of materials into the environment, govern
the use, storage, treatment, disposal, transportation and management of hazardous substances and wastes and protect the health and
safety of our employees. These laws also impose liability for the costs of investigating and remediating, and damages resulting from,
present and past releases of hazardous substances, including releases by prior owners or operators of sites we currently own or operate.
Compliance with environmental, health and safety laws increases our operating costs, limits or restricts the services provided
by our reportable segments or the methods by which they offer, sell and fulfill those services or conduct their respective businesses, or
subjects us and our reportable segments to the possibility of regulatory or private actions or proceedings.
Compliance with environmental, health and safety laws increases our operating costs, limits or restricts the services provided
by our reportable segments or the methods by which they offer, sell and fulfill those services or conduct their respective businesses, or
subjects us and our reportable segments to the possibility of regulatory or private actions or proceedings.
Terminix is regulated under many federal and state environmental laws, including the Comprehensive Environmental
Terminix is regulated under many federal and state environmental laws, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (the “CERCLA”), the Superfund Amendments and Reauthorization Act of 1986
(the “Superfund”), the Federal Environmental Pesticide Control Act of 1972, the Federal Insecticide, Fungicide and Rodenticide Act
of 1947, the Resource Conservation and Recovery Act of 1976, the Clean Air Act, the Emergency Planning and Community
Right-to-Know Act of 1986, the Oil Pollution Act of 1990 and the Clean Water Act of 1977, each as amended.
Response, Compensation and Liability Act of 1980 (the “CERCLA”), the Superfund Amendments and Reauthorization Act of 1986
(the “Superfund”), the Federal Environmental Pesticide Control Act of 1972, the Federal Insecticide, Fungicide and Rodenticide Act
of 1947, the Resource Conservation and Recovery Act of 1976, the Clean Air Act, the Emergency Planning and Community
Right-to-Know Act of 1986, the Oil Pollution Act of 1990 and the Clean Water Act of 1977, each as amended.
We cannot predict the effect of possible future environmental laws on our operations. Changes in, or new interpretations of,
We cannot predict the effect of possible future environmental laws on our operations. Changes in, or new interpretations of,
existing laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other
environmental liabilities or obligations in the future, may lead to additional compliance or other costs. During 2016, there were no
material capital expenditures for environmental control facilities, and there are no material expenditures anticipated for 2017 or 2018
existing laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other
environmental liabilities or obligations in the future, may lead to additional compliance or other costs. During 2016, there were no
material capital expenditures for environmental control facilities, and there are no material expenditures anticipated for 2017 or 2018
related to such facilities.
We are subject to international, federal, state, provincial and local laws and regulations designed to protect consumers,
including laws governing consumer privacy and fraud, the collection and use of consumer data, telemarketing and other forms of
solicitation.
We are subject to international, federal, state, provincial and local laws and regulations designed to protect consumers,
including laws governing consumer privacy and fraud, the collection and use of consumer data, telemarketing and other forms of
solicitation.
The telemarketing rules adopted by the Federal Communications Commission pursuant to the Federal Telephone Consumer
The telemarketing rules adopted by the Federal Communications Commission pursuant to the Federal Telephone Consumer
Protection Act and the Federal Telemarketing Sales Rule issued by the Federal Trade Commission govern our telephone sales
practices. In addition, some states and local governing bodies have adopted laws and regulations targeted at direct telephone sales and
“do-not-knock,” “do-not-mail” and “do-not-leave” activities. The implementation of these marketing regulations requires us to rely
more extensively on other marketing methods and channels. In addition, if we were to fail to comply with any applicable law or
regulation, we could be subject to substantial fines or damages, be involved in lawsuits, enforcement actions and other claims by third
parties or governmental authorities, suffer losses to our reputation and our business or suffer the loss of licenses or penalties that may
affect how the business is operated, which, in turn, could have a material adverse effect on our financial position, results of operations
Protection Act and the Federal Telemarketing Sales Rule issued by the Federal Trade Commission govern our telephone sales
practices. In addition, some states and local governing bodies have adopted laws and regulations targeted at direct telephone sales and
“do-not-knock,” “do-not-mail” and “do-not-leave” activities. The implementation of these marketing regulations requires us to rely
more extensively on other marketing methods and channels. In addition, if we were to fail to comply with any applicable law or
regulation, we could be subject to substantial fines or damages, be involved in lawsuits, enforcement actions and other claims by third
parties or governmental authorities, suffer losses to our reputation and our business or suffer the loss of licenses or penalties that may
affect how the business is operated, which, in turn, could have a material adverse effect on our financial position, results of operations
and cash flows.
Consumer Protection and Solicitation Matters
related to such facilities.
Consumer Protection and Solicitation Matters
Franchise Matters
Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec are subject to various
international, federal, state, provincial and local laws and regulations governing franchise sales, marketing and licensing and franchise
trade practices generally, including applicable rules and regulations of the Federal Trade Commission. These laws and regulations
generally require disclosure of business information in connection with the sale and licensing of franchises. Certain state regulations
also affect the ability of the franchisor to revoke or refuse to renew a franchise. We seek to comply with regulatory requirements and
deal with franchisees and licensees in good faith. From time to time, we and one or more franchisees may become involved in a
dispute regarding the franchise relationship, including payment of royalties or fees, location of branches, advertising, purchase of
products by franchisees, non-competition covenants, compliance with our standards and franchise renewal criteria. There can be no
assurance that compliance problems will not be encountered from time to time or that significant disputes with one or more
franchisees will not arise.
Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec are subject to various
international, federal, state, provincial and local laws and regulations governing franchise sales, marketing and licensing and franchise
trade practices generally, including applicable rules and regulations of the Federal Trade Commission. These laws and regulations
generally require disclosure of business information in connection with the sale and licensing of franchises. Certain state regulations
also affect the ability of the franchisor to revoke or refuse to renew a franchise. We seek to comply with regulatory requirements and
deal with franchisees and licensees in good faith. From time to time, we and one or more franchisees may become involved in a
dispute regarding the franchise relationship, including payment of royalties or fees, location of branches, advertising, purchase of
products by franchisees, non-competition covenants, compliance with our standards and franchise renewal criteria. There can be no
assurance that compliance problems will not be encountered from time to time or that significant disputes with one or more
franchisees will not arise.
From time to time, we receive communications from our franchisees regarding complaints, disputes or questions about our
From time to time, we receive communications from our franchisees regarding complaints, disputes or questions about our
practices and standards in relation to our franchised operations and certain economic terms of our franchise arrangements. If
franchisees or groups representing franchisees were to bring legal proceedings against us, we would vigorously defend against the
claims in any such proceeding, but our reputation, business, financial position, results of operations and cash flows could be materially
adversely impacted and the price of our common stock could decline.
practices and standards in relation to our franchised operations and certain economic terms of our franchise arrangements. If
franchisees or groups representing franchisees were to bring legal proceedings against us, we would vigorously defend against the
claims in any such proceeding, but our reputation, business, financial position, results of operations and cash flows could be materially
adversely impacted and the price of our common stock could decline.
Available Information
Available Information
ServiceMaster maintains a website at http://www.servicemaster.com that includes a hyperlink to a website maintained by a
ServiceMaster maintains a website at http://www.servicemaster.com that includes a hyperlink to a website maintained by a
third party where ServiceMaster’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
third party where ServiceMaster’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
and cash flows.
Franchise Matters
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all amendments to those reports are available without charge as soon as reasonably practicable following the time that they are filed
with or furnished to the SEC. The information found on the Company’s website is not a part of this or any other report filed with or
furnished to the SEC.
ITEM 1A. RISK FACTORS
You should carefully consider the factors described below, in addition to the other information set forth in this Annual Report
on Form 10-K. These risk factors are important to understanding the contents of this Annual Report on Form 10-K and of other
reports. Our reputation, business, financial position, results of operations and cash flows are subject to various risks. The risks and
uncertainties described below are not the only ones relevant to us. Additional risks and uncertainties not presently known to us or that
we currently believe to be immaterial may also materially and adversely affect our reputation, business, financial position, results of
operations and cash flows.
The materialization of any risks and uncertainties set forth below or identified in Forward-Looking Statements contained in
this report 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 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Information Regarding Forward-Looking Statements” below.
Risks Related to Our Business and Our Industry
Weakening in general economic conditions, especially as they may affect home sales, unemployment or consumer confidence or
spending levels, may adversely impact our business, financial position, results of operations and cash flows.
A substantial portion of our results of operations is dependent upon spending by consumers. Deterioration in general
economic conditions and consumer confidence, particularly in California, Texas and Florida, which collectively represented
approximately one-third of our revenue in 2016 in our Terminix and American Home Shield segments, could affect the demand for
our services. Consumer spending and confidence tend to decline during times of declining economic conditions. A worsening of
macroeconomic indicators, including weak home sales, higher home foreclosures, declining consumer confidence or rising
unemployment rates, could adversely affect consumer spending levels, reduce the demand for our services and adversely impact our
business, financial position, results of operations and cash flows. These factors could also negatively impact the timing or the ultimate
collection of accounts receivable, which would adversely impact our business, financial position, results of operations and cash flows.
We may not successfully implement our business strategies, including achieving our growth objectives.
We may not be able to fully implement our business strategies or realize, in whole or in part within the expected time frames,
the anticipated benefits of our various growth or other initiatives. Our various business strategies and initiatives, including growth of
our customer base, introduction of new service offerings, geographic expansion, growth of our commercial business and enhancement
of profitability, are subject to significant business, economic and competitive uncertainties and contingencies, many of which are
beyond our control.
In addition, we may incur certain costs to achieve efficiency improvements and growth in our business and we may not meet
anticipated implementation timetables or stay within budgeted costs. As these efficiency improvement and growth initiatives are
undertaken, we may not fully achieve our expected cost savings and efficiency improvements or growth rates, or these initiatives
could adversely impact our customer retention or our operations. Also, our business strategies may change from time to time in light
of our ability to implement our new business initiatives, competitive pressures, economic uncertainties or developments, or other
factors.
Adverse credit and financial market events and conditions could, among other things, impede access to or increase the cost of
financing or cause our commercial and governmental customers to incur liquidity issues that could lead to some of our services
not being purchased or being cancelled, any of which could have an adverse impact on our business, financial position, results of
operations and cash flows.
Disruptions in credit or financial markets could, among other things, lead to impairment charges, make it more difficult for us
to obtain, or increase our cost of obtaining, financing for our operations or investments or to refinance our indebtedness, cause our
lenders to depart from prior credit industry practice and not give technical or other waivers under the $1,650 million Term Loan
Facility and the $300 million Revolving Credit Facility to the extent we may seek them in the future, thereby causing us to be in
default under the Credit Facilities. These disruptions also could cause our commercial customers to encounter liquidity issues that
could lead to some of our services being cancelled or reduced, or that could result in an increase in the time it takes our customers to
pay us, or that could lead to a decrease in pricing for our services and products, any of which could adversely affect our accounts
receivable, among other things, and, in turn, increase our working capital needs. Volatile swings in the commercial real estate segment
could also impact the demand for our services as landlords cut back on services provided to their tenants. In addition, adverse
developments at federal, state and local levels associated with budget deficits resulting from economic conditions could result in
federal, state and local governments decreasing their purchasing of our products or services and/or increasing taxes or other fees on
businesses, including us, to generate more tax revenues, which could negatively impact spending by commercial customers and
municipalities on our services.
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Our market segments are highly competitive. Competition could reduce our share of the market segments served by us and
adversely impact our reputation, business, financial position, results of operations and cash flows.
Our market segments are highly competitive. Competition could reduce our share of the market segments served by us and
adversely impact our reputation, business, financial position, results of operations and cash flows.
We operate in highly competitive market segments. Changes in the source and intensity of competition in the market
We operate in highly competitive market segments. Changes in the source and intensity of competition in the market
segments served by us impact the demand for our services and may also result in additional pricing pressures. The relatively low
capital cost of entry into certain of our business categories has led to strong competitive market segments, including competition from
smaller regional and local owner-operated companies. Regional and local competitors operating in a limited geographic area may have
lower labor, employee benefits and overhead costs. The principal methods of competition in our businesses include name recognition,
quality and speed of service, customer satisfaction, reputation and pricing. We may be unable to compete successfully against current
or future competitors, and the competitive pressures that we face may result in reduced market segment share, reduced pricing or
adversely impact our reputation, business, financial position, results of operations and cash flows.
segments served by us impact the demand for our services and may also result in additional pricing pressures. The relatively low
capital cost of entry into certain of our business categories has led to strong competitive market segments, including competition from
smaller regional and local owner-operated companies. Regional and local competitors operating in a limited geographic area may have
lower labor, employee benefits and overhead costs. The principal methods of competition in our businesses include name recognition,
quality and speed of service, customer satisfaction, reputation and pricing. We may be unable to compete successfully against current
or future competitors, and the competitive pressures that we face may result in reduced market segment share, reduced pricing or
adversely impact our reputation, business, financial position, results of operations and cash flows.
Weather conditions and seasonality affect the demand for our services and our results of operations and cash flows.
Weather conditions and seasonality affect the demand for our services and our results of operations and cash flows.
The demand for our services and our results of operations are affected by weather conditions, including, without limitation,
The demand for our services and our results of operations are affected by weather conditions, including, without limitation,
potential impacts, if any, from climate change, known and unknown, and by the seasonal nature of our termite and pest control
services, home inspection services and disaster restoration services. Adverse weather conditions (e.g., cooler temperatures or
droughts), whether created by climate change factors or otherwise, can impede the development of termite swarms and lead to lower
demand for our termite control services. Extreme temperatures can lead to an increase in service requests related to household systems
in our American Home Shield business, resulting in higher claim frequency and costs and lower profitability. For example, in the third
quarter of 2016, we experienced an increase in contract claims cost at American Home Shield driven by a higher number of HVAC
work orders driven by high temperatures. These or other weather conditions could adversely impact our business, financial position,
results of operations and cash flows.
potential impacts, if any, from climate change, known and unknown, and by the seasonal nature of our termite and pest control
services, home inspection services and disaster restoration services. Adverse weather conditions (e.g., cooler temperatures or
droughts), whether created by climate change factors or otherwise, can impede the development of termite swarms and lead to lower
demand for our termite control services. Extreme temperatures can lead to an increase in service requests related to household systems
in our American Home Shield business, resulting in higher claim frequency and costs and lower profitability. For example, in the third
quarter of 2016, we experienced an increase in contract claims cost at American Home Shield driven by a higher number of HVAC
work orders driven by high temperatures. These or other weather conditions could adversely impact our business, financial position,
results of operations and cash flows.
Compliance with United States Internal Revenue Service (“IRS”) rules for our 401(k) Plan could result in significant costs that
adversely impact our financial position, results of operations and cash flows.
Compliance with United States Internal Revenue Service (“IRS”) rules for our 401(k) Plan could result in significant costs that
adversely impact our financial position, results of operations and cash flows.
In 2008, we amended our Profit Sharing and Retirement Plan, a tax qualified 401(k) defined contribution plan available to
In 2008, we amended our Profit Sharing and Retirement Plan, a tax qualified 401(k) defined contribution plan available to
substantially all of our employees (the “401(k) Plan”), to implement a qualified automatic contribution arrangement (“QACA”) under
the safe harbor provisions of the Internal Revenue Code of 1986, as amended (the “Code”). QACA plans, in general, require automatic
enrollment of employees into the retirement plan absent an affirmative election that such employees do not wish to participate.
substantially all of our employees (the “401(k) Plan”), to implement a qualified automatic contribution arrangement (“QACA”) under
the safe harbor provisions of the Internal Revenue Code of 1986, as amended (the “Code”). QACA plans, in general, require automatic
enrollment of employees into the retirement plan absent an affirmative election that such employees do not wish to participate.
Although we implemented processes to auto-enroll new hires after adopting the QACA plan in 2008, we have discovered that
Although we implemented processes to auto-enroll new hires after adopting the QACA plan in 2008, we have discovered that
we did not auto-enroll then existing employees who were not participating in the 401(k) Plan. In response, we implemented an auto-
enrollment process for affected active employees, and we submitted to the IRS a voluntary correction proposal to remedy the issue for
prior years. Our current estimate of the cost of the correction ranges from $25 million to approximately $92 million. We have recorded
within Selling and administrative expenses in the consolidated statement of operations and comprehensive income total charges of $25
million. However, there can be no assurances as to the ultimate costs of the correction.
we did not auto-enroll then existing employees who were not participating in the 401(k) Plan. In response, we implemented an auto-
enrollment process for affected active employees, and we submitted to the IRS a voluntary correction proposal to remedy the issue for
prior years. Our current estimate of the cost of the correction ranges from $25 million to approximately $92 million. We have recorded
within Selling and administrative expenses in the consolidated statement of operations and comprehensive income total charges of $25
million. However, there can be no assurances as to the ultimate costs of the correction.
Increases in raw material prices, fuel prices and other operating costs could adversely impact our business, financial position,
results of operations and cash flows.
Increases in raw material prices, fuel prices and other operating costs could adversely impact our business, financial position,
results of operations and cash flows.
Our financial performance may be adversely affected by increases in the level of our operating expenses, such as fuel,
Our financial performance may be adversely affected by increases in the level of our operating expenses, such as fuel,
chemicals, refrigerants, appliances and equipment, parts, raw materials, wages and salaries, employee benefits, health care, vehicle
maintenance, contractor costs, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs, all
of which may be subject to inflationary pressures.
chemicals, refrigerants, appliances and equipment, parts, raw materials, wages and salaries, employee benefits, health care, vehicle
maintenance, contractor costs, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs, all
of which may be subject to inflationary pressures.
Fuel prices are subject to market volatility. Previous increases in fuel prices increased our costs of operating vehicles and
Fuel prices are subject to market volatility. Previous increases in fuel prices increased our costs of operating vehicles and
equipment. Although fuel prices remained relatively low during 2016, there can be no assurances that rates will not return to historical
levels. We cannot predict what effect global events or any future Middle East, Russia or other crisis could have on fuel prices, but it is
possible that such events could lead to higher fuel prices. With respect to fuel, our fleet has been negatively impacted by significant
increases in fuel prices in the past and could be negatively impacted in the future. Although we hedge a significant portion of our fuel
costs, we do not hedge all of those costs. We expect to use approximately 14 million gallons of fuel in 2017. As of December 31,
2016, a ten percent change in fuel prices would result in a change of approximately $3 million in our annual fuel cost before
considering the impact of fuel swap contracts. Fuel price increases can also result in increases in the cost of chemicals and other
materials used in our business. We cannot predict the extent to which we may experience future increases in costs of fuel, chemicals,
refrigerants, appliances and equipment, parts, raw materials, wages and salaries, employee benefits, health care, vehicle maintenance,
contractor costs, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs and other
operating costs. To the extent such costs increase, we may be prevented, in whole or in part, from passing these cost increases through
to our existing and prospective customers, which could have a material adverse impact on our business, financial position, results of
operations and cash flows.
equipment. Although fuel prices remained relatively low during 2016, there can be no assurances that rates will not return to historical
levels. We cannot predict what effect global events or any future Middle East, Russia or other crisis could have on fuel prices, but it is
possible that such events could lead to higher fuel prices. With respect to fuel, our fleet has been negatively impacted by significant
increases in fuel prices in the past and could be negatively impacted in the future. Although we hedge a significant portion of our fuel
costs, we do not hedge all of those costs. We expect to use approximately 14 million gallons of fuel in 2017. As of December 31,
2016, a ten percent change in fuel prices would result in a change of approximately $3 million in our annual fuel cost before
considering the impact of fuel swap contracts. Fuel price increases can also result in increases in the cost of chemicals and other
materials used in our business. We cannot predict the extent to which we may experience future increases in costs of fuel, chemicals,
refrigerants, appliances and equipment, parts, raw materials, wages and salaries, employee benefits, health care, vehicle maintenance,
contractor costs, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs and other
operating costs. To the extent such costs increase, we may be prevented, in whole or in part, from passing these cost increases through
to our existing and prospective customers, which could have a material adverse impact on our business, financial position, results of
operations and cash flows.
We may not be able to attract and retain qualified key executives or transition smoothly to new leadership, which could adversely
impact us and our businesses and inhibit our ability to operate and grow successfully.
We may not be able to attract and retain qualified key executives or transition smoothly to new leadership, which could adversely
impact us and our businesses and inhibit our ability to operate and grow successfully.
The execution of our business strategy and our financial performance will continue to depend in significant part on our
executive management team and other key management personnel. Any inability to attract in a timely manner other qualified key
The execution of our business strategy and our financial performance will continue to depend in significant part on our
executive management team and other key management personnel. Any inability to attract in a timely manner other qualified key
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executives, retain our leadership team and recruit other important personnel could have a material adverse impact on our business,
financial position, results of operations and cash flows.
Compliance with, or violation of, environmental, health and safety laws and regulations, including laws pertaining to the use of
pesticides, could result in significant costs that adversely impact our reputation, business, financial position, results of operations
and cash flows.
International, federal, state, provincial and local laws and regulations relating to environmental, health and safety matters
affect us in several ways. In the United States, products containing pesticides generally must be registered with the EPA, and similar
state agencies before they can be sold or applied. The failure to obtain or the cancellation of any such registration, or the withdrawal
from the marketplace of such pesticides, could have an adverse effect on our business, the severity of which would depend on the
products involved, whether other products could be substituted and whether our competitors were similarly affected. The pesticides
we use are manufactured by independent third parties and are evaluated by the EPA as part of its ongoing exposure risk assessment.
The EPA may decide that a pesticide we use will be limited or will not be re-registered for use in the United States. We cannot predict
the outcome or the severity of the effect of the EPA’s continuing evaluations.
In addition, the use of certain pesticide products is regulated by various international, federal, state, provincial and local
environmental and public health agencies. Although we strive to comply with such laws and regulations and have processes in place
designed to achieve compliance, given our dispersed locations, distributed operations and numerous associates, we may be unable to
prevent violations of these or other laws and regulations from occurring. Even if we are able to comply with all such laws and
regulations and obtain all necessary registrations and licenses, the pesticides or other products we apply or use, or the manner in which
we apply or use them, could be alleged to cause injury to the environment, to people or to animals, or such products could be banned
in certain circumstances. The laws and regulations may also apply to third-party vendors who are hired to repair or remediate property
and who may fail to comply with environmental laws, health and safety laws and regulations and subject us to risk of legal exposure.
The costs of compliance, non-compliance, investigation, remediation, combating reputational harm or defending civil or criminal
proceedings, products liability, personal injury or other lawsuits could have a material adverse impact on our reputation, business,
financial position, results of operations and cash flows.
International, federal, state, provincial and local agencies regulate the disposal, handling and storage of waste, discharges
from our facilities and the investigation and clean-up of contaminated sites. We could incur significant costs, including investigation
and clean-up costs, fines, penalties and civil or criminal sanctions and claims by third parties for property damage and personal injury,
as a result of violations of, or liabilities under, these laws and regulations. In addition, potentially significant expenditures could be
required to comply with environmental, health and safety laws and regulations, including requirements that may be adopted or
imposed in the future.
On July 21, 2016, Terminix International USVI, LLC (“TMX USVI”) and The Terminix International Company Limited
Partnership (“TMX LP”), each an indirect, wholly-owned subsidiary of the Company, entered into a superseding Plea Agreement (the
“Superseding Plea Agreement”) in connection with the investigation initiated by the United States Department of Justice
Environmental Crimes Section (the “DOJ”) into allegations that a local Terminix branch used methyl bromide as a fumigant at a resort
in St. John, U.S. Virgin Islands. The Superseding Plea Agreement was intended to resolve four misdemeanor charges of violations of
the Federal Insecticide, Fungicide, and Rodenticide Act related to improper applications of methyl bromide. Those charges were set
forth in an Information, dated March 29, 2016, in the matter styled United States of America v. The Terminix International Company
Limited Partnership and Terminix International USVI, LLC. At a hearing held on August 25, 2016, the United States District Court of
the U.S. Virgin Islands (the “District Court”) rejected the Superseding Plea Agreement. On August 31, 2016, the DOJ requested that
the charges be dismissed, reserving its right to re-file the charges, in light of ongoing discussions to resolve the matter. The District
Court granted that request, and the March 29, 2016 Information was dismissed.
On January 20, 2017, TMX USVI and TMX LP entered into a new Plea Agreement (the “New Plea Agreement”) with the
DOJ, which has been filed with the District Court, and replaces the Superseding Plea Agreement. Under the New Plea Agreement,
TMX USVI and TMX LP have agreed to plead guilty to four misdemeanor charges of violations of the Federal Insecticide, Fungicide,
and Rodenticide Act related to improper applications of methyl bromide, as set forth in a new Information filed on January 20, 2017
with the District Court that is substantially similar to the March 29, 2016 Information. Under the terms of the New Plea
Agreement, the parties agree and jointly recommend to the District Court that (i) TMX USVI and TMX LP each pay a fine of $4
million (total of $8 million); (ii) TMX USVI pay $1 million to the EPA for costs incurred by the EPA for the response and clean-up of
the affected units at the resort in St. John; (iii) TMX USVI make a community service payment of $1 million to the National Fish and
Wildlife Foundation for the purpose of engaging a third party to provide training to pesticide applicators in the U.S. Virgin Islands;
and (iv) both TMX USVI and TMX LP serve a three-year probation period, subject to the special conditions of probation under the
New Plea Agreement. The total financial terms of the recommended sentence under the New Plea Agreement are equivalent in total
amount to the financial terms under the Superseding Plea Agreement. Unlike the Superseding Plea Agreement, however, the New
Plea Agreement is non-binding on the District Court. It is possible that the District Court could use its discretion to impose fines or
other terms different than those in the New Plea Agreement. If approved by the District Court, and upon compliance with the terms
and conditions of the New Plea Agreement, the New Plea Agreement will resolve the federal criminal consequences associated with
the DOJ investigation. The New Plea Agreement does not bind any other federal, state or local authority; however, the EPA has
indicated that it does not intend to initiate any administrative enforcement action or refer the matter to the DOJ for any civil
enforcement action if the New Plea Agreement is approved by the District Court.
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We have recorded within Fumigation related matters in the consolidated statement of operations and comprehensive income
We have recorded within Fumigation related matters in the consolidated statement of operations and comprehensive income
charges of $2 million and $8 million in the years ended December 31, 2016 and 2015, respectively, in connection with the
aforementioned criminal matter. The amount and extent of any further potential penalties, fines, sanctions, costs and damages that the
federal or other governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of
any additional civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S.
Virgin Islands matter, which could be material, is not currently known or reasonably estimable, and any such further penalties, fines,
sanctions, costs or damages would not be covered under our general liability insurance policies. On December 16, 2016, the U.S.
Virgin Islands Department of Justice filed a civil complaint in the Superior Court of the Virgin Islands related to the aforementioned
fumigation incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster Company, LLC, The
Terminix International Company Limited Partnership, and Terminix International USVI, LLC. We have not recorded any charge for
this new civil lawsuit.
impact the demand for our services.
Public perceptions that the products we use and the services we deliver are not environmentally friendly or safe may adversely
charges of $2 million and $8 million in the years ended December 31, 2016 and 2015, respectively, in connection with the
aforementioned criminal matter. The amount and extent of any further potential penalties, fines, sanctions, costs and damages that the
federal or other governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of
any additional civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S.
Virgin Islands matter, which could be material, is not currently known or reasonably estimable, and any such further penalties, fines,
sanctions, costs or damages would not be covered under our general liability insurance policies. On December 16, 2016, the U.S.
Virgin Islands Department of Justice filed a civil complaint in the Superior Court of the Virgin Islands related to the aforementioned
fumigation incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster Company, LLC, The
Terminix International Company Limited Partnership, and Terminix International USVI, LLC. We have not recorded any charge for
this new civil lawsuit.
Public perceptions that the products we use and the services we deliver are not environmentally friendly or safe may adversely
impact the demand for our services.
In providing our services, we use, among other things, pesticides and other chemicals. Public perception that the products we
use and the services we deliver are not environmentally friendly or safe or are harmful to humans or animals, whether justified or not,
or our improper application of these chemicals, could reduce demand for our services, increase regulation or government restrictions
or actions, result in fines or penalties, impair our reputation, involve us in litigation, damage our brand names and otherwise have a
material adverse impact on our business, financial position, results of operations and cash flows.
In providing our services, we use, among other things, pesticides and other chemicals. Public perception that the products we
use and the services we deliver are not environmentally friendly or safe or are harmful to humans or animals, whether justified or not,
or our improper application of these chemicals, could reduce demand for our services, increase regulation or government restrictions
or actions, result in fines or penalties, impair our reputation, involve us in litigation, damage our brand names and otherwise have a
material adverse impact on our business, financial position, results of operations and cash flows.
Laws and government regulations applicable to our businesses and lawsuits, enforcement actions and other claims by third parties
or governmental authorities could increase our legal and regulatory expenses, and impact our business, financial position, results
of operations and cash flows.
Laws and government regulations applicable to our businesses and lawsuits, enforcement actions and other claims by third parties
or governmental authorities could increase our legal and regulatory expenses, and impact our business, financial position, results
of operations and cash flows.
Our businesses are subject to significant international, federal, state, provincial and local laws and regulations. These laws
Our businesses are subject to significant international, federal, state, provincial and local laws and regulations. These laws
and regulations include laws relating to consumer protection, wage and hour requirements, franchising, the employment of
immigrants, labor relations, permitting and licensing, building code requirements, workers’ safety, the environment, insurance and
home warranties, employee benefits, marketing (including, without limitation, telemarketing) and advertising, the application and use
of pesticides and other chemicals. In particular, we anticipate that various international, federal, state, provincial and local governing
bodies may propose additional legislation and regulation that may be detrimental to our business or may substantially increase our
operating costs, including increases in the minimum wage; environmental regulations related to chemical use, climate change,
equipment efficiency standards, refrigerant production and use and other environmental matters; other consumer protection laws or
regulations; health care coverage; or “do-not-knock,” “do-not-mail,” “do-not-leave” or other marketing regulations. It is difficult to
predict the future impact of the broad and expanding legislative and regulatory requirements affecting our businesses and changes to
such requirements may adversely affect our business, financial position, results of operations and cash flows. In addition, if we were to
fail to comply with any applicable law or regulation, we could be subject to substantial fines or damages, be involved in lawsuits,
enforcement actions and other claims by third parties or governmental authorities, suffer losses to our reputation, suffer the loss of
licenses or incur penalties that may affect how our business is operated, which, in turn, could have a material adverse impact on our
business, financial position, results of operations and cash flows.
and regulations include laws relating to consumer protection, wage and hour requirements, franchising, the employment of
immigrants, labor relations, permitting and licensing, building code requirements, workers’ safety, the environment, insurance and
home warranties, employee benefits, marketing (including, without limitation, telemarketing) and advertising, the application and use
of pesticides and other chemicals. In particular, we anticipate that various international, federal, state, provincial and local governing
bodies may propose additional legislation and regulation that may be detrimental to our business or may substantially increase our
operating costs, including increases in the minimum wage; environmental regulations related to chemical use, climate change,
equipment efficiency standards, refrigerant production and use and other environmental matters; other consumer protection laws or
regulations; health care coverage; or “do-not-knock,” “do-not-mail,” “do-not-leave” or other marketing regulations. It is difficult to
predict the future impact of the broad and expanding legislative and regulatory requirements affecting our businesses and changes to
such requirements may adversely affect our business, financial position, results of operations and cash flows. In addition, if we were to
fail to comply with any applicable law or regulation, we could be subject to substantial fines or damages, be involved in lawsuits,
enforcement actions and other claims by third parties or governmental authorities, suffer losses to our reputation, suffer the loss of
licenses or incur penalties that may affect how our business is operated, which, in turn, could have a material adverse impact on our
business, financial position, results of operations and cash flows.
Our franchisees, subcontractors, third-party distributors and vendors could take actions that could harm our business.
Our franchisees, subcontractors, third-party distributors and vendors could take actions that could harm our business.
For the years ended December 31, 2016 and 2015, $135 million and $132 million, respectively, of our consolidated revenue
For the years ended December 31, 2016 and 2015, $135 million and $132 million, respectively, of our consolidated revenue
was received in the form of franchise revenues. Accordingly, our financial results are dependent in part upon the operational and
financial success of our franchisees. Our franchisees, subcontractors, third-party distributors and vendors are contractually obligated to
operate their businesses in accordance with the standards set forth in our agreements with them. Each franchising brand also provides
training and support to franchisees. However, franchisees, subcontractors, third-party distributors and vendors are independent third
parties that we do not control, and who own, operate and oversee the daily operations of their businesses. As a result, the ultimate
success of any franchise operation rests with the franchisee. If franchisees do not successfully operate their businesses in a manner
consistent with required standards, royalty payments to us will be adversely affected and our brands’ image and reputation could be
harmed, which in turn could adversely impact our business, financial position, results of operations and cash flows. Similarly, if
third-party distributors, subcontractors, vendors and franchisees do not successfully operate their businesses in a manner consistent
with required laws, standards and regulations, we could be subject to claims from regulators or legal claims for the actions or
omissions of such third-party distributors, subcontractors, vendors and franchisees. In addition, our relationship with our franchisees,
third-party distributors, subcontractors and vendors could become strained (including resulting in litigation) as we impose new
standards or assert more rigorous enforcement practices of the existing required standards. These strains in our relationships or claims
could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.
was received in the form of franchise revenues. Accordingly, our financial results are dependent in part upon the operational and
financial success of our franchisees. Our franchisees, subcontractors, third-party distributors and vendors are contractually obligated to
operate their businesses in accordance with the standards set forth in our agreements with them. Each franchising brand also provides
training and support to franchisees. However, franchisees, subcontractors, third-party distributors and vendors are independent third
parties that we do not control, and who own, operate and oversee the daily operations of their businesses. As a result, the ultimate
success of any franchise operation rests with the franchisee. If franchisees do not successfully operate their businesses in a manner
consistent with required standards, royalty payments to us will be adversely affected and our brands’ image and reputation could be
harmed, which in turn could adversely impact our business, financial position, results of operations and cash flows. Similarly, if
third-party distributors, subcontractors, vendors and franchisees do not successfully operate their businesses in a manner consistent
with required laws, standards and regulations, we could be subject to claims from regulators or legal claims for the actions or
omissions of such third-party distributors, subcontractors, vendors and franchisees. In addition, our relationship with our franchisees,
third-party distributors, subcontractors and vendors could become strained (including resulting in litigation) as we impose new
standards or assert more rigorous enforcement practices of the existing required standards. These strains in our relationships or claims
could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.
From time to time, we receive communications from our franchisees regarding complaints, disputes or questions about our
From time to time, we receive communications from our franchisees regarding complaints, disputes or questions about our
practices and standards in relation to our franchised operations and certain economic terms of our franchise arrangements. If
franchisees or groups representing franchisees were to bring legal proceedings against us, we would vigorously defend against the
claims in any such proceeding, but our reputation, business, financial position, results of operations and cash flows could be materially
adversely impacted and the price of our common stock could decline.
practices and standards in relation to our franchised operations and certain economic terms of our franchise arrangements. If
franchisees or groups representing franchisees were to bring legal proceedings against us, we would vigorously defend against the
claims in any such proceeding, but our reputation, business, financial position, results of operations and cash flows could be materially
adversely impacted and the price of our common stock could decline.
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Disruptions or failures in our information technology systems could create liability for us or limit our ability to effectively monitor,
operate and control our operations and adversely impact our reputation, business, financial position, results of operations and
cash flows.
Our information technology systems facilitate our ability to monitor, operate and control our operations. Changes or
modifications to our information technology systems could cause disruption to our operations or cause challenges with respect to our
compliance with laws, regulations or other applicable standards. As the development and implementation of our information
technology systems (including our operating systems) evolve, we may elect to modify, replace or abandon certain technology
initiatives, which could result in write-downs.
Any disruption in our information technology systems, including capacity limitations, instabilities, or failure to operate as
expected, could, depending on the magnitude of the problem, adversely impact our business, financial position, results of operations
and cash flows, including by limiting our capacity to monitor, operate and control our operations effectively. Failures of our
information technology systems could also lead to violations of privacy laws, regulations, trade guidelines or practices related to our
customers and associates. If our disaster recovery plans do not work as anticipated, or if the third-party vendors to which we have
outsourced certain information technology, contact center or other services fail to fulfill their obligations to us, our operations may be
adversely impacted, and any of these circumstances could adversely impact our reputation, business, financial position, results of
operations and cash flows.
Changes in the services we deliver or the products we use could impact our reputation, business, financial position, results of
operations and cash flows and our future plans.
Our financial performance is affected by changes in the services and products we offer our customers. There can be no
assurance that our new strategies or product offerings will succeed in increasing revenue and growing profitability. An unsuccessful
execution of new strategies, including the rollout or adjustment of our new services or products or sales and marketing plans, could
cause us to re-evaluate or change our business strategies and could have a material adverse impact on our reputation, business,
financial position, results of operations and cash flows and our future plans.
If we fail to protect the security of personal information about our customers, associates and third parties, we could be subject to
interruption of our business operations, private litigation, reputational damage and costly penalties.
We rely on, among other things, commercially available systems, software, tools and monitoring to provide security for
processing, transmission and storage of confidential information of customers, associates and third parties, such as payment card and
personal information. The systems currently used for transmission and approval of payment card transactions, and the technology
utilized in payment cards themselves, all of which can put payment card data at risk, are central to meeting standards set by the
payment card industry (“PCI”). We continue to evaluate and modify our systems and protocols for PCI compliance purposes, and such
PCI standards may change from time to time. Activities by third parties, advances in computer and software capabilities and
encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach
of our systems. Any compromises, breaches or errors in applications related to our systems or failures to comply with standards set by
the PCI could cause damage to our reputation and interruptions in our operations, including our customers’ ability to pay for our
services and products by credit card or their willingness to purchase our services and products and could result in a violation of
applicable laws, regulations, orders, industry standards or agreements and subject us to costs, penalties and liabilities which could
have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.
We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.
Our ability to compete effectively depends in part on our rights to service marks, trademarks, trade names and other
intellectual property rights we own or license, particularly our registered brand names, ServiceMaster, Terminix, American Home
Shield, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec. We have not sought to register
or protect every one of our marks either in the United States or in every country in which they are or may be used. Furthermore,
because of the differences in foreign trademark, patent and other intellectual property or proprietary rights laws, we may not receive
the same protection in other countries as we would in the United States. If we are unable to protect our proprietary information and
brand names, we could suffer a material adverse impact on our reputation, business, financial position, results of operations and cash
flows. Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend
against claims by third parties that our products, services or activities infringe their intellectual property rights.
Future acquisitions or other strategic transactions could negatively impact our reputation, business, financial position, results of
operations and cash flows.
We may pursue strategic transactions in the future, which could involve acquisitions or dispositions of businesses or assets.
Any future strategic transaction could involve integration or implementation challenges, business disruption or other risks, or change
our business profile significantly. Any inability on our part to consolidate and manage growth from acquired businesses or
successfully implement other strategic transactions could have an adverse impact on our reputation, business, financial position,
results of operations and cash flows. Any acquisition that we make may not provide us with the benefits that were anticipated when
entering into such acquisition. The process of integrating an acquired business may create unforeseen difficulties and expenses,
including the diversion of resources needed to integrate new businesses, technologies, products, personnel or systems; the inability to
retain associates, customers and suppliers; the assumption of actual or contingent liabilities (including those relating to the
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environment); failure to effectively and timely adopt and adhere to our internal control processes and other policies; write-offs or
impairment charges relating to goodwill and other intangible assets; unanticipated liabilities relating to acquired businesses; and
potential expense associated with litigation with sellers of such businesses. Any future disposition transactions could also impact our
business and may subject us to various risks, including failure to obtain appropriate value for the disposed businesses, post-closing
claims being levied against us and disruption to our other businesses during the sale process or thereafter.
environment); failure to effectively and timely adopt and adhere to our internal control processes and other policies; write-offs or
impairment charges relating to goodwill and other intangible assets; unanticipated liabilities relating to acquired businesses; and
potential expense associated with litigation with sellers of such businesses. Any future disposition transactions could also impact our
business and may subject us to various risks, including failure to obtain appropriate value for the disposed businesses, post-closing
claims being levied against us and disruption to our other businesses during the sale process or thereafter.
We may be required to recognize additional impairment charges.
We may be required to recognize additional impairment charges.
In the first quarter of 2014, we incurred impairment charges with respect to fixed assets, and we have also incurred
impairment charges in the past in connection with our disposition activities. We have significant amounts of goodwill and intangible
assets, such as trade names. In accordance with applicable accounting standards, goodwill and indefinite-lived intangible assets are not
amortized and are subject to assessment for impairment by applying a fair-value based test annually, or more frequently if there are
indicators of impairment, including:
In the first quarter of 2014, we incurred impairment charges with respect to fixed assets, and we have also incurred
impairment charges in the past in connection with our disposition activities. We have significant amounts of goodwill and intangible
assets, such as trade names. In accordance with applicable accounting standards, goodwill and indefinite-lived intangible assets are not
amortized and are subject to assessment for impairment by applying a fair-value based test annually, or more frequently if there are
indicators of impairment, including:
significant adverse changes in the business climate, including economic or financial conditions;
significant adverse changes in expected operating results;
adverse actions or assessments by regulators;
•
•
•
•
•
•
unanticipated competition;
loss of key personnel; and
disposed of.
a current expectation that it is more likely than not that a reporting unit or intangible asset will be sold or otherwise
•
•
•
•
•
•
significant adverse changes in the business climate, including economic or financial conditions;
significant adverse changes in expected operating results;
adverse actions or assessments by regulators;
unanticipated competition;
loss of key personnel; and
a current expectation that it is more likely than not that a reporting unit or intangible asset will be sold or otherwise
disposed of.
In February 2014, American Home Shield ceased efforts to deploy a new operating system that had been intended to improve
In February 2014, American Home Shield ceased efforts to deploy a new operating system that had been intended to improve
customer relationship management capabilities and enhance its operations. We recorded an impairment charge of $47 million in the
year ended December 31, 2014 relating to this decision.
customer relationship management capabilities and enhance its operations. We recorded an impairment charge of $47 million in the
year ended December 31, 2014 relating to this decision.
Based upon future economic and financial market conditions, the operating performance of our reporting units and other
Based upon future economic and financial market conditions, the operating performance of our reporting units and other
factors, including those listed above, we may incur impairment charges in the future. It is possible that such impairment, if required,
could be material. Any future impairment charges that we are required to record could have a material adverse impact on our results of
We are subject to various restrictive covenants that could adversely impact our business, financial position, results of operations
operations.
and cash flows.
factors, including those listed above, we may incur impairment charges in the future. It is possible that such impairment, if required,
could be material. Any future impairment charges that we are required to record could have a material adverse impact on our results of
operations.
We are subject to various restrictive covenants that could adversely impact our business, financial position, results of operations
and cash flows.
From time to time, we enter into noncompetition agreements or other restrictive covenants (e.g., exclusivity, take or pay and
From time to time, we enter into noncompetition agreements or other restrictive covenants (e.g., exclusivity, take or pay and
non-solicitation), including in connection with business dispositions or strategic contracts, that restrict us from entering into lines of
business or operating in certain geographic areas into which we may desire to expand our business. We also are subject to various
non-solicitation and no-hire covenants that may restrict our ability to solicit potential customers or associates. If we do not comply
with such restrictive covenants, or if a dispute arises regarding the scope and interpretation thereof, litigation could ensue, which could
have an adverse impact on our business, financial position, results of operations and cash flows. Further, to the extent that such
restrictive covenants prevent us from taking advantage of business opportunities, our business, financial position, results of operations
and cash flows may be adversely impacted.
non-solicitation), including in connection with business dispositions or strategic contracts, that restrict us from entering into lines of
business or operating in certain geographic areas into which we may desire to expand our business. We also are subject to various
non-solicitation and no-hire covenants that may restrict our ability to solicit potential customers or associates. If we do not comply
with such restrictive covenants, or if a dispute arises regarding the scope and interpretation thereof, litigation could ensue, which could
have an adverse impact on our business, financial position, results of operations and cash flows. Further, to the extent that such
restrictive covenants prevent us from taking advantage of business opportunities, our business, financial position, results of operations
and cash flows may be adversely impacted.
Our business process outsourcing initiatives have increased our reliance on third-party vendors and may expose our business to
harm upon the termination or disruption of our third-party vendor relationships.
Our business process outsourcing initiatives have increased our reliance on third-party vendors and may expose our business to
harm upon the termination or disruption of our third-party vendor relationships.
Our strategy to increase profitability, in part, by reducing our costs of operations includes the implementation of certain
Our strategy to increase profitability, in part, by reducing our costs of operations includes the implementation of certain
business process outsourcing initiatives. Any disruption, termination or substandard performance of these outsourced services,
including possible breaches by third-party vendors of their agreements with us, could adversely affect our brands, reputation, customer
relationships, financial position, results of operations and cash flows. Also, to the extent a third-party outsourcing provider
relationship is terminated, there is a risk of disputes or litigation and that we may not be able to enter into a similar agreement with an
alternate provider in a timely manner or on terms that we consider favorable, and even if we find an alternate provider, or choose to
insource such services, there are significant risks associated with any transitioning activities. In addition, to the extent we decide to
terminate outsourcing services and insource such services, there is a risk that we may not have the capabilities to perform these
services internally, resulting in a disruption to our business, which could adversely impact our reputation, business, financial position,
results of operations and cash flows. We could incur costs, including personnel and equipment costs, to insource previously
outsourced services like these, and these costs could adversely affect our results of operations and cash flows.
business process outsourcing initiatives. Any disruption, termination or substandard performance of these outsourced services,
including possible breaches by third-party vendors of their agreements with us, could adversely affect our brands, reputation, customer
relationships, financial position, results of operations and cash flows. Also, to the extent a third-party outsourcing provider
relationship is terminated, there is a risk of disputes or litigation and that we may not be able to enter into a similar agreement with an
alternate provider in a timely manner or on terms that we consider favorable, and even if we find an alternate provider, or choose to
insource such services, there are significant risks associated with any transitioning activities. In addition, to the extent we decide to
terminate outsourcing services and insource such services, there is a risk that we may not have the capabilities to perform these
services internally, resulting in a disruption to our business, which could adversely impact our reputation, business, financial position,
results of operations and cash flows. We could incur costs, including personnel and equipment costs, to insource previously
outsourced services like these, and these costs could adversely affect our results of operations and cash flows.
Our future success depends on our ability to attract, retain and maintain positive relations with trained workers and third-party
contractors.
Our future success depends on our ability to attract, retain and maintain positive relations with trained workers and third-party
contractors.
Our future success and financial performance depend substantially on our ability to attract, train and retain workers, attract
Our future success and financial performance depend substantially on our ability to attract, train and retain workers, attract
and retain third-party contractors and ensure third-party contractor compliance with our policies and standards. Our ability to conduct
our operations is in part impacted by our reliance on a network of third-party contractors. When a contractor relationship is terminated,
there is a risk that we may not be able to enter into a similar agreement with an alternate contractor in a timely manner or on terms that
we consider favorable. We could incur costs to transition to other contractors, and these costs could adversely affect our results of
operations and cash flows.
and retain third-party contractors and ensure third-party contractor compliance with our policies and standards. Our ability to conduct
our operations is in part impacted by our reliance on a network of third-party contractors. When a contractor relationship is terminated,
there is a risk that we may not be able to enter into a similar agreement with an alternate contractor in a timely manner or on terms that
we consider favorable. We could incur costs to transition to other contractors, and these costs could adversely affect our results of
operations and cash flows.
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Our ability to conduct our operations is in part impacted by our ability to increase our labor force, including on a seasonal
basis, which may be adversely impacted by a number of factors. In the event of a labor shortage, we could experience difficulty in
delivering our services in a high-quality or timely manner and could be forced to increase wages in order to attract and retain
associates, which would result in higher operating costs and reduced profitability. New decisions and rules by the National Labor
Relations Board, including “expedited elections” and restrictions on appeals, could lead to increased organizing activities at our
subsidiaries or franchisees. If these labor organizing activities were successful, it could further increase labor costs, decrease operating
efficiency and productivity in the future, or otherwise disrupt or negatively impact our operations. In addition, potential competition
from key associates who leave ServiceMaster could impact our ability to maintain our market segment share in certain geographic
areas.
Risks Related to Our Substantial Indebtedness
We have substantial indebtedness and may incur substantial additional indebtedness, which could adversely affect our financial
health and our ability to obtain financing in the future, react to changes in our business and satisfy our obligations.
As of December 31, 2016, we had approximately $2.8 billion of total long-term consolidated indebtedness outstanding.
As of December 31, 2016, there were $35 million of letters of credit outstanding and $265 million of available borrowing
capacity under the Revolving Credit Facility. In addition, we are able to incur additional indebtedness in the future, subject to the
limitations contained in the agreements governing our indebtedness. Our substantial indebtedness could have important consequences
to you. Because of our substantial indebtedness:
•
•
•
our ability to engage in acquisitions without raising additional equity or obtaining additional debt financing is limited;
our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service
requirements or general corporate purposes and our ability to satisfy our obligations with respect to our indebtedness
may be impaired in the future;
a large portion of our cash flow from operations must be dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available to us for other purposes;
• we are exposed to the risk of increased interest rates because a portion of our borrowings are or will be at variable rates
•
of interest;
it may be more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on, and
acceleration of, such indebtedness;
• we may be more vulnerable to general adverse economic and industry conditions;
• we may be at a competitive disadvantage compared to our competitors with proportionately less indebtedness or with
comparable indebtedness on more favorable terms and, as a result, they may be better positioned to withstand economic
downturns;
our ability to refinance indebtedness may be limited or the associated costs may increase;
our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited;
and
•
•
• we may be prevented from carrying out capital spending and restructurings that are necessary or important to our growth
strategy and efforts to improve operating margins of our businesses.
Increases in interest rates would increase the cost of servicing our indebtedness and could reduce our profitability.
A significant portion of our outstanding indebtedness, including indebtedness incurred under the Credit Facilities, bears
interest at variable rates. As a result, increases in interest rates would increase the cost of servicing our indebtedness and could
materially reduce our profitability and cash flows. As of December 31, 2016, each one percentage point change in interest rates would
result in an approximately $10 million change in the annual interest expense on the Term Loan Facility after considering the impact of
the effective interest rate swaps. Assuming all revolving loans were fully drawn as of December 31, 2016, each one percentage point
change in interest rates would result in an approximately $3 million change in annual interest expense on the Revolving Credit
Facility. The impact of increases in interest rates could be more significant for us than it would be for some other companies because
of our substantial indebtedness.
A lowering or withdrawal of the ratings, outlook or watch assigned to our debt securities by rating agencies may increase our
future borrowing costs and reduce our access to capital.
Our indebtedness currently has a non-investment grade rating, and any rating, outlook or watch assigned could be lowered or
withdrawn entirely by a rating agency if, in that rating agency’s judgment, current or future circumstances relating to the basis of the
rating, outlook or watch, such as adverse changes to our business, so warrant. Any future lowering of our ratings, outlook or watch
likely would make it more difficult or more expensive for us to obtain additional debt financing.
The agreements and instruments governing our indebtedness contain restrictions and limitations that could significantly impact
our ability to operate our business.
The Credit Facilities contain covenants that, among other things, restrict our ability to:
•
incur additional indebtedness (including guarantees of other indebtedness);
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•
•
•
•
•
•
investments and, in the case of the Revolving Credit Facility, make acquisitions;
prepay, repurchase or amend the terms of certain outstanding indebtedness;
enter into certain types of transactions with affiliates;
transfer or sell assets;
create liens;
• merge, consolidate or sell all or substantially all of our assets; and
enter into agreements restricting dividends or other distributions by our subsidiaries.
receive dividends from certain of our subsidiaries, redeem stock or make other restricted payments, including
•
receive dividends from certain of our subsidiaries, redeem stock or make other restricted payments, including
investments and, in the case of the Revolving Credit Facility, make acquisitions;
prepay, repurchase or amend the terms of certain outstanding indebtedness;
enter into certain types of transactions with affiliates;
transfer or sell assets;
create liens;
•
•
•
•
• merge, consolidate or sell all or substantially all of our assets; and
•
enter into agreements restricting dividends or other distributions by our subsidiaries.
The restrictions in the agreements governing the Credit Facilities and the instruments governing our other indebtedness may
prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to execute
our business strategy successfully or effectively compete with companies that are not similarly restricted. We may also incur future
debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. We
may be unable to refinance our indebtedness, at maturity or otherwise, on terms acceptable to us, or at all.
The restrictions in the agreements governing the Credit Facilities and the instruments governing our other indebtedness may
prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to execute
our business strategy successfully or effectively compete with companies that are not similarly restricted. We may also incur future
debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. We
may be unable to refinance our indebtedness, at maturity or otherwise, on terms acceptable to us, or at all.
Our ability to comply with the covenants and restrictions contained in the agreements governing the Credit Facilities and the
Our ability to comply with the covenants and restrictions contained in the agreements governing the Credit Facilities and the
instruments governing our other indebtedness may be affected by economic, financial and industry conditions beyond our control
including credit or capital market disruptions. The breach of any of these covenants or restrictions could result in a default that would
permit the applicable lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid
interest. If we are unable to repay indebtedness, lenders having secured obligations, such as the lenders under the Credit Facilities,
could proceed against the collateral securing the indebtedness. In any such case, we may be unable to borrow under the Credit
Facilities and may not be able to repay the amounts due under such facilities or our other outstanding indebtedness. This could have
serious consequences to our financial position and results of operations and could cause us to become bankrupt or insolvent.
instruments governing our other indebtedness may be affected by economic, financial and industry conditions beyond our control
including credit or capital market disruptions. The breach of any of these covenants or restrictions could result in a default that would
permit the applicable lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid
interest. If we are unable to repay indebtedness, lenders having secured obligations, such as the lenders under the Credit Facilities,
could proceed against the collateral securing the indebtedness. In any such case, we may be unable to borrow under the Credit
Facilities and may not be able to repay the amounts due under such facilities or our other outstanding indebtedness. This could have
serious consequences to our financial position and results of operations and could cause us to become bankrupt or insolvent.
Our ability to generate the significant amount of cash needed to pay interest and principal on our indebtedness and our ability to
refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.
Our ability to generate the significant amount of cash needed to pay interest and principal on our indebtedness and our ability to
refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.
We are a holding company, and as such we have no independent operations or material assets other than ownership of equity
We are a holding company, and as such we 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. Our ability to make scheduled payments on, or to refinance our
obligations under, our indebtedness depends on the financial and operating performance of our subsidiaries and their ability to make
distributions and dividends to us, which, in turn, depends on their results of operations, cash flows, cash requirements, financial
position and general business conditions and any legal and regulatory restrictions on the payment of dividends to which they may be
subject, many of which may be beyond our control.
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. Our ability to make scheduled payments on, or to refinance our
obligations under, our indebtedness depends on the financial and operating performance of our subsidiaries and their ability to make
distributions and dividends to us, which, in turn, depends on their results of operations, cash flows, cash requirements, financial
position and general business conditions and any legal and regulatory restrictions on the payment of dividends to which they may be
subject, many of which may be beyond our control.
There are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. If we cannot receive
There are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. If we cannot receive
sufficient distributions from our subsidiaries, we may not be able to meet our obligations to fund general corporate expenses or service
our debt obligations. These restrictions are related to regulatory requirements at American Home Shield and to a subsidiary borrowing
arrangement at ServiceMaster Acceptance Company Limited Partnership (“SMAC”). The payment of ordinary and extraordinary
dividends by our home warranty and similar subsidiaries (through which we conduct our American Home Shield business) are subject
to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws
and regulations require certain such subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of
ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. As of December 31, 2016, the total net
assets subject to these third-party restrictions was $173 million. Such limitations are expected to be in effect for the foreseeable future.
sufficient distributions from our subsidiaries, we may not be able to meet our obligations to fund general corporate expenses or service
our debt obligations. These restrictions are related to regulatory requirements at American Home Shield and to a subsidiary borrowing
arrangement at ServiceMaster Acceptance Company Limited Partnership (“SMAC”). The payment of ordinary and extraordinary
dividends by our home warranty and similar subsidiaries (through which we conduct our American Home Shield business) are subject
to significant regulatory restrictions under the laws and regulations of the states in which they operate. Among other things, such laws
and regulations require certain such subsidiaries to maintain minimum capital and net worth requirements and may limit the amount of
ordinary and extraordinary dividends and other payments that these subsidiaries can pay to us. As of December 31, 2016, the total net
assets subject to these third-party restrictions was $173 million. Such limitations are expected to be in effect for the foreseeable future.
We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and
We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and
interest on our indebtedness. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be
forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure our indebtedness. In
the future, our cash flow and capital resources may not be sufficient for payments of interest on and principal of our indebtedness, and
such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
interest on our indebtedness. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be
forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure our indebtedness. In
the future, our cash flow and capital resources may not be sufficient for payments of interest on and principal of our indebtedness, and
such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
The $1,628 million of outstanding borrowings under the Term Loan Facility as of December 31, 2016, after including the
The $1,628 million of outstanding borrowings under the Term Loan Facility as of December 31, 2016, after including the
unamortized original issue discount paid and unamortized debt issuance costs, have a maturity date of November 8, 2023. The
Revolving Credit Facility is scheduled to mature on November 8, 2021. We may be unable to refinance any of our indebtedness or
obtain additional financing, particularly because of our high levels of indebtedness. Market disruptions, such as those experienced in
2008 and 2009, as well as our significant indebtedness levels, may increase our cost of borrowing or adversely affect our ability to
refinance our obligations as they become due. If we are unable to refinance our indebtedness or access additional credit, or if short-
term or long-term borrowing costs dramatically increase, our ability to finance current operations and meet our short term and long
term obligations could be adversely affected.
unamortized original issue discount paid and unamortized debt issuance costs, have a maturity date of November 8, 2023. The
Revolving Credit Facility is scheduled to mature on November 8, 2021. We may be unable to refinance any of our indebtedness or
obtain additional financing, particularly because of our high levels of indebtedness. Market disruptions, such as those experienced in
2008 and 2009, as well as our significant indebtedness levels, may increase our cost of borrowing or adversely affect our ability to
refinance our obligations as they become due. If we are unable to refinance our indebtedness or access additional credit, or if short-
term or long-term borrowing costs dramatically increase, our ability to finance current operations and meet our short term and long
term obligations could be adversely affected.
If we cannot make scheduled payments on our indebtedness, we will be in default, the lenders under the Credit Facilities
If we cannot make scheduled payments on our indebtedness, we will be in default, the lenders under the Credit Facilities
could terminate their commitments to loan money, the secured lenders could foreclose against the assets securing their borrowings and
we could be forced into bankruptcy or liquidation.
could terminate their commitments to loan money, the secured lenders could foreclose against the assets securing their borrowings and
we could be forced into bankruptcy or liquidation.
Despite our indebtedness levels, we and our subsidiaries may be able to incur substantially more indebtedness. This could further
exacerbate the risks associated with our substantial indebtedness.
Despite our indebtedness levels, we and our subsidiaries may be able to incur substantially more indebtedness. This could further
exacerbate the risks associated with our substantial indebtedness.
2016 Annual Report 36
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We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the instruments
governing our indebtedness do not prohibit us or fully prohibit our subsidiaries from doing so. The Credit Facilities permit additional
borrowings beyond the committed amounts under certain circumstances. If new indebtedness is added to our current indebtedness
levels, the related risks we face would increase, and we may not be able to meet all of our debt obligations.
Risks Related to Our Common Stock
ServiceMaster is a holding company with no operations of its own, and it depends on its subsidiaries for cash to fund all of its
operations and expenses, including to make future dividend payments, if any.
ServiceMaster’s operations are conducted entirely through our subsidiaries, and our ability to generate cash to fund our
operations and expenses, to pay dividends or to meet debt service obligations is highly dependent on the earnings and the receipt of
funds from our subsidiaries through dividends or intercompany loans. Deterioration in the financial condition, earnings or cash flow of
our subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, to the extent that
ServiceMaster needs funds, and its subsidiaries are restricted from making such distributions under applicable law or regulation or
under the terms of our financing arrangements, or are otherwise unable to provide such funds, it could materially adversely affect our
business, financial condition, results of operations or prospects.
We do not currently expect to declare or pay dividends on our common stock for the foreseeable future. Payments of
dividends, if any, will be at the sole discretion of our board of directors after taking into account various factors, including general and
economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital
requirements, contractual, legal, tax and regulatory restrictions and implications of the payment of dividends by us to our stockholders
or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. In addition, Delaware law may impose
requirements that may restrict our ability to pay dividends to holders of our common stock. To the extent that we determine in the
future to pay dividends on our common stock, none of our subsidiaries will be obligated to make funds available to us for the payment
of dividends.
The market price of our common stock may be volatile and could decline.
The market price of our common stock may fluctuate significantly. Among the factors that could affect our stock price are:
•
•
•
•
•
•
•
•
•
industry or general market conditions;
domestic and international economic factors unrelated to our performance;
lawsuits, enforcement actions and other claims by third parties or governmental authorities;
changes in our customers’ preferences;
new regulatory pronouncements and changes in regulatory guidelines;
actual or anticipated fluctuations in our quarterly operating results;
changes in securities analysts’ estimates of our financial performance or lack of research coverage and reports by
industry analysts;
action by institutional stockholders or other large stockholders;
failure to meet any guidance given by us or any change in any guidance given by us, or changes by us in our guidance
practices;
announcements by us of significant impairment charges;
speculation in the press or investment community;
investor perception of us and our industry;
changes in market valuations or earnings of similar companies;
announcements by us or our competitors of significant contracts, acquisitions, dispositions or strategic partnerships;
•
•
•
•
•
• war, terrorist acts and epidemic disease;
•
•
any future sales of our common stock or other securities; and
additions or departures of key personnel.
The stock markets have experienced extreme volatility in recent years that has been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a company’s securities, class action litigation has often been instituted against the
affected company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management’s
attention and resources, which would harm our business, operating results and financial condition.
Future sales of shares by existing stockholders could cause our stock price to decline.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could
cause the market price of our common stock to decline. These sales, or the possibility that these sales may occur, also might make it
more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
In July 2014, we filed a registration statement on Form S-8 under the Securities Act to register the shares of common stock to
be issued under our equity compensation plans and, as a result, all shares of common stock acquired upon exercise of (i) stock options
granted under these plans and (ii) other equity based awards granted under the ServiceMaster Global Holdings, Inc. 2014 Omnibus
2016 Annual Report 37
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Incentive Plan (“Omnibus Incentive Plan”), including approximately 2.5 million shares of our common stock that have been sold in
the public market through the exercise of stock options as of December 31, 2016, are freely tradable under the Securities Act, unless
purchased by our affiliates. As of December 31, 2016, there were stock options outstanding to purchase a total of 3,155,344 shares of
our common stock, there were 439,134 shares of our common stock subject to restricted stock units and there were 109,881 shares of
our common stock subject to performance share units. In addition, 6,811,337 shares of our common stock are reserved for future
issuances under our Omnibus Incentive Plan.
Incentive Plan (“Omnibus Incentive Plan”), including approximately 2.5 million shares of our common stock that have been sold in
the public market through the exercise of stock options as of December 31, 2016, are freely tradable under the Securities Act, unless
purchased by our affiliates. As of December 31, 2016, there were stock options outstanding to purchase a total of 3,155,344 shares of
our common stock, there were 439,134 shares of our common stock subject to restricted stock units and there were 109,881 shares of
our common stock subject to performance share units. In addition, 6,811,337 shares of our common stock are reserved for future
issuances under our Omnibus Incentive Plan.
On February 24, 2015, our board of directors approved and recommended for approval by our stockholders the
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 is 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 ten 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 1,000,000 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. As of December 31, 2016, 895,635 shares of our common stock are reserved for future
issuances under the Employee Stock Purchase Plan.
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 is 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 ten 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 1,000,000 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. As of December 31, 2016, 895,635 shares of our common stock are reserved for future
issuances under the Employee Stock Purchase Plan.
In the future, we may issue additional shares of common stock or other equity or debt securities convertible into or
In the future, we may issue additional shares of common stock or other equity or debt securities convertible into or
exercisable or exchangeable for shares of our common stock in connection with a financing, acquisition, litigation settlement or
employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing stockholders and could
cause the trading price of our common stock to decline.
exercisable or exchangeable for shares of our common stock in connection with a financing, acquisition, litigation settlement or
employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing stockholders and could
cause the trading price of our common stock to decline.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our
stock price and trading volume could decline.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our
stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts that covers our common stock downgrades our stock or publishes
misleading or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts ceases
coverage of our common stock or fails to publish reports on us regularly, demand for our common stock could decrease, which could
cause our common stock price or trading volume to decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts that covers our common stock downgrades our stock or publishes
misleading or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts ceases
coverage of our common stock or fails to publish reports on us regularly, demand for our common stock could decrease, which could
cause our common stock price or trading volume to decline.
Future offerings of debt or equity securities which would rank senior to our common stock may adversely affect the market price
of our common stock.
Future offerings of debt or equity securities which would rank senior to our common stock may adversely affect the market price
of our common stock.
If, in the future, we decide to issue debt or equity securities that rank senior to our common stock, it is likely that such
securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally,
any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than
those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear
the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will
depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our
future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our
common stock and diluting the value of their stock holdings in us.
If, in the future, we decide to issue debt or equity securities that rank senior to our common stock, it is likely that such
securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally,
any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than
those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear
the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will
depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our
future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our
common stock and diluting the value of their stock holdings in us.
Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated by-laws could
discourage, delay or prevent a change of control of our company and may affect the trading price of our common stock.
Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated by-laws could
discourage, delay or prevent a change of control of our company and may affect the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated by-laws include a number of provisions that
Our amended and restated certificate of incorporation and amended and restated by-laws include a number of provisions that
may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For
example, our amended and restated certificate of incorporation and amended and restated by-laws collectively:
may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For
example, our amended and restated certificate of incorporation and amended and restated by-laws collectively:
•
•
•
•
•
•
•
•
authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a
takeover attempt;
provide for a classified board of directors, which divides our board of directors into three classes, with members of each
class serving staggered three-year terms, which prevents stockholders from electing an entirely new board of directors at
an annual meeting;
limit the ability of stockholders to remove directors;
provide that vacancies on our board of directors, including vacancies resulting from an enlargement of our board of
directors, may be filled only by a majority vote of directors then in office;
prohibit stockholders from calling special meetings of stockholders;
prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders;
establish advance notice requirements for nominations of candidates for election as directors or to bring other business
before an annual meeting of our stockholders; and
require the approval of holders of at least 662/3% of the outstanding shares of our common stock to amend our amended
and restated by-laws and certain provisions of our amended and restated certificate of incorporation.
•
•
•
•
•
•
•
•
authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a
takeover attempt;
provide for a classified board of directors, which divides our board of directors into three classes, with members of each
class serving staggered three-year terms, which prevents stockholders from electing an entirely new board of directors at
an annual meeting;
limit the ability of stockholders to remove directors;
provide that vacancies on our board of directors, including vacancies resulting from an enlargement of our board of
directors, may be filled only by a majority vote of directors then in office;
prohibit stockholders from calling special meetings of stockholders;
prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders;
establish advance notice requirements for nominations of candidates for election as directors or to bring other business
before an annual meeting of our stockholders; and
require the approval of holders of at least 662/3% of the outstanding shares of our common stock to amend our amended
and restated by-laws and certain provisions of our amended and restated certificate of incorporation.
2016 Annual Report 38
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These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our
common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions
may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts
in the future.
Our amended and restated certificate of incorporation and amended and restated by laws may also make it difficult for
stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter,
render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will
depend on appreciation in the price of our common stock.
We do not intend to declare and pay dividends on our common stock for the foreseeable future. We currently intend to use
our future earnings, if any, to repay debt, to repurchase shares of our common stock, to fund our growth, to develop our business and
for working capital needs and general corporate purposes. Therefore, you are not likely to receive any dividends on your common
stock for the foreseeable future, and the success of an investment in shares of our common stock will depend upon any future
appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price
at which our stockholders have purchased their shares. In addition, ServiceMaster’s operations are conducted almost entirely through
our subsidiaries. As such, to the extent that we determine in the future to pay dividends on our common stock, none of our subsidiaries
will be obligated to make funds available to ServiceMaster for the payment of dividends. Further, the agreements governing the Credit
Facilities may restrict the ability of our subsidiaries to pay dividends, make loans or otherwise transfer assets to us. In addition, the
payment of ordinary and extraordinary dividends by our subsidiaries that are regulated as insurance, home service, or similar
companies is subject to applicable state law limitations.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive
forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole
and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a
fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim
against us arising under the General Corporation Law of the State of Delaware or (iv) any action asserting a claim against us that is
governed by the internal affairs doctrine. By becoming a stockholder in our company, you will be deemed to have notice of and have
consented to the provisions of our amended and restated certificate of incorporation related to choice of forum. The choice of forum
provision in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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2016 Annual Report 39
ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our corporate headquarters and the headquarters for Terminix are located in leased premises at 860 Ridge Lake Boulevard,
Our corporate headquarters and the headquarters for Terminix are located in leased premises at 860 Ridge Lake Boulevard,
Memphis, Tennessee. The headquarters for American Home Shield and the Franchise Services Group are located in leased premises at
889 Ridge Lake Boulevard, Memphis, Tennessee. In 2016, we entered into an office lease agreement with Peabody Place Centre GP
that will result in the relocation of our corporate headquarters to 150 Peabody Place, Memphis, Tennessee at the end of 2017. In
addition, we lease space for call centers located at 6399 Shelby View Drive, Memphis, Tennessee and 7620 Appling Center Drive,
Memphis, Tennessee, offices located at 855 Ridge Lake Boulevard, Memphis, Tennessee, and a training facility located at 1650
Shelby Oaks Drive North, Memphis, Tennessee, and own offices at 3839 Forest Hill Irene Road, Memphis, Tennessee.
Memphis, Tennessee. The headquarters for American Home Shield and the Franchise Services Group are located in leased premises at
889 Ridge Lake Boulevard, Memphis, Tennessee. In 2016, we entered into an office lease agreement with Peabody Place Centre GP
that will result in the relocation of our corporate headquarters to 150 Peabody Place, Memphis, Tennessee at the end of 2017. In
addition, we lease space for call centers located at 6399 Shelby View Drive, Memphis, Tennessee and 7620 Appling Center Drive,
Memphis, Tennessee, offices located at 855 Ridge Lake Boulevard, Memphis, Tennessee, and a training facility located at 1650
Shelby Oaks Drive North, Memphis, Tennessee, and own offices at 3839 Forest Hill Irene Road, Memphis, Tennessee.
We and our operating companies own and lease a variety of facilities, principally in the United States, for branch and service
We and our operating companies own and lease a variety of facilities, principally in the United States, for branch and service
center operations and for office, storage, call center and data processing space. Our branches are strategically located to optimize route
efficiency, market coverage and branch overhead. The following table identifies the number of owned and leased facilities, other than
the headquarters properties listed above, used by each of our reportable segments as of December 31, 2016. We believe that these
facilities, when considered with the corporate headquarters, call center facilities, offices and training facilities described above, are
suitable and adequate to support the current needs of its business.
center operations and for office, storage, call center and data processing space. Our branches are strategically located to optimize route
efficiency, market coverage and branch overhead. The following table identifies the number of owned and leased facilities, other than
the headquarters properties listed above, used by each of our reportable segments as of December 31, 2016. We believe that these
facilities, when considered with the corporate headquarters, call center facilities, offices and training facilities described above, are
suitable and adequate to support the current needs of its business.
Reportable Segment
Terminix
American Home Shield
Franchise Services Group
ITEM 3. LEGAL PROCEEDINGS
Owned
Facilities
Leased
Facilities
18
1
—
328
6
5
Reportable Segment
Terminix
American Home Shield
Franchise Services Group
ITEM 3. LEGAL PROCEEDINGS
Owned
Facilities
Leased
Facilities
18
1
—
328
6
5
On July 21, 2016, TMX USVI and TMX LP, each an indirect, wholly-owned subsidiary of the Company, entered into the
Superseding Plea Agreement in connection with the investigation initiated by the DOJ into allegations that a local Terminix branch
used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands. The Superseding Plea Agreement was intended to
resolve four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act related to improper
applications of methyl bromide. Those charges were set forth in an Information, dated March 29, 2016, in the matter styled United
States of America v. The Terminix International Company Limited Partnership and Terminix International USVI, LLC. At a hearing
held on August 25, 2016, the District Court rejected the Superseding Plea Agreement. On August 31, 2016, the DOJ requested that
the charges be dismissed, reserving its right to re-file the charges, in light of ongoing discussions to resolve the matter. The District
Court granted that request, and the March 29, 2016 Information was dismissed.
On July 21, 2016, TMX USVI and TMX LP, each an indirect, wholly-owned subsidiary of the Company, entered into the
Superseding Plea Agreement in connection with the investigation initiated by the DOJ into allegations that a local Terminix branch
used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands. The Superseding Plea Agreement was intended to
resolve four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act related to improper
applications of methyl bromide. Those charges were set forth in an Information, dated March 29, 2016, in the matter styled United
States of America v. The Terminix International Company Limited Partnership and Terminix International USVI, LLC. At a hearing
held on August 25, 2016, the District Court rejected the Superseding Plea Agreement. On August 31, 2016, the DOJ requested that
the charges be dismissed, reserving its right to re-file the charges, in light of ongoing discussions to resolve the matter. The District
Court granted that request, and the March 29, 2016 Information was dismissed.
On January 20, 2017, TMX USVI and TMX LP entered into the New Plea Agreement with the DOJ, which has been filed
with the District Court, and replaces the Superseding Plea Agreement. Under the New Plea Agreement, TMX USVI and TMX LP
have agreed to plead guilty to four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act
related to improper applications of methyl bromide, as set forth in a new Information filed on January 20, 2017 with the District Court
that is substantially similar to the March 29, 2016 Information. Under the terms of the New Plea Agreement, the parties agree and
jointly recommend to the District Court that (i) TMX USVI and TMX LP each pay a fine of $4 million (total of $8 million); (ii) TMX
USVI pay $1 million to the EPA for costs incurred by the EPA for the response and clean-up of the affected units at the resort in St.
John; (iii) TMX USVI make a community service payment of $1 million to the National Fish and Wildlife Foundation for the purpose
of engaging a third party to provide training to pesticide applicators in the U.S. Virgin Islands; and (iv) both TMX USVI and TMX
LP serve a three-year probation period, subject to the special conditions of probation under the New Plea Agreement. The total
financial terms of the recommended sentence under the New Plea Agreement are equivalent in total amount to the financial terms
under the Superseding Plea Agreement. Unlike the Superseding Plea Agreement, however, the New Plea Agreement is non-binding
on the District Court. It is possible that the District Court could use its discretion to impose fines or other terms different than those in
the New Plea Agreement. If approved by the District Court, and upon compliance with the terms and conditions of the New Plea
Agreement, the New Plea Agreement will resolve the federal criminal consequences associated with the DOJ investigation. The New
Plea Agreement does not bind any other federal, state or local authority; however, the EPA has indicated that it does not intend to
initiate any administrative enforcement action or refer the matter to the DOJ for any civil enforcement action if the New Plea
Agreement is approved by the District Court.
On January 20, 2017, TMX USVI and TMX LP entered into the New Plea Agreement with the DOJ, which has been filed
with the District Court, and replaces the Superseding Plea Agreement. Under the New Plea Agreement, TMX USVI and TMX LP
have agreed to plead guilty to four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act
related to improper applications of methyl bromide, as set forth in a new Information filed on January 20, 2017 with the District Court
that is substantially similar to the March 29, 2016 Information. Under the terms of the New Plea Agreement, the parties agree and
jointly recommend to the District Court that (i) TMX USVI and TMX LP each pay a fine of $4 million (total of $8 million); (ii) TMX
USVI pay $1 million to the EPA for costs incurred by the EPA for the response and clean-up of the affected units at the resort in St.
John; (iii) TMX USVI make a community service payment of $1 million to the National Fish and Wildlife Foundation for the purpose
of engaging a third party to provide training to pesticide applicators in the U.S. Virgin Islands; and (iv) both TMX USVI and TMX
LP serve a three-year probation period, subject to the special conditions of probation under the New Plea Agreement. The total
financial terms of the recommended sentence under the New Plea Agreement are equivalent in total amount to the financial terms
under the Superseding Plea Agreement. Unlike the Superseding Plea Agreement, however, the New Plea Agreement is non-binding
on the District Court. It is possible that the District Court could use its discretion to impose fines or other terms different than those in
the New Plea Agreement. If approved by the District Court, and upon compliance with the terms and conditions of the New Plea
Agreement, the New Plea Agreement will resolve the federal criminal consequences associated with the DOJ investigation. The New
Plea Agreement does not bind any other federal, state or local authority; however, the EPA has indicated that it does not intend to
initiate any administrative enforcement action or refer the matter to the DOJ for any civil enforcement action if the New Plea
Agreement is approved by the District Court.
We have recorded within Fumigation related matters in the consolidated statement of operations and comprehensive income
We have recorded within Fumigation related matters in the consolidated statement of operations and comprehensive income
charges of $2 million and $8 million in the years ended December 31, 2016 and 2015, respectively, in connection with the
aforementioned criminal matter. The New Plea Agreement and the payments contemplated thereunder would not resolve any civil or
administrative claims for damages or other relief related to the U.S. Virgin Islands matter; however, we previously disclosed that we
have formalized the terms of the settlement agreement, which includes customary releases and confidentiality provisions, and a civil
court in Delaware has given the necessary approvals. Accordingly, the civil claims for all four members of the Delaware family
impacted are resolved. In the year ended December 31, 2016, we recorded within Fumigation related matters in the consolidated
statement of operations and comprehensive income a charge of $87 million in connection with the settlement agreement. In the year
ended December 31, 2015, we recorded within Cost of services rendered and products sold in the consolidated statement of operations
and comprehensive income a charge of $3 million in connection with the civil claims related to the U.S. Virgin Islands matter, which
is an amount equal to our insurance deductible under our general liability insurance policies.
charges of $2 million and $8 million in the years ended December 31, 2016 and 2015, respectively, in connection with the
aforementioned criminal matter. The New Plea Agreement and the payments contemplated thereunder would not resolve any civil or
administrative claims for damages or other relief related to the U.S. Virgin Islands matter; however, we previously disclosed that we
have formalized the terms of the settlement agreement, which includes customary releases and confidentiality provisions, and a civil
court in Delaware has given the necessary approvals. Accordingly, the civil claims for all four members of the Delaware family
impacted are resolved. In the year ended December 31, 2016, we recorded within Fumigation related matters in the consolidated
statement of operations and comprehensive income a charge of $87 million in connection with the settlement agreement. In the year
ended December 31, 2015, we recorded within Cost of services rendered and products sold in the consolidated statement of operations
and comprehensive income a charge of $3 million in connection with the civil claims related to the U.S. Virgin Islands matter, which
is an amount equal to our insurance deductible under our general liability insurance policies.
2016 Annual Report 40
2016 Annual Report 40
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The amount and extent of any further potential penalties, fines, sanctions, costs and damages that the federal or other
governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of any additional
civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S. Virgin Islands
matter, which could be material, is not currently known or reasonably estimable, and any such further penalties, fines, sanctions, costs
or damages would not be covered under our general liability insurance policies. On December 16, 2016, the U.S. Virgin Islands
Department of Justice filed a civil complaint in the Superior Court of the Virgin Islands related to the aforementioned fumigation
incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster Company, LLC, The Terminix
International Company Limited Partnership, and Terminix International USVI, LLC. We have not recorded any charge for this new
civil lawsuit.
On September 15, 2015, a lawsuit was filed in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County,
Florida, styled Carl Robert McCaughey, et al. v. Terminix International Company Limited Partnership, Sunland Pest Control
Services, Inc., et al. The lawsuit alleges that fumigation of a Florida family’s residence by Sunland, a subcontractor of TMX LP,
resulted in serious injuries to one of the family’s children. We have formalized the terms of a settlement agreement, which includes
customary releases and confidentiality provisions, and a civil court in Florida has given the necessary approvals. Accordingly, the civil
claims of the affected family related to the Florida fumigation matter are now resolved, and the case has been dismissed. Under the
terms of the settlement agreement, in addition to the amounts that our insurance carriers have agreed to pay to the family pursuant to
our general liability insurance policies, we have paid $3 million, an amount equal to our insurance deductible under our general
liability insurance policies. In the year ended December 31, 2016, we recorded within Cost of services rendered and products
sold in the consolidated statement of operations and comprehensive income a charge of $3 million in connection with the civil
claims related to the Florida fumigation matter.
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 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. If one or more of our settlements are not finally approved,
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 3 to the consolidated financial statements for more details.
ITEM 4. MINE SAFETY DISCLOSURES
None.
2701784_Text_1cPages.indd 25
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2016 Annual Report 41
PURCHASES OF EQUITY SECURITIES
Market Information
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
PART II
PART II
Our common stock is listed on the NYSE under the symbol ‘‘SERV.’’ Our common stock began trading on the NYSE on
Our common stock is listed on the NYSE under the symbol ‘‘SERV.’’ Our common stock began trading on the NYSE on
June 26, 2014. As of February 17, 2017, there were approximately 11 registered holders of our common stock.
June 26, 2014. As of February 17, 2017, there were approximately 11 registered holders of our common stock.
The following table sets forth the high and low sale prices per share of our common stock during 2016 and 2015 as reported
The following table sets forth the high and low sale prices per share of our common stock during 2016 and 2015 as reported
Market Information
on the NYSE:
2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sales Price
Low Sales Price
$ 42.21
$ 40.41
$ 41.49
$ 39.47
$ 36.95
$ 37.30
$ 38.90
$ 39.99
$ 34.36
$ 34.28
$ 33.28
$ 32.41
$ 25.98
$ 31.98
$ 32.10
$ 32.79
on the NYSE:
2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sales Price
Low Sales Price
$ 42.21
$ 40.41
$ 41.49
$ 39.47
$ 36.95
$ 37.30
$ 38.90
$ 39.99
$ 34.36
$ 34.28
$ 33.28
$ 32.41
$ 25.98
$ 31.98
$ 32.10
$ 32.79
The graph below presents our cumulative total shareholder returns relative to the performance of the Standard & Poor’s 500
The graph below presents our cumulative total shareholder returns relative to the performance of the Standard & Poor’s 500
Composite Stock Index and Standard & Poor’s 400 Consumer Services Index, commencing on June 26, 2014, our initial day of
trading. The graph assumes $100 invested at the opening price of our common stock on NYSE and each index on June 26, 2014.
Composite Stock Index and Standard & Poor’s 400 Consumer Services Index, commencing on June 26, 2014, our initial day of
trading. The graph assumes $100 invested at the opening price of our common stock on NYSE and each index on June 26, 2014.
Dividends
Dividends
We did not pay any cash dividends in 2015 or 2016. The spin-off of the TruGreen Business in 2014 was accomplished
We did not pay any cash dividends in 2015 or 2016. The spin-off of the TruGreen Business in 2014 was accomplished
through a tax-free, stock dividend. We do not intend to declare or pay dividends on our common stock for the foreseeable future. We
currently intend to use our future earnings, if any, to repay debt, to repurchase shares of our common stock, to fund our growth, to
develop our business and for working capital needs and general corporate purposes. Our ability to pay dividends to holders of our
common stock may be restricted by the Credit Facilities, insofar as we may seek to pay dividends out of funds made available to us by
our subsidiaries. Any future determination to pay dividends on our common stock is subject to the discretion of our board of directors
and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, capital
requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable
law, general business conditions and other factors that our board of directors may deem relevant. See “Liquidity—Limitations on
through a tax-free, stock dividend. We do not intend to declare or pay dividends on our common stock for the foreseeable future. We
currently intend to use our future earnings, if any, to repay debt, to repurchase shares of our common stock, to fund our growth, to
develop our business and for working capital needs and general corporate purposes. Our ability to pay dividends to holders of our
common stock may be restricted by the Credit Facilities, insofar as we may seek to pay dividends out of funds made available to us by
our subsidiaries. Any future determination to pay dividends on our common stock is subject to the discretion of our board of directors
and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, capital
requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable
law, general business conditions and other factors that our board of directors may deem relevant. See “Liquidity—Limitations on
2016 Annual Report 42
2016 Annual Report 42
2701784_Text_1cPages.indd 26
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Distributions and Dividends by Subsidiaries” for a description of the impact of our restrictions under our debt instruments on our
ability to pay dividends.
Share Repurchase Program
On February 23, 2016, our board of directors authorized a three-year share repurchase program, under which we may
repurchase up to $300 million of outstanding shares of our common stock. We expect to fund the share repurchases from net cash
provided from operating activities. The share repurchase program is part of our capital allocation strategy that focuses on sustainable
growth and maximizing shareholder value.
Issuer Purchases of Equity Securities
Total number of
shares purchased(1)
Average
price paid
per share
Total number of
shares purchased as
part of publicly
announced plans or
programs
Maximum dollar
value of shares
that may yet be
purchased under the
plans or programs
(in millions)
— $
$
$
461,174
960,770
— $
$
— $
$
$
224,772
224,772
1,646,716
—
36.04
37.19
—
35.57
—
35.57
36.65
— $
$
$
461,174
960,770
— $
$
— $
$
$
224,772
224,772
1,646,716
300
283
248
248
240
240
240
240
Period
Jan. 1, 2016 through Mar. 31, 2016
Apr. 1, 2016 through Jun. 30, 2016
Jul. 1, 2016 through Sep. 30, 2016
Fourth Quarter 2016:
Oct. 1, 2016 through Oct. 31, 2016
Nov. 1, 2016 through Nov. 30, 2016
Dec. 1, 2016 through Dec. 31, 2016
Oct. 1, 2016 through Dec. 31, 2016
Total
___________________________________
(1)
All shares were acquired as part of our share repurchase program.
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2016 Annual Report 43
ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial data derived from our audited consolidated financial statements for each
The following table sets forth our selected financial data derived from our audited consolidated financial statements for each
of the periods indicated. The selected financial data presented below should be read in conjunction with Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes
included in Item 8 of this Annual Report on Form 10-K. Our consolidated financial information may not be indicative of our future
of the periods indicated. The selected financial data presented below should be read in conjunction with Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes
included in Item 8 of this Annual Report on Form 10-K. Our consolidated financial information may not be indicative of our future
performance.
performance.
Five-Year Financial Summary
(In millions, except per share data)
Operating Results:
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
401(k) Plan corrective contribution(1)
Fumigation related matters(2)
Insurance reserve adjustment(3)
Impairment of software and other related costs(4)
Consulting agreement termination fees(5)
Interest expense
Loss on extinguishment of debt(6)
Income (Loss) from continuing operations
Net Income (Loss)
Cash dividends per share
Weighted-average shares outstanding:
Basic
Diluted
Basic Earnings (Loss) Per Share -- Continuing Operations
Diluted Earnings (Loss) Per Share -- Continuing Operations
Financial Position (as of period end):
Total assets
Total long-term debt
Total shareholders' equity
Cash Flow Data:
Net cash provided from operating activities from continuing operations
$
325
$
Net cash used for investing activities from continuing operations
Net cash used for financing activities from continuing operations
(133)
(102)
398
(98)
(381)
Other Non-GAAP Financial Data:
Adjusted EBITDA(7)
Adjusted EBITDA Margin(8)
Free Cash Flow(9)
__________________________________
Year Ended December 31,
2016
2015
2014
2013
2012
2
9
—
—
—
—
23
93
23
711
691
669
666
1,220
1,448
1,298
1,375
$ 2,746
$ 2,457
$ 2,594
$ 2,293
$ 2,214
1,196
678
—
—
—
—
—
245
55
(18)
(714)
$ — $ — $ — $ — $ —
(507)
(57)
160
167
162
219
247
153
155
155
47
58
43
65
21
42
32
—
—
—
—
—
—
—
—
—
1
135.3
137.3
1.15
1.13
$
$
135.0
136.6
1.20
1.19
$
$
112.8
113.8
0.38
0.38
91.6
92.2
0.46
0.46
$ 5,386
$ 5,098
$ 5,028
$ 5,760
2,831
686
2,752
545
3,026
359
3,867
23
91.9
91.9
$ (0.20)
$ (0.20)
$ 6,269
3,882
535
289
(56)
(312)
557
274
208
(70)
(78)
450
169
$
$
$
144
(85)
(54)
413
18.7 %
100
$
$
667
270
$
$
622
358
24.3 %
24.0 %
22.7 %
19.6 %
$
$
$
$
$
$
$
$
$
$
Five-Year Financial Summary
(In millions, except per share data)
Operating Results:
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
401(k) Plan corrective contribution(1)
Fumigation related matters(2)
Insurance reserve adjustment(3)
Impairment of software and other related costs(4)
Consulting agreement termination fees(5)
Interest expense
Loss on extinguishment of debt(6)
Income (Loss) from continuing operations
Net Income (Loss)
Cash dividends per share
Weighted-average shares outstanding:
Basic
Diluted
Basic Earnings (Loss) Per Share -- Continuing Operations
Diluted Earnings (Loss) Per Share -- Continuing Operations
Financial Position (as of period end):
Total assets
Total long-term debt
Total shareholders' equity
Cash Flow Data:
Net cash provided from operating activities from continuing operations
Net cash used for investing activities from continuing operations
Net cash used for financing activities from continuing operations
Other Non-GAAP Financial Data:
Adjusted EBITDA(7)
Adjusted EBITDA Margin(8)
Free Cash Flow(9)
__________________________________
2016
Year Ended December 31,
2014
2015
2013
2012
$ 2,746
1,448
711
2
93
23
1
—
153
32
155
155
$ 2,214
1,196
678
—
—
—
—
—
245
55
(18)
(714)
$ — $ — $ — $ — $ —
$ 2,293
1,220
691
—
—
—
—
—
247
—
42
(507)
$ 2,457
1,298
669
—
—
—
47
21
219
65
43
(57)
$ 2,594
1,375
666
23
9
—
—
—
167
58
162
160
135.3
137.3
1.15
1.13
$
$
$ 5,386
2,831
686
135.0
136.6
1.20
1.19
$
$
$ 5,098
2,752
545
112.8
113.8
0.38
0.38
$
$
$ 5,028
3,026
359
91.6
92.2
0.46
0.46
$
$
91.9
91.9
$ (0.20)
$ (0.20)
$ 5,760
3,867
23
$ 6,269
3,882
535
$
$
$
325
(133)
(102)
$
398
(98)
(381)
$
289
(56)
(312)
$
208
(70)
(78)
$
144
(85)
(54)
667
24.3 %
270
$
$
622
24.0 %
358
$
$
557
22.7 %
274
$
$
450
19.6 %
169
$
$
413
18.7 %
100
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Represents costs related to the 401(k) Plan described in Note 11 to the consolidated financial statements.
Represents charges for fumigation related matters described in Note 9 to the consolidated financial statements.
(1)
(2)
Represents costs related to the 401(k) Plan described in Note 11 to the consolidated financial statements.
Represents charges for fumigation related matters described in Note 9 to the consolidated financial statements.
Represents an adjustment to the Company’s accrued self-insured claims related to automobile, general liability and workers’
(3)
compensation risk described in Note 9 to the consolidated financial statements.
Represents an adjustment to the Company’s accrued self-insured claims related to automobile, general liability and workers’
compensation risk described in Note 9 to the consolidated financial statements.
Represents the impairment of software and other related costs described in Note 2 to the consolidated financial statements.
Represents consulting agreement termination fees described in Note 10 to the consolidated financial statements.
For 2016, 2015 and 2014, represents a loss on extinguishment of debt as described in Note 12 to the consolidated financial
statements. For 2012, represents a loss on extinguishment of debt related to the redemption of the $996 million aggregate
principal amount of the then-existing 10.75% senior notes maturing in 2015 and repayment of $276 million of outstanding
borrowings under the then-existing term loan facility.
(4)
(5)
(6)
Represents the impairment of software and other related costs described in Note 2 to the consolidated financial statements.
Represents consulting agreement termination fees described in Note 10 to the consolidated financial statements.
For 2016, 2015 and 2014, represents a loss on extinguishment of debt as described in Note 12 to the consolidated financial
statements. For 2012, represents a loss on extinguishment of debt related to the redemption of the $996 million aggregate
principal amount of the then-existing 10.75% senior notes maturing in 2015 and repayment of $276 million of outstanding
borrowings under the then-existing term loan facility.
We use Adjusted EBITDA to facilitate operating performance comparisons from period to period. Adjusted EBITDA is a
supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA
is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income
(7)
We use Adjusted EBITDA to facilitate operating performance comparisons from period to period. Adjusted EBITDA is a
supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA
is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income
2016 Annual Report 44
2016 Annual Report 44
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or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating
activities or any other measures of our cash flow or liquidity. Adjusted EBITDA means net income (loss) before: loss from
discontinued operations, net of income taxes; provision (benefit) for income taxes; loss on extinguishment of debt; interest
expense; depreciation and amortization expense; 401(k) Plan corrective contribution; fumigation related matters; insurance
reserve adjustment; non-cash stock-based compensation expense; restructuring charges; gain on sale of Merry Maids
branches; non-cash impairment of software and other related costs; non-cash impairment of property and equipment;
management and consulting fees; consulting agreement termination fees; and other non-operating expenses.
We believe Adjusted EBITDA facilitates company-to-company operating performance comparisons by excluding potential
differences caused by variations in capital structures (affecting net interest income and expense), taxation, the age and book
depreciation of facilities and equipment (affecting relative depreciation expense), restructuring initiatives, consulting
agreements and equity-based, long-term incentive plans, which may vary for different companies for reasons unrelated to
operating performance.
Adjusted EBITDA is not necessarily comparable to other similarly titled financial measures of other companies due to the
potential inconsistencies in the methods of calculation.
Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for
analyzing our results as reported under GAAP. Some of these limitations are:
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
• Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or
principal payments on our debt;
• Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;
• Adjusted EBITDA does not reflect historical capital expenditures or future requirements for capital expenditures or
contractual commitments;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have
to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
• Other companies in our industries may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative
measure.
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2016 Annual Report 45
The following table sets forth Adjusted EBITDA for each of our reportable segments and Corporate and reconciles total
Adjusted EBITDA to Net Income (Loss) for the periods presented, which we consider to be the most directly comparable
GAAP financial measure:
The following table sets forth Adjusted EBITDA for each of our reportable segments and Corporate and reconciles total
Adjusted EBITDA to Net Income (Loss) for the periods presented, which we consider to be the most directly comparable
GAAP financial measure:
(In millions)
Adjusted EBITDA:
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Adjusted EBITDA
Corporate(a)
Total Adjusted EBITDA
Depreciation and amortization expense
401(k) Plan corrective contribution(b)
Fumigation related matters(c)
Insurance reserve adjustment(d)
Non-cash stock-based compensation expense(e)
Restructuring charges(f)
Gain on sale of Merry Maids branches(g)
Non-cash impairment of software and other related costs(h)
Non-cash impairment of property and equipment(i)
Management and consulting fees(j)
Consulting agreement termination fees(k)
Loss from discontinued operations, net of income taxes(l)
(Provision) benefit for income taxes
Loss on extinguishment of debt(m)
Interest expense
Other non-operating expenses(n)
Net Income (Loss)
____________________________________________________________________
(a) Represents unallocated corporate expenses.
Year Ended December 31,
2016
2015
2014
2013
2012
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
347
205
77
630
(9)
622
(84)
(23)
(9)
—
(10)
(5)
7
—
—
—
—
(2)
(107)
(58)
(167)
(3)
309
179
78
566
(9)
557
(100)
—
—
—
(8)
(11)
1
(47)
—
(4)
(21)
(100)
(40)
(65)
(219)
—
266
145
78
489
(39)
450
(99)
—
—
—
(4)
(6)
—
—
—
(7)
—
(549)
(43)
—
(247)
(2)
371
220
79
670
(3)
667
(94)
(2)
(93)
(23)
(13)
(17)
2
(1)
—
—
—
(1)
(85)
(32)
(153)
—
155
$
$
160
$
(57) $
(507) $
266
117
70
453
(40)
413
(100)
—
—
—
(7)
(15)
—
—
(9)
(7)
—
(696)
8
(55)
(245)
(1)
(714)
(In millions)
Adjusted EBITDA:
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Adjusted EBITDA
Corporate(a)
Total Adjusted EBITDA
Depreciation and amortization expense
401(k) Plan corrective contribution(b)
Fumigation related matters(c)
Insurance reserve adjustment(d)
Non-cash stock-based compensation expense(e)
Restructuring charges(f)
Gain on sale of Merry Maids branches(g)
Non-cash impairment of software and other related costs(h)
Non-cash impairment of property and equipment(i)
Management and consulting fees(j)
Consulting agreement termination fees(k)
Loss from discontinued operations, net of income taxes(l)
(Provision) benefit for income taxes
Loss on extinguishment of debt(m)
Interest expense
Other non-operating expenses(n)
Net Income (Loss)
____________________________________________________________________
(a) Represents unallocated corporate expenses.
2016
371
220
79
670
(3)
667
(94)
(2)
(93)
(23)
(13)
(17)
2
(1)
—
—
—
(1)
(85)
(32)
(153)
—
155
$
$
$
$
$
$
$
$
Year Ended December 31,
2014
2015
2013
347
205
77
630
(9)
622
(84)
(23)
(9)
—
(10)
(5)
7
—
—
—
—
(2)
(107)
(58)
(167)
(3)
160
$
$
$
$
$
$
$
309
179
78
566
(9)
557
(100)
—
—
—
(8)
(11)
1
(47)
—
(4)
(21)
(100)
(40)
(65)
(219)
—
(57) $
$
$
$
266
145
78
489
(39)
450
(99)
—
—
—
(4)
(6)
—
—
—
(7)
—
(549)
(43)
—
(247)
(2)
(507) $
2012
266
117
70
453
(40)
413
(100)
—
—
—
(7)
(15)
—
—
(9)
(7)
—
(696)
8
(55)
(245)
(1)
(714)
(b) Represents costs related to the 401(k) Plan described in Note 11 to the consolidated financial statements. We exclude
these charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we
believe doing so is useful to investors in aiding period-to-period comparability.
(b) Represents costs related to the 401(k) Plan described in Note 11 to the consolidated financial statements. We exclude
these charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we
believe doing so is useful to investors in aiding period-to-period comparability.
(c) Represents charges for fumigation related matters described in Note 9 to the consolidated financial statements. We
exclude these charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and
because we believe doing so is useful to investors in aiding period-to-period comparability.
(c) Represents charges for fumigation related matters described in Note 9 to the consolidated financial statements. We
exclude these charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and
because we believe doing so is useful to investors in aiding period-to-period comparability.
(d) Represents an adjustment to our accrued self-insured claims related to automobile, general liability and workers’
(d) Represents an adjustment to our accrued self-insured claims related to automobile, general liability and workers’
compensation risks. The adjustment is based on our detailed annual assessment of this actuarially determined accrual,
which we complete the second quarter of each year. This adjustment relates to coverage periods of 2015 and prior. We
have excluded this discrete second quarter 2016 adjustment from Adjusted EBITDA because we believe it does not
reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period
comparability. Adjustments to accrued self-insured claims related to this insurance program of $4 million, $9 million,
$13 million and $4 million in the years ended December 31, 2016, 2015, 2014 and 2013, respectively, were recorded as
charges in total Adjusted EBITDA, and an adjustment of $1 million in the year ended December 31, 2012 was recorded
as a credit in total Adjusted EBITDA.
compensation risks. The adjustment is based on our detailed annual assessment of this actuarially determined accrual,
which we complete the second quarter of each year. This adjustment relates to coverage periods of 2015 and prior. We
have excluded this discrete second quarter 2016 adjustment from Adjusted EBITDA because we believe it does not
reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period
comparability. Adjustments to accrued self-insured claims related to this insurance program of $4 million, $9 million,
$13 million and $4 million in the years ended December 31, 2016, 2015, 2014 and 2013, respectively, were recorded as
charges in total Adjusted EBITDA, and an adjustment of $1 million in the year ended December 31, 2012 was recorded
as a credit in total Adjusted EBITDA.
(e) Represents the non-cash expense of our equity-based compensation. We exclude this expense from Adjusted EBITDA
primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational
performance. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period
comparability.
(f) For 2016, 2015, and 2014, represents restructuring charges described in Note 8 to the consolidated financial statements.
For 2013 and 2012, represents restructuring charges related primarily to the impact of a branch optimization program at
Terminix, a reorganization of leadership at Franchise Services Group and an initiative to enhance capabilities and reduce
costs in our headquarters functions. We exclude these restructuring charges from Adjusted EBITDA because we believe
they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding
period-to-period comparability.
(e) Represents the non-cash expense of our equity-based compensation. We exclude this expense from Adjusted EBITDA
primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational
performance. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period
comparability.
(f) For 2016, 2015, and 2014, represents restructuring charges described in Note 8 to the consolidated financial statements.
For 2013 and 2012, represents restructuring charges related primarily to the impact of a branch optimization program at
Terminix, a reorganization of leadership at Franchise Services Group and an initiative to enhance capabilities and reduce
costs in our headquarters functions. We exclude these restructuring charges from Adjusted EBITDA because we believe
they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding
period-to-period comparability.
2016 Annual Report 46
2016 Annual Report 46
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(g) Represents the gain associated with the conversion of certain company-owned Merry Maids branches to franchises in
2014, 2015 and 2016 (the “branch conversions”).
(h) Represents the impairment of software and other related costs described in Note 2 to the consolidated financial
statements. We exclude non-cash impairments from Adjusted EBITDA because we believe doing so is useful to
investors in aiding period-to-period comparability.
(i) Represents a $3 million impairment of licensed intellectual property and a $1 million impairment of abandoned real
estate at Terminix, and a $4 million impairment of certain internally developed software at Merry Maids recorded in
2012. We exclude non-cash impairments of property and equipment from Adjusted EBITDA because we believe doing
so is useful to investors in aiding period-to-period comparability.
(j) Represents the amounts paid to certain of our Equity Sponsors under the consulting agreements described in Note 10 to
the consolidated financial statements. We exclude these amounts from Adjusted EBITDA primarily because they are not
reflective of ongoing operating results and because they are not used by management to assess ongoing operational
performance. In addition, we have excluded these amounts from Adjusted EBITDA because the consulting agreements
terminated in connection with our initial public offering.
(k) Represents the consulting agreement termination fees described in Note 10 to the consolidated financial statements. We
exclude these amounts from Adjusted EBITDA because we believe doing so is useful to investors in aiding period-to-
period comparability.
(l) Represents our loss in connection with the spin-off of TruGreen in 2014. See Note 7 to the consolidated financial
statements for further discussion of the spin-off of TruGreen. We exclude these amounts from Adjusted EBITDA
because these charges are not part of our ongoing operations and we believe doing so is useful to investors in aiding
period-to-period comparability.
(m) For 2016, 2015 and 2014, represents a loss on extinguishment of debt as described in Note 12 to the consolidated
financial statements. For 2012, represents a loss on extinguishment of debt related to the redemption of the $996 million
aggregate principal amount of the then-existing 10.75% senior notes maturing in 2015 and repayment of $276 million of
outstanding borrowings under the then-existing term loan facility. We believe excluding this expense from Adjusted
EBITDA is useful to investors in aiding period-to-period comparability.
(n) For 2015, primarily represents secondary offering expenses. We exclude these amounts from Adjusted EBITDA because
we believe doing so is useful to investors in aiding period-to-period comparability. For 2013 and 2012, represents certain
administrative expenses. We excluded these expenses from the calculation of Adjusted EBITDA in order to present
Adjusted EBITDA on a basis consistent with Adjusted EBITDA as reported in periods prior to our initial public offering,
which is familiar to holders of our indebtedness.
Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of revenue.
Free Cash Flow is not a measurement of our financial performance or liquidity under GAAP and does not purport to be an
alternative to net cash provided from operating activities from continuing operations or any other performance or liquidity
measures derived in accordance with GAAP. Free Cash Flow means (i) net cash provided from operating activities from
continuing operations before cash paid for consulting agreement termination fees; (ii) less property additions. Free Cash Flow
has limitations as an analytical tool and should not be considered in isolation or as a substitute for analyzing our results as
reported under GAAP. Other companies in our industries may calculate Free Cash Flow or similarly titled non-GAAP
financial measures differently, limiting its usefulness as a comparative measure.
Management believes Free Cash Flow is useful as a supplemental measure of our liquidity. Management uses Free Cash
Flow to facilitate company-to-company cash flow comparisons by removing payments for consulting agreement termination
fees, which may vary from company to company for reasons unrelated to operating performance.
The following table reconciles net cash provided from operating activities from continuing operations, which we consider to
be the most directly comparable GAAP measure, to Free Cash Flow using data derived from our consolidated financial
statements for the periods indicated:
(8)
(9)
(In millions)
Net Cash Provided from Operating Activities from
Continuing Operations
Cash paid for consulting agreement termination fees
Property additions
Free Cash Flow
Year Ended December 31,
2016
2015
2014
2013
2012
$
$
325
—
(56)
270
$
$
398
—
(40)
358
$
$
289
21
(35)
274
$
$
208
—
(39)
169
$
$
144
—
(44)
100
2701784_Text_1cPages.indd 31
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2016 Annual Report 47
OPERATIONS
Factors.”
Overview
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following information should be read in conjunction with Item 6 “Selected Financial Data” and the consolidated
The following information should be read in conjunction with Item 6 “Selected Financial Data” and the consolidated
financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. The following discussion may contain
forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors
discussed below and elsewhere in this report, particularly in “—Information Regarding Forward-Looking Statements” and “Risk
financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. The following discussion may contain
forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors
discussed below and elsewhere in this report, particularly in “—Information Regarding Forward-Looking Statements” and “Risk
Factors.”
Overview
Our core services include termite and pest control, home warranties, disaster restoration, janitorial, residential cleaning,
Our core services include termite and pest control, home warranties, disaster restoration, janitorial, residential cleaning,
cabinet and wood furniture repair and home inspection under the following leading brands: Terminix, American Home Shield,
ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec. Our operations for the periods presented
in this report are organized into three reportable segments: Terminix, American Home Shield and Franchise Services Group.
cabinet and wood furniture repair and home inspection under the following leading brands: Terminix, American Home Shield,
ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec. Our operations for the periods presented
in this report are organized into three reportable segments: Terminix, American Home Shield and Franchise Services Group.
Management Change
Management Change
On January 18, 2017, we announced that Senior Vice President and Chief Financial Officer Alan Haughie will retire in
On January 18, 2017, we announced that Senior Vice President and Chief Financial Officer Alan Haughie will retire in
March 2017, following the filing of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 10-K”). We
also announced that Anthony (Tony) DiLucente has joined the Company as a Senior Vice President and will assume the role of Chief
March 2017, following the filing of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 10-K”). We
also announced that Anthony (Tony) DiLucente has joined the Company as a Senior Vice President and will assume the role of Chief
Financial Officer after the filing of the 2016 10-K.
We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and
We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and
performance of the continuing operations of our businesses. These metrics include:
performance of the continuing operations of our businesses. These metrics include:
Key Business Metrics
•
•
•
•
•
•
•
•
revenue,
operating expenses,
net income (loss),
earnings (loss) per share,
Adjusted EBITDA,
organic revenue growth,
customer retention rates, and
customer counts growth.
Financial Officer after the filing of the 2016 10-K.
Key Business Metrics
•
•
•
•
•
•
•
•
revenue,
operating expenses,
net income (loss),
earnings (loss) per share,
Adjusted EBITDA,
organic revenue growth,
customer retention rates, and
customer counts growth.
To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges that
To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges that
management believes are not indicative of the earnings capabilities of our businesses. We also focus on measures designed to monitor
cash flow, including net cash provided from operating activities from continuing operations and free cash flow.
management believes are not indicative of the earnings capabilities of our businesses. We also focus on measures designed to monitor
cash flow, including net cash provided from operating activities from continuing operations and free cash flow.
Revenue. Our revenue results are primarily a function of the volume and pricing of the services and products provided to our
customers by our businesses as well as the mix of services and products provided across our businesses. The volume of our revenue in
Terminix and American Home Shield is impacted by new unit sales, the retention of our existing customers and acquisitions. We
expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions. Revenue
results in the Franchise Services Group are driven principally by royalty fees earned from our franchisees. We serve both residential
and commercial customers, principally in the United States. In 2016, approximately 98 percent of our revenue was generated by sales
in the United States.
Revenue. Our revenue results are primarily a function of the volume and pricing of the services and products provided to our
customers by our businesses as well as the mix of services and products provided across our businesses. The volume of our revenue in
Terminix and American Home Shield is impacted by new unit sales, the retention of our existing customers and acquisitions. We
expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions. Revenue
results in the Franchise Services Group are driven principally by royalty fees earned from our franchisees. We serve both residential
and commercial customers, principally in the United States. In 2016, approximately 98 percent of our revenue was generated by sales
in the United States.
Operating Expenses. In addition to the impact of changes in our revenue results, our operating results are affected by, among
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, raw materials, wages and salaries, employee benefits and health care, vehicles, contractor costs, self-insurance costs
and other insurance premiums, as well as various regulatory compliance costs.
other things, the level of our operating expenses. A number of our operating expenses are subject to inflationary pressures, such as
fuel, chemicals, raw materials, wages and salaries, employee benefits and health care, vehicles, contractor costs, self-insurance costs
and other insurance premiums, as well as various regulatory compliance costs.
We have historically hedged a significant portion of our annual fuel consumption. Fuel costs for 2016, after the impact of the
hedges and after adjusting for the impact of year-over-year changes in the number of gallons used, decreased $5 million compared to
2015, and 2015 decreased $5 million compared to 2014. Based upon current Department of Energy fuel price forecasts, as well as
hedges we have executed to date for 2017, we project that fuel prices for 2017 will decrease our fuel costs for 2017 by approximately
$4 million compared to 2016.
We have historically hedged a significant portion of our annual fuel consumption. Fuel costs for 2016, after the impact of the
hedges and after adjusting for the impact of year-over-year changes in the number of gallons used, decreased $5 million compared to
2015, and 2015 decreased $5 million compared to 2014. Based upon current Department of Energy fuel price forecasts, as well as
hedges we have executed to date for 2017, we project that fuel prices for 2017 will decrease our fuel costs for 2017 by approximately
$4 million compared to 2016.
After adjusting for the impact of year-over-year changes in the number of covered employees, health care and related costs
for 2016 decreased approximately $6 million compared to 2015 while costs in 2015 were comparable to 2014. We expect our health
care costs in 2017 to increase approximately $5 million compared to 2016.
After adjusting for the impact of year-over-year changes in the number of covered employees, health care and related costs
for 2016 decreased approximately $6 million compared to 2015 while costs in 2015 were comparable to 2014. We expect our health
care costs in 2017 to increase approximately $5 million compared to 2016.
2016 Annual Report 48
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Net Income (Loss) and Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted-average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by
dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to
include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been
issued. The dilutive effect of stock options and RSUs are reflected in diluted net income (loss) per share by applying the treasury stock
method. The presentation of net income (loss) and earnings (loss) 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 (loss) before: loss from discontinued operations, net of income taxes; provision (benefit) for income
taxes; loss on extinguishment of debt; interest expense; depreciation and amortization expense; 401(k) Plan corrective contribution;
fumigation related matters; insurance reserve adjustment; non-cash stock-based compensation expense; restructuring charges; gain on
sale of Merry Maids branches; non-cash impairment of software and other related costs; non-cash impairment of property and
equipment; management and consulting fees; consulting agreement termination fees; and other non-operating expenses. We believe
Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating
performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book
depreciation of facilities and equipment, restructuring initiatives, consulting agreements and equity-based, long-term incentive plans.
Organic Revenue Growth. We evaluate organic revenue growth to track performance of the business, including the impacts
of sales, pricing, new service offerings and other growth initiatives. Organic revenue growth excludes revenue from acquired
customers for 12 months following the acquisition date.
Customer Retention Rates and Customer Counts Growth. Where applicable, we report our customer retention rates and
growth in customer counts in order to track the performance of the business. Customer counts represent our recurring customer base,
which includes customers with active contracts for recurring services. Retention rates are calculated as the ratio of ending customer
counts to the sum of beginning customer counts, new sales and acquired accounts for the applicable period. These measures are
presented on a rolling, 12-month basis in order to avoid seasonal anomalies. See “—Segment Review.”
Seasonality
We have seasonality in our business, which drives fluctuations in revenue and Adjusted EBITDA for interim periods. In
2016, approximately 22 percent, 27 percent, 28 percent and 23 percent of our revenue and approximately 19 percent, 30 percent,
29 percent and 22 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.
Effect of Weather Conditions
The demand for our services and our results of operations are also affected by weather conditions, including the seasonal
nature of our termite and pest control services, home inspection services and disaster restoration services. Weather conditions which
have a potentially unfavorable impact to our business include cooler temperatures or droughts which can impede the development of
termite swarms and lead to lower demand for our termite control services; and extreme temperatures which can lead to an increase in
service requests related to household systems. For example, in the third quarter of 2016, we experienced an increase in contract claims
cost at American Home Shield driven by a higher number of HVAC work orders driven by high temperatures. 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; mild winters or summers which can lead to lower household systems claim frequency; and severe storms which can
lead to an increase in demand for disaster restoration services.
Refinancing of Indebtedness
On November 8, 2016, we entered into a $1,650 million Term Loan Facility and a $300 million Revolving Credit Facility
and sold $750 million of 2024 Notes. On November 8, 2016, we used the net proceeds from the Term Loan Facility and the 2024
Notes to repay the remaining outstanding $2,356 million in aggregate principal amount of the $2,400 million Old Term Loan Facility.
In connection with the repayment, we recorded a loss on extinguishment of debt of $32 million in the year ended December 31, 2016,
which includes the write-off of $14 million of original issue discount and $18 million of debt issuance costs.
2701784_Text_1cPages.indd 33
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2016 Annual Report 49
53
26
1
1
—
—
—
—
—
—
6
—
2
53
27
2
—
—
—
2
1
—
—
9
—
3
53
26
1
—
3
1
—
—
1
—
6
—
1
Increase (Decrease)
2015 vs.
2016 vs.
2014
2015
% of Revenue
2016
2015
2014
6 %
5
7
(13)
*
*
*
*
*
*
*
(8)
(33)
*
(11)
(21)
*
(4)
*
(3)
6 % 100 % 100 % 100 %
6
—
(27)
*
*
*
*
*
*
*
(24)
29
*
Year Ended December 31,
% of Revenue
Increase (Decrease)
2016 vs.
2015 vs.
2016
2015
2014
$ 2,746
$ 2,594
$ 2,457
2015
6 %
2014
2016
2015
2014
6 % 100 % 100 % 100 %
53
27
2
—
—
—
2
1
—
—
9
—
3
3
2
—
2
$
(2)
160
$
(100)
(57)
$
6 %
6 %
(4)
(2)%
Results of Operations
(In millions)
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
Amortization expense
401(k) Plan corrective contribution
Fumigation related matters
Insurance reserve adjustment
Impairment of software and other related costs
Consulting agreement termination fees
Restructuring charges
Gain on sale of Merry Maids branches
Interest expense
Interest and net investment income
Loss on extinguishment of debt
Income from Continuing Operations before
Income Taxes
Provision for income taxes
Equity in losses of joint venture
Income from Continuing Operations
Loss from discontinued operations, net of
income taxes
Net Income (Loss)
___________________________________
*
not meaningful
Revenue
Year Ended December 31,
2016
$ 2,746
1,448
711
33
2
93
23
1
—
17
(2)
153
(6)
32
241
85
(1)
155
(1)
155
$
2015
$ 2,594
1,375
666
38
23
9
—
—
—
5
(7)
167
(9)
58
270
107
—
162
2014
$ 2,457
1,298
669
52
—
—
—
47
21
11
(1)
219
(7)
65
84
40
—
43
(2)
160
$
(100)
(57)
$
Cost of services rendered and products sold
Selling and administrative expenses
1,448
711
1,375
666
1,298
669
38
23
9
—
—
—
5
(7)
167
(9)
58
270
107
—
162
33
2
93
23
1
—
17
(2)
153
(6)
32
241
85
(1)
155
(1)
155
52
—
—
—
47
21
11
84
40
—
43
(1)
219
(7)
65
5
7
(13)
*
*
*
*
*
*
*
*
(8)
(33)
(11)
(21)
*
(4)
*
(3)
6
—
(27)
*
*
*
*
*
*
*
*
*
*
*
(24)
29
221
168
277
53
26
—
1
3
1
—
—
1
—
6
—
1
9
3
6
—
—
53
26
1
1
—
—
—
—
—
—
6
—
2
10
4
—
6
—
Results of Operations
(In millions)
Revenue
Amortization expense
401(k) Plan corrective contribution
Fumigation related matters
Insurance reserve adjustment
Impairment of software and other related costs
Consulting agreement termination fees
Restructuring charges
Gain on sale of Merry Maids branches
Interest expense
Interest and net investment income
Loss on extinguishment of debt
Income from Continuing Operations before
Income Taxes
Provision for income taxes
Equity in losses of joint venture
Income from Continuing Operations
Loss from discontinued operations, net of
___________________________________
income taxes
Net Income (Loss)
*
not meaningful
Revenue
(In millions)
Year Ended December 31, 2014
Pest Control(1)
Termite and Other Services(2)
Home Warranties(3)
Franchise-Related Revenue
Sale of Merry Maids branches(4)
Other
Year Ended December 31, 2015
Pest Control(1)
Termite and Other Services(2)
Home Warranties(3)
Franchise-Related Revenue
Sale of Merry Maids branches(4)
Other
We reported revenue of $2,746 million, $2,594 million and $2,457 million for the years ended December 31, 2016, 2015 and
We reported revenue of $2,746 million, $2,594 million and $2,457 million for the years ended December 31, 2016, 2015 and
2014, respectively. A summary of changes in revenue for each of our reportable segments and Corporate is included in the table
below. See “—Segment Review” for a discussion of the drivers of the year-over-year changes.
2014, respectively. A summary of changes in revenue for each of our reportable segments and Corporate is included in the table
below. See “—Segment Review” for a discussion of the drivers of the year-over-year changes.
American
Franchise
Home
Shield
Services
Group
Terminix
Corporate
Total
$
1,370
$
828
$
253
$
$
1,444
$
917
$
54
17
—
—
—
3
63
13
—
—
—
4
—
—
89
—
—
—
—
—
—
—
—
103
—
—
—
(5)
(16)
—
232
—
—
—
(1)
(31)
—
200
$
$
(5)
7
—
—
—
—
—
2
—
—
—
—
—
—
2
$
$
$
2,457
54
17
89
(5)
(16)
(2)
2,594
63
13
103
(1)
(31)
5
2,746
(In millions)
Year Ended December 31, 2014
Pest Control(1)
Termite and Other Services(2)
Home Warranties(3)
Franchise-Related Revenue
Sale of Merry Maids branches(4)
Other
Year Ended December 31, 2015
Pest Control(1)
Termite and Other Services(2)
Home Warranties(3)
Franchise-Related Revenue
Sale of Merry Maids branches(4)
Other
Year Ended December 31, 2016
___________________________________
American
Home
Shield
Franchise
Services
Group
Terminix
Corporate
Total
$
$
$
1,370
54
17
—
—
—
3
1,444
63
13
—
—
—
4
1,524
$
$
$
828
—
—
89
—
—
—
917
—
—
103
—
—
—
1,020
$
$
$
253
—
—
—
(5)
(16)
—
232
—
—
—
(1)
(31)
—
200
$
$
$
7
—
—
—
—
—
(5)
2
—
—
—
—
—
—
2
$
$
$
2,457
54
17
89
(5)
(16)
(2)
2,594
63
13
103
(1)
(31)
5
2,746
Year Ended December 31, 2016
___________________________________
$
1,524
$
1,020
$
(1)
(2)
Includes growth from acquisitions of approximately $55 million and $26 million for the years ended December 31, 2016 and
2015, respectively, of which approximately $42 million and $8 million, respectively, is a result of the acquisition of Alterra
(1)
Pest Control, LLC (“Alterra”) on November 10, 2015.
Includes growth from acquisitions of approximately $55 million and $26 million for the years ended December 31, 2016 and
2015, respectively, of which approximately $42 million and $8 million, respectively, is a result of the acquisition of Alterra
Pest Control, LLC (“Alterra”) on November 10, 2015.
Includes wildlife exclusion, crawl space encapsulation and attic insulation products which are managed as a component of
our termite line of business. Includes growth from acquisitions of approximately $5 million and $4 million for the years
(2)
ended December 31, 2016 and 2015, respectively.
Includes wildlife exclusion, crawl space encapsulation and attic insulation products which are managed as a component of
our termite line of business. Includes growth from acquisitions of approximately $5 million and $4 million for the years
ended December 31, 2016 and 2015, respectively.
2016 Annual Report 50
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221
168
*
277
*
*
9
3
—
6
10
4
—
6
3
2
—
2
—
6 %
—
6 %
(4)
(2)%
(3)
(4)
Includes approximately $22 million for the year ended December 31, 2016 as a result of the acquisition of OneGuard Home
Warranties (“OneGuard”) on June 27, 2016 and Landmark Home Warranty, LLC (“Landmark”) on November 30, 2016.
Includes approximately $10 million for the year ended December 31, 2015 as a result of the acquisition of Home Security of
America, Inc., (“HSA”) on February 28, 2014.
Includes a $33 million and a $17 million reduction in revenue from company-owned branches, offset, in part, by a $2 million
and a $1 million increase in royalty fees as result of the branch conversions for the years ended December 31, 2016 and 2015,
respectively.
Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of $1,448 million, $1,375 million and $1,298 million for the years
ended December 31, 2106, 2015 and 2014, respectively. The following table provides a summary of changes in cost of services
rendered and products sold for each of our reportable segments and Corporate:
(In millions)
Year Ended December 31, 2014
Impact of change in revenue(1)
Fuel prices
Contract claims
Sale of Merry Maids branches
Insurance program
Cost reduction initiatives
Other
Year Ended December 31, 2015
Impact of change in revenue(1)
Production labor
Fuel prices
Legal expense
Contract claims
Sale of Merry Maids branches
Insurance program
Other
Year Ended December 31, 2016
___________________________________
American
Home
Shield
Franchise
Services
Group
Terminix
Corporate
Total
$
$
$
763
36
(5)
—
—
—
(3)
1
792
44
6
(5)
4
—
—
—
(2)
839
$
$
$
404
32
—
33
—
—
—
(1)
468
41
—
—
—
17
—
—
(2)
524
$
$
$
118
—
—
—
(12)
—
—
—
106
1
—
—
—
—
(26)
—
—
81
$
$
$
14
—
—
—
—
(4)
—
—
10
—
—
—
—
—
—
(5)
(1)
4
$
$
$
1,298
68
(5)
33
(12)
(4)
(3)
—
1,375
86
6
(5)
4
17
(26)
(5)
(5)
1,448
(1)
For American Home Shield, includes approximately $10 million for the year ended December 31, 2016 as a result of the
acquisitions of OneGuard on June 27, 2016 and Landmark on November 30, 2016 and approximately $5 million for the year
ended December 31, 2015 as a result of the acquisition of HSA on February 28, 2014.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The increase in production labor at Terminix was driven by investments in field operations focused on improving safety,
technician efficiency, customer service and retention. We realized lower fuel costs at Terminix as a result of lower fuel prices in 2016.
The increase in legal expense at Terminix was driven by increased provisions for certain legal matters.
The increase in contract claims cost at American Home Shield was primarily driven by normal inflationary pressure on the
underlying costs of repairs.
We realized a reduction in cost of sales of $26 million in the Franchise Services Group as a result of the branch conversions.
The decrease in expense related to our automobile, general liability and workers’ compensation insurance program was
driven by the impact of increased reserves of $4 million and $9 million recorded in 2016 and 2015, respectively, driven by
unfavorable claims trends.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
We realized lower fuel costs at Terminix as a result of lower fuel prices in 2015.
The increase in contract claims cost at American Home Shield was driven by an increase in the average cost per service
request associated with appliance repairs due to greater use of more expensive out-of-network contractors, largely in the fourth
quarter, and, to a lesser extent, by warmer summer temperatures in 2015 and normal inflationary pressure on the underlying costs of
repairs.
We realized a reduction in cost of sales of $12 million in the Franchise Services Group as a result of the branch conversions.
2016 Annual Report 51
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unfavorable claims trends.
Selling and Administrative Expenses
The decrease in expense related to our automobile, general liability and workers’ compensation insurance program was
The decrease in expense related to our automobile, general liability and workers’ compensation insurance program was
driven by the impact of increased reserves of $9 million and $13 million recorded in 2015 and 2014, respectively, driven by
driven by the impact of increased reserves of $9 million and $13 million recorded in 2015 and 2014, respectively, driven by
unfavorable claims trends.
For the years ended December 31, 2016, 2015 and 2014, we reported selling and administrative expenses of $711 million,
For the years ended December 31, 2016, 2015 and 2014, we reported selling and administrative expenses of $711 million,
$666 million and $669 million, respectively, which comprised general and administrative expenses of $284 million, $255 million and
$271 million, respectively, and selling and marketing expenses of $427 million, $411 million and $398 million, respectively. The
following table provides a summary of changes in selling and administrative expenses for each of our reportable segments and
Corporate:
$666 million and $669 million, respectively, which comprised general and administrative expenses of $284 million, $255 million and
$271 million, respectively, and selling and marketing expenses of $427 million, $411 million and $398 million, respectively. The
following table provides a summary of changes in selling and administrative expenses for each of our reportable segments and
Corporate:
Selling and Administrative Expenses
(In millions)
Year Ended December 31, 2014
Sales and marketing costs
Customer service costs
HSA selling and administrative expenses
Technology costs
Sale of Merry Maids branches
Incentive compensation
Cost reduction initiatives
Management and consulting fees
Stock-based compensation expense
Secondary offering expenses
Other
Sales and marketing costs
Technology costs
Incentive compensation
expenses
Customer service costs
Sale of Merry Maids branches
Cost reduction initiatives
Stock-based compensation expense
Secondary offering expenses
Other
OneGuard and Landmark selling and administrative
American
Home
Shield
Franchise
Services
Group
Terminix
Corporate
Total
$
329
$
257
$
$
$
11
—
—
—
—
—
—
—
—
(4)
(1)
4
12
(7)
—
—
—
—
—
—
4
(2)
5
4
(2)
—
(4)
(1)
—
—
—
(1)
12
7
(2)
8
4
—
—
—
—
3
59
(3)
—
—
—
(2)
—
(3)
—
—
—
—
51
—
—
(1)
—
—
(3)
(4)
—
—
—
43
23
—
—
—
—
—
—
—
(4)
3
3
(1)
24
—
6
—
—
—
—
—
3
(3)
1
31
669
6
5
4
(2)
(2)
(8)
(4)
(4)
3
3
(3)
666
16
25
(10)
8
4
(3)
(4)
3
(3)
8
711
(In millions)
Year Ended December 31, 2014
Sales and marketing costs
Customer service costs
HSA selling and administrative expenses
Technology costs
Sale of Merry Maids branches
Incentive compensation
Cost reduction initiatives
Management and consulting fees
Stock-based compensation expense
Secondary offering expenses
Other
Year Ended December 31, 2015
Sales and marketing costs
Technology costs
Incentive compensation
OneGuard and Landmark selling and administrative
expenses
Customer service costs
Sale of Merry Maids branches
Cost reduction initiatives
Stock-based compensation expense
Secondary offering expenses
Other
Year Ended December 31, 2016
$
$
$
American
Home
Shield
Franchise
Services
Group
Terminix
Corporate
Total
329
11
—
—
—
—
(4)
—
—
—
—
(1)
335
4
12
(7)
—
—
—
—
—
—
4
348
$
$
$
257
(2)
5
4
(2)
—
(4)
(1)
—
—
—
(1)
256
12
7
(2)
8
4
—
—
—
—
3
288
$
$
$
59
(3)
—
—
—
(2)
—
(3)
—
—
—
—
51
—
—
(1)
—
—
(3)
(4)
—
—
—
43
$
$
$
23
—
—
—
—
—
—
—
(4)
3
3
(1)
24
—
6
—
—
—
—
—
3
(3)
1
31
$
$
$
669
6
5
4
(2)
(2)
(8)
(4)
(4)
3
3
(3)
666
16
25
(10)
8
4
(3)
(4)
3
(3)
8
711
Year Ended December 31, 2015
$
335
$
256
$
$
$
Year Ended December 31, 2016
$
348
$
288
$
$
$
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The increase in sales costs at Terminix was driven by higher depreciation and, to a lesser extent, other costs related to a sales
The increase in sales costs at Terminix was driven by higher depreciation and, to a lesser extent, other costs related to a sales
vehicle program initiated in 2016. The increase in sales and marketing costs at American Home Shield was primarily driven by the
shift in the timing of a holiday mail campaign from the fourth quarter of 2015 to the first quarter of 2016 and, to a lesser extent, an
vehicle program initiated in 2016. The increase in sales and marketing costs at American Home Shield was primarily driven by the
shift in the timing of a holiday mail campaign from the fourth quarter of 2015 to the first quarter of 2016 and, to a lesser extent, an
increase in sales commissions.
The increase in technology costs was primarily due to an acceleration of investments to improve our customers’ experiences
The increase in technology costs was primarily due to an acceleration of investments to improve our customers’ experiences
through technology.
increase in sales commissions.
through technology.
We incurred incremental selling and administrative expenses at American Home Shield as a result of the OneGuard and
We incurred incremental selling and administrative expenses at American Home Shield as a result of the OneGuard and
Landmark acquisitions. The increase in customer service costs at American Home Shield was due to higher labor costs resulting from
an acceleration of pre-season hiring and training in preparation for the high-volume summer season.
Landmark acquisitions. The increase in customer service costs at American Home Shield was due to higher labor costs resulting from
an acceleration of pre-season hiring and training in preparation for the high-volume summer season.
We realized a reduction in selling and administrative expenses of $3 million in the Franchise Services Group as a result of the
We realized a reduction in selling and administrative expenses of $3 million in the Franchise Services Group as a result of the
branch conversions.
branch conversions.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
The increase in sales costs at Terminix was primarily driven by investments to grow and train our sales force and higher
The increase in sales costs at Terminix was primarily driven by investments to grow and train our sales force and higher
commissions attributable to the growth in new products and pest control revenue.
commissions attributable to the growth in new products and pest control revenue.
The increase in customer service costs at American Home Shield was due to higher labor costs resulting from customer
The increase in customer service costs at American Home Shield was due to higher labor costs resulting from customer
growth. Additionally, we incurred incremental selling and administrative expenses at American Home Shield as a result of the HSA
growth. Additionally, we incurred incremental selling and administrative expenses at American Home Shield as a result of the HSA
2016 Annual Report 52
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acquisition on February, 28, 2014. The decrease in technology costs at American Home Shield was driven by our decision in the first
quarter of 2014 to abandon efforts to deploy a new operating system.
We realized a reduction in selling and administrative expenses of $2 million in the Franchises Services Group as a result of
the branch conversions.
Amortization Expense
Amortization expense was $33 million, $38 million and $52 million in the years ended December 31, 2016, 2015 and 2014,
respectively. The decreases in 2016 and 2015 were a result of certain finite-lived intangible assets recorded in connection with the
merger transaction by which the Company was taken public in 2007 being fully amortized.
401(k) Plan Corrective Contribution
We recorded charges of $2 million and $23 million in the years ended December 31, 2016 and 2015, respectively, related to
the 401(k) Plan. See Note 11 to the consolidated financial statements for more details.
Fumigation Related Matters
We recorded charges of $93 and $9 million in the years ended December 31, 2016 and 2015, respectively, for fumigation
related matters. See Note 9 to the consolidated financial statements for more details.
Insurance Reserve Adjustment
We recorded a charge of $23 million in the year ended December 31, 2016 for an adjustment to the Company’s accrued self-
insured claims related to automobile, general liability and workers’ compensation risks. The adjustment is based on the Company’s
detailed annual assessment of this actuarially determined accrual, which the Company completes in the second quarter of each year.
This adjustment relates to coverage periods of 2015 and prior.
Impairment of Software and Other Related Costs
We recorded impairment charges of $1 million and $47 million in the years ended December 31, 2016 and 2014,
respectively, relating to our decision in the second quarter of 2016 to replace certain software pursuant to our ServSmart initiative and
our decision in the first quarter of 2014 to abandon our efforts to deploy a new operating system at American Home Shield.
Consulting Agreement Termination Fees
On July 1, 2014, in connection with the completion of our initial public offering, we paid the Equity Sponsors aggregate fees
of $21 million in connection with the termination of the consulting agreements, which was recorded in the year ended December 31,
2014. See Note 10 to the consolidated financial statements for more details.
Restructuring Charges
We incurred restructuring charges of $17 million, $5 million and $11 million for the years ended December 31, 2016, 2015
and 2014, respectively. Restructuring charges were comprised of the following:
(In millions)
Terminix(1)
American Home Shield(2)
Franchise Services Group(3)
Corporate(4)
Headquarters relocation(5)
Total restructuring charges
___________________________________
Year Ended December 31,
2015
2016
2014
$
$
7
2
—
5
3
17
$
$
3
—
1
1
—
5
$
$
2
—
3
6
—
11
(1)
(2)
(3)
(4)
For the year ended December 31, 2016, these charges include $1 million of severance costs and $3 million of stock-based
compensation expense due to the modification of non-vested stock options and RSUs as part of the severance agreement with
the former president of Terminix. Additionally, $4 million, $3 million and $2 million for the years ended December 31, 2016,
2015 and 2014, respectively, relate to lease termination and severance costs driven by Terminix’s branch optimization
program.
Represents lease termination and other costs driven by the decision to consolidate the stand-alone operations of HSA
acquired in February 2014 with those of American Home Shield.
Represents severance costs related to the reorganization of the Franchise Services Group.
For the year ended December 31, 2016, these charges include professional fees of $2 million and accelerated depreciation of
$2 million related to the early termination of a long-term human resources outsourcing agreement. Additionally, for the years
ended December 31, 2016, 2015 and 2014, these charges included severance and other costs of $2 million, $1 million and $6
2016 Annual Report 53
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the Company’s headquarters.
Gain on Sale of Merry Maids Branches
million, respectively, related to an initiative to enhance capabilities and reduce costs in our headquarters functions that
provide company-wide administrative services for our operations.
million, respectively, related to an initiative to enhance capabilities and reduce costs in our headquarters functions that
provide company-wide administrative services for our operations.
(5)
Represents impairment charges of $1 million and professional fees and other costs of $1 million related to the relocation of
(5)
Represents impairment charges of $1 million and professional fees and other costs of $1 million related to the relocation of
the Company’s headquarters.
Gain on Sale of Merry Maids Branches
We recorded a gain of $2 million, $7 million and $1 million for the years ended December 31, 2016, 2015 and 2014,
We recorded a gain of $2 million, $7 million and $1 million for the years ended December 31, 2016, 2015 and 2014,
respectively, associated with the branch conversions. As of October 10, 2016, the branch conversion process was complete.
respectively, associated with the branch conversions. As of October 10, 2016, the branch conversion process was complete.
Interest Expense
Interest Expense
Interest expense was $153 million, $167 million and $219 million for the years ended December 31, 2016, 2015 and 2014,
respectively. The decrease in interest expense in the year ended December 31, 2016 compared to the year ended December 31, 2015
was driven by the redemption of the 2020 Notes in 2015, offset, in part, by additional borrowings under the Old Term Loan Facility.
The decrease in interest expense in the year ended December 31, 2015 compared to the year ended December 31, 2014 was driven by
the refinancing of the then-existing term loan facility on July 1, 2014 and the redemption of the 2020 Notes, offset, in part, by
additional borrowings under the Old Term Loan Facility. See Note 12 to the consolidated financial statements for more details.
Interest expense was $153 million, $167 million and $219 million for the years ended December 31, 2016, 2015 and 2014,
respectively. The decrease in interest expense in the year ended December 31, 2016 compared to the year ended December 31, 2015
was driven by the redemption of the 2020 Notes in 2015, offset, in part, by additional borrowings under the Old Term Loan Facility.
The decrease in interest expense in the year ended December 31, 2015 compared to the year ended December 31, 2014 was driven by
the refinancing of the then-existing term loan facility on July 1, 2014 and the redemption of the 2020 Notes, offset, in part, by
additional borrowings under the Old Term Loan Facility. See Note 12 to the consolidated financial statements for more details.
Interest and Net Investment Income
Interest and Net Investment Income
Interest and net investment income was $6 million, $9 million and $7 million for the years ended December 31, 2016, 2015
and 2014, respectively, and comprised net investment gains and interest and dividend income realized on the American Home Shield
Interest and net investment income was $6 million, $9 million and $7 million for the years ended December 31, 2016, 2015
and 2014, respectively, and comprised net investment gains and interest and dividend income realized on the American Home Shield
investment portfolio and interest income on other cash balances.
A loss on extinguishment of debt of $32 million was recorded in the year ended December 31, 2016 related to the refinancing
of our Old Term Loan Facility on November 8, 2016. A loss on extinguishment of debt of $58 million was recorded in the year ended
December 31, 2015 related to the redemptions of the 8% 2020 Notes on February 17, 2015 and April 1, 2015 and the redemption of
the 7% 2020 Notes on August 17, 2015. A loss on extinguishment of debt of $65 million was recorded in the year ended December
31, 2014 related to the repayment of the then-existing term loan facility and the partial redemption of the 2020 Notes on July 16, 2014.
A loss on extinguishment of debt of $32 million was recorded in the year ended December 31, 2016 related to the refinancing
of our Old Term Loan Facility on November 8, 2016. A loss on extinguishment of debt of $58 million was recorded in the year ended
December 31, 2015 related to the redemptions of the 8% 2020 Notes on February 17, 2015 and April 1, 2015 and the redemption of
the 7% 2020 Notes on August 17, 2015. A loss on extinguishment of debt of $65 million was recorded in the year ended December
31, 2014 related to the repayment of the then-existing term loan facility and the partial redemption of the 2020 Notes on July 16, 2014.
See Note 12 to the consolidated financial statements for more details.
Income from continuing operations before income taxes was $241 million, $270 million and $84 million for the years ended
Income from continuing operations before income taxes was $241 million, $270 million and $84 million for the years ended
December 31, 2016, 2015 and 2014, 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:
December 31, 2016, 2015 and 2014, 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:
Year Ended December 31,
Year Ended December 31,
Income from Continuing Operations before Income Taxes
See Note 12 to the consolidated financial statements for more details.
Income from Continuing Operations before Income Taxes
Loss on Extinguishment of Debt
investment portfolio and interest income on other cash balances.
Loss on Extinguishment of Debt
(In millions)
Reportable segments and Corporate(1)
Amortization expense(2)
401(k) Plan corrective contribution(3)
Fumigation related matters(4)
Insurance reserve adjustment(5)
Impairment of software and other related costs(6)
Consulting agreement termination fees(7)
Restructuring charges(8)
Gain on sale of Merry Maids branches(9)
Interest expense(10)
Loss on extinguishment of debt(11)
Other(12)
___________________________________
2016 vs. 2015
$
$
45
5
21
(84)
(23)
(1)
—
(12)
(5)
14
26
(15)
2015 vs. 2014
65
14
(23)
(9)
—
47
21
6
6
52
7
—
186
(In millions)
Reportable segments and Corporate(1)
Amortization expense(2)
401(k) Plan corrective contribution(3)
Fumigation related matters(4)
Insurance reserve adjustment(5)
Impairment of software and other related costs(6)
Consulting agreement termination fees(7)
Restructuring charges(8)
Gain on sale of Merry Maids branches(9)
Interest expense(10)
Loss on extinguishment of debt(11)
Other(12)
(Decrease) increase in income from continuing operations before income taxes
___________________________________
2016 vs. 2015
$
45
5
21
(84)
(23)
(1)
—
(12)
(5)
14
26
(15)
(29) $
2015 vs. 2014
65
14
(23)
(9)
—
47
21
6
6
52
7
—
186
$
$
(Decrease) increase in income from continuing operations before income taxes
$
(29) $
(1)
(2)
(3)
(4)
Represents the net change in Adjusted EBITDA as described in “—Segment Review.”
Represents the net change in amortization expense as described in “—Amortization Expense.”
Represents the $2 million and $23 million charges recorded in the years ended December 31, 2016 and 2015, respectively,
related to the 401(k) Plan as described in “—401(k) Plan Corrective Contribution.”
(1)
(2)
(3)
Represents the net change in Adjusted EBITDA as described in “—Segment Review.”
Represents the net change in amortization expense as described in “—Amortization Expense.”
Represents the $2 million and $23 million charges recorded in the years ended December 31, 2016 and 2015, respectively,
related to the 401(k) Plan as described in “—401(k) Plan Corrective Contribution.”
Represents the $93 million and $9 million charges for fumigation related matters recorded in the years ended December 31,
(4)
2016 and 2015, respectively, a described in “—Fumigation Related Matters.”
Represents the $93 million and $9 million charges for fumigation related matters recorded in the years ended December 31,
2016 and 2015, respectively, a described in “—Fumigation Related Matters.”
2016 Annual Report 54
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(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Represents the $23 million insurance reserve adjustment recorded in the year ended December 31, 2016 as described in “—
Insurance Reserve Adjustment.”
Represents impairment charges of $1 million and $47 million recorded in the years ended December 31, 2016 and 2014,
respectively, as described in “—Impairment of Software and Other Related Costs.”
Represents the consulting agreement termination fees of $21 million recorded in the year ended December 31, 2014 as
described in “—Consulting Agreement Termination Fees.”
Represents the $17 million, $5 million and $11 million charges recorded in the years ended December 31, 2016, 2015 and
2014, respectively, as described in “—Restructuring Charges.”
Represents the $2 million, $7 million and $1 million gains in the years ended December 31, 2016, 2015 and 2014,
respectively, as described in “—Gain on Sale of Merry Maids branches.”
Represents the net change in interest expense as described in “—Interest Expense.”
Represents the $32 million, $58 million and $65 million loss on extinguishment of debt recorded in the years ended
December 31, 2016, 2015 and 2014, respectively, as described in “—Loss on Extinguishment of Debt.”
Primarily represents the net change in management and consulting fees, stock-based compensation, secondary offering fees
and depreciation.
Provision for Income Taxes
The effective tax rate on income from continuing operations was 35.4 percent, 39.8 percent and 48.2 percent for the years
ended December 31, 2016, 2015 and 2014, respectively. The effective tax rate on income from continuing operations for the year
ended December 31, 2016 was favorably impacted by tax benefits relating to stock-based compensation and the resolution of certain
prior year tax matters applied against lower pre-tax income. The effective tax rate on income from continuing operations for the year
ended December 31, 2014 was affected by an adjustment to deferred state taxes as a result of a change in the state apportionment
factors attributable to the spin-off of TruGreen in 2014. For 2014, the increased state tax expense applied against lower pre-tax income
was the primary driver of a higher overall effective tax rate. Additional information on income taxes, including our effective tax rate
reconciliation and liabilities for uncertain tax positions, can be found in Note 5 to the consolidated financial statements.
Net Income (Loss)
Net income (loss) was $155 million, $160 million and $(57) million for the years ended December 31, 2016, 2014 and 2014,
respectively. The $5 million reduction for the year ended December 31, 2016 compared to the year ended December 31, 2015 was
primarily driven by a $29 million reduction in income from continuing operations before income taxes, offset, in part, by a $22 million
reduction in provision for income taxes. The $217 million improvement for the year ended December 31, 2015 compared to the year
ended December 31, 2014 was primarily driven by a $186 million improvement in income from continuing operations before income
taxes and a $98 million reduction in loss from discontinued operations, net of income taxes, offset, in part, by a $67 million increase in
provision for income taxes.
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2016 Annual Report 55
(In millions)
Revenue:
Terminix
American Home Shield
Franchise Services Group
Corporate
Total Revenue:
Adjusted EBITDA:(1)
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Adjusted EBITDA
Corporate(2)
Total Adjusted EBITDA
___________________________________
(1)
(2)
Terminix Segment
Represents unallocated corporate expenses.
December 31, 2014.
Revenue
Revenue by service line is as follows:
Segment Review
Segment Review
The following business segment reviews should be read in conjunction with the required footnote disclosures presented in the
The following business segment reviews should be read in conjunction with the required footnote disclosures presented in the
notes to the consolidated financial statements included in this report.
notes to the consolidated financial statements included in this report.
Revenue and Adjusted EBITDA by reportable segment and for Corporate are as follows:
Revenue and Adjusted EBITDA by reportable segment and for Corporate are as follows:
Year Ended December 31,
Increase (Decrease)
2016
2015
2014
2016 vs. 2015
2015 vs. 2014
$
$
$
$
$
1,524
1,020
200
2
2,746
371
220
79
670
(3)
667
$
$
$
$
$
1,444
$
1,370
917
232
2
2,594
347
205
77
630
(9)
622
$
$
$
$
828
253
7
2,457
309
179
78
566
(9)
557
6 %
11 %
(14) %
— %
6 %
7 %
7 %
3 %
6 %
(67) %
7 %
5 %
11 %
(8) %
(71) %
6 %
12 %
15 %
(1) %
11 %
— %
12 %
(In millions)
Revenue:
Terminix
American Home Shield
Franchise Services Group
Corporate
Total Revenue:
Adjusted EBITDA:(1)
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Adjusted EBITDA
Corporate(2)
Total Adjusted EBITDA
___________________________________
Year Ended December 31,
2015
2016
2014
2016 vs. 2015
2015 vs. 2014
Increase (Decrease)
$
$
$
$
$
1,524
1,020
200
2
2,746
371
220
79
670
(3)
667
$
$
$
$
$
1,444
917
232
2
2,594
347
205
77
630
(9)
622
$
$
$
$
$
1,370
828
253
7
2,457
309
179
78
566
(9)
557
6 %
11 %
(14) %
— %
6 %
7 %
7 %
3 %
6 %
(67) %
7 %
5 %
11 %
(8) %
(71) %
6 %
12 %
15 %
(1) %
11 %
— %
12 %
For our definition of Adjusted EBITDA and a reconciliation to net income (loss), see “—Selected Historical Financial Data.”
(1)
For our definition of Adjusted EBITDA and a reconciliation to net income (loss), see “—Selected Historical Financial Data.”
(2)
Represents unallocated corporate expenses.
Terminix Segment
The Terminix segment, which provides termite and pest control services to residential and commercial customers and
The Terminix segment, which provides termite and pest control services to residential and commercial customers and
distributes pest control products, reported a six percent increase in revenue and a seven percent increase in Adjusted EBITDA for the
year ended December 31, 2016 compared to the year ended December 31, 2015. The Terminix segment reported a five percent
increase in revenue and a 12 percent increase in Adjusted EBITDA for the year ended December 31, 2015 compared to the year ended
distributes pest control products, reported a six percent increase in revenue and a seven percent increase in Adjusted EBITDA for the
year ended December 31, 2016 compared to the year ended December 31, 2015. The Terminix segment reported a five percent
increase in revenue and a 12 percent increase in Adjusted EBITDA for the year ended December 31, 2015 compared to the year ended
December 31, 2014.
Termite and Other Services
(In millions)
Pest Control
Other
Total revenue
Termite and Other Services
(In millions)
Pest Control
Other
Total revenue
Year Ended
December 31,
$
$
$
$ 1,524
$ 1,444
$
Year Ended
December 31,
$
$
$
812
559
73
758
542
70
875
571
77
812
559
73
$ 1,444
$ 1,370
$
63
13
4
80
54
17
3
74
8 % $
2 %
5 %
6 % $
7 % $
3 %
4 %
5 % $
55
5
—
60
26
4
—
30
7 % $
1 %
— %
4 % $
3 % $
1 %
— %
2 % $
8
8
4
20
28
13
3
44
2016
2015
Growth
Acquired
Organic
2015
2014
Growth
Acquired
Organic
Revenue
Revenue by service line is as follows:
(In millions)
Pest Control
Termite and Other Services
Other
Total revenue
1 %
1 %
5 %
1 %
(In millions)
Pest Control
Termite and Other Services
Other
Total revenue
4 %
2 %
4 %
3 %
Year Ended
December 31,
2016
2015
$
875
571
77
$ 1,524
$
812
559
73
$ 1,444
Year Ended
December 31,
2015
2014
$
812
559
73
$ 1,444
$
758
542
70
$ 1,370
$
$
$
$
Growth
63
13
4
80
8 % $
2 %
5 %
6 % $
Acquired
55
5
—
60
7 % $
1 %
— %
4 % $
Organic
8
8
4
20
1 %
1 %
5 %
1 %
Growth
54
17
3
74
7 % $
3 %
4 %
5 % $
Acquired
26
4
—
30
3 % $
1 %
— %
2 % $
Organic
28
13
3
44
4 %
2 %
4 %
3 %
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Pest control revenue increased eight percent, reflecting the impact of the Alterra acquisition, improved price realization and
Pest control revenue increased eight percent, reflecting the impact of the Alterra acquisition, improved price realization and
growth in mosquito and bed bug services. Organic pest control revenue growth was negatively impacted by a $2 million organic
revenue decline associated with Alterra. Excluding Alterra, organic pest control revenue growth was $10 million and one percent.
growth in mosquito and bed bug services. Organic pest control revenue growth was negatively impacted by a $2 million organic
revenue decline associated with Alterra. Excluding Alterra, organic pest control revenue growth was $10 million and one percent.
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Termite revenue, including the wildlife exclusion, crawl space encapsulation and attic insulation products which are managed
as a component of our termite line of business, increased two percent. In 2016, termite renewal revenue comprised 51 percent of total
termite revenue, while the remainder consisted of termite new unit revenue. The increase in termite revenue reflects an increase in
core termite sales and increased sales of wildlife exclusion and crawlspace encapsulation, offset, in part, by lower price realization
driven by targeted offerings of bundled services. Termite activity is unpredictable in its nature. Factors that can impact termite activity
include conducive weather conditions and consumer awareness of termite swarms.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Pest control revenue increased seven percent, reflecting improved price realization, a favorable product mix, the impact of the
Alterra acquisition and growth in mosquito and bed bug services.
Termite revenue, including the wildlife exclusion, crawl space encapsulation and attic insulation products which are managed
as a component of our termite line of business, increased three percent. In 2015, termite renewal revenue comprised 50 percent of total
termite revenue, while the remainder consisted of termite new unit revenue. The increase in termite revenue reflects increased sales of
wildlife exclusion, crawlspace encapsulation and attic insulation and improved price realization, offset, in part, by a decrease in core
termite sales.
Adjusted EBITDA
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
(In millions)
Year Ended December 31, 2014
Impact of change in revenue
Fuel prices
Sales costs
Incentive compensation
Cost reduction initiatives
Other
Year Ended December 31, 2015
Impact of change in revenue
Production labor
Fuel prices
Legal expense
Technology costs
Incentive compensation
Other
Year Ended December 31, 2016
$
$
$
309
38
5
(11)
4
3
(1)
347
36
(6)
5
(4)
(12)
7
(2)
371
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The increase in production labor was driven by investments in field operations focused on improving safety, technician
efficiency, customer service and retention. We realized lower fuel costs as a result of lower fuel prices in 2016. The increase in legal
expense was driven by increased provisions for certain legal matters. The increase in technology costs was primarily due to an
acceleration of investments to transform our customers’ experiences through technology.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
We realized lower fuel costs as a result of lower fuel prices in 2015. The increase in sales costs was primarily driven by
investments to grow and train our sales force and higher commissions attributable to the growth in new products and pest control
revenue.
American Home Shield Segment
The American Home Shield segment, which provides home warranties for household systems and appliances, reported an 11
percent increase in revenue and a seven percent increase in Adjusted EBITDA for the year ended December 31, 2016 compared to the
year ended December 31, 2015. The American Home Shield segment reported an 11 percent increase in revenue and a 15 percent
increase in Adjusted EBITDA for the year ended December 31, 2015 compared to the year ended December 31, 2014.
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2016 Annual Report 57
The growth in renewable customer counts and customer retention are presented below.
The growth in renewable customer counts and customer retention are presented below.
As of December 31,
2016(1)
2015
2014(2)
15 %
76 %
7 %
75 %
American Home Shield
15 %
75 %
Growth in Home Warranties
Customer Retention Rate
___________________________________
2016(1)
As of December 31,
2015
2014(2)
15 %
76 %
7 %
75 %
15 %
75 %
As of December 31, 2016, excluding the OneGuard and Landmark accounts acquired on June 27, 2016 and November 30,
2016, respectively, the growth in home warranties was seven percent, and, excluding all OneGuard and Landmark accounts,
(1)
the customer retention rate for our American Home Shield segment was 75 percent.
As of December 31, 2016, excluding the OneGuard and Landmark accounts acquired on June 27, 2016 and November 30,
2016, respectively, the growth in home warranties was seven percent, and, excluding all OneGuard and Landmark accounts,
the customer retention rate for our American Home Shield segment was 75 percent.
As of December 31, 2014, excluding the HSA accounts acquired on February 28, 2014, the growth in home warranties was
five percent, and, excluding all HSA accounts, the customer retention rate for our American Home Shield segment was 76
(2)
As of December 31, 2014, excluding the HSA accounts acquired on February 28, 2014, the growth in home warranties was
five percent, and, excluding all HSA accounts, the customer retention rate for our American Home Shield segment was 76
percent.
Revenue
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The revenue results reflect an increase in new unit sales, improved price realization and the impact of the OneGuard and
The revenue results reflect an increase in new unit sales, improved price realization and the impact of the OneGuard and
Landmark acquisitions (an approximate $22 million increase).
Landmark acquisitions (an approximate $22 million increase).
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
The revenue results reflect an increase in new unit sales, improved price realization, a favorable product mix and the impact
The revenue results reflect an increase in new unit sales, improved price realization, a favorable product mix and the impact
of the HSA acquisition (an approximate $10 million increase as a result of the acquisition on February 28, 2014).
of the HSA acquisition (an approximate $10 million increase as a result of the acquisition on February 28, 2014).
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
Adjusted EBITDA
$
$
$
179
57
(33)
2
(5)
(4)
2
4
1
2
205
62
(17)
(12)
(7)
(8)
(4)
2
(3)
2
220
(In millions)
Year Ended December 31, 2014
Impact of change in revenue
Contract claims
Marketing costs
Customer services costs
HSA selling and administrative expenses
Technology costs
Incentive compensation
Cost reduction initiatives
Interest and net investment income
Year Ended December 31, 2015
Impact of change in revenue
Contract claims
Sales and marketing costs
Technology costs
OneGuard and Landmark selling and administrative expenses
Customer services costs
Incentive compensation
Interest and net investment income
Other
Year Ended December 31, 2016
$
$
$
179
57
(33)
2
(5)
(4)
2
4
1
2
205
62
(17)
(12)
(7)
(8)
(4)
2
(3)
2
220
American Home Shield
Growth in Home Warranties
Customer Retention Rate
___________________________________
(1)
(2)
percent.
Revenue
HSA selling and administrative expenses
Adjusted EBITDA
(In millions)
Year Ended December 31, 2014
Impact of change in revenue
Contract claims
Marketing costs
Customer services costs
Technology costs
Incentive compensation
Cost reduction initiatives
Interest and net investment income
Year Ended December 31, 2015
Impact of change in revenue
Contract claims
Sales and marketing costs
Technology costs
Customer services costs
Incentive compensation
Interest and net investment income
Other
Year Ended December 31, 2016
OneGuard and Landmark selling and administrative expenses
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The increase in contract claims cost was primarily driven by normal inflationary pressure on the underlying costs of repairs.
The increase in contract claims cost was primarily driven by normal inflationary pressure on the underlying costs of repairs.
Extreme temperatures in 2017 could lead to an increase in service requests related to household systems, resulting in higher claim
frequency and costs.
Extreme temperatures in 2017 could lead to an increase in service requests related to household systems, resulting in higher claim
frequency and costs.
The increase in sales and marketing costs was primarily driven by the shift in the timing of a holiday mail campaign from the
fourth quarter of 2015 to the first quarter of 2016 and, to a lesser extent, an increase in sales commissions. The increase in technology
costs was primarily due to an acceleration of investments to improve our customers’ experiences through technology. Additionally, we
incurred incremental selling and administrative expenses as a result of the OneGuard and Landmark acquisitions. The increase in
The increase in sales and marketing costs was primarily driven by the shift in the timing of a holiday mail campaign from the
fourth quarter of 2015 to the first quarter of 2016 and, to a lesser extent, an increase in sales commissions. The increase in technology
costs was primarily due to an acceleration of investments to improve our customers’ experiences through technology. Additionally, we
incurred incremental selling and administrative expenses as a result of the OneGuard and Landmark acquisitions. The increase in
2016 Annual Report 58
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customer service costs was due to higher labor costs resulting from an acceleration of pre-season hiring and training in preparation for
the high-volume summer season.
In 2016 and 2015, the segment’s Adjusted EBITDA included interest and net investment income from the American Home
Shield investment portfolio of $5 million and $8 million, respectively.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
The increase in contract claims cost was driven by an increase in the average cost per service request associated with
appliance repairs due to greater use of more expensive out-of-network contractors, largely in the fourth quarter, and, to a lesser extent,
by warmer summer temperatures in 2015 and normal inflationary pressure on the underlying costs of repairs.
The increase in customer service costs was due to higher labor costs resulting from customer growth. Additionally, we
incurred incremental selling and administrative expenses as a result of the HSA acquisition on February 28, 2014. The decrease in
technology costs was driven by our decision in the first quarter of 2014 to abandon efforts to deploy a new operating system.
In 2015 and 2014, the segment’s Adjusted EBITDA included interest and net investment income from the American Home
Shield investment portfolio of $8 million and $6 million, respectively.
Franchise Services Group Segment
The Franchise Services Group segment, which consists of the ServiceMaster Restore (disaster restoration), ServiceMaster
Clean (janitorial), Merry Maids (residential cleaning), Furniture Medic (cabinet and wood furniture repair) and AmeriSpec (home
inspection) businesses, reported a 14 percent decrease in revenue and a three percent increase in Adjusted EBITDA for the year ended
December 31, 2016 compared to the year ended December 31, 2015. The Franchise Services Group segment reported an eight percent
decrease in revenue and a one percent decrease in Adjusted EBITDA for the year ended December 31, 2015 compared to the year
ended December 31, 2014.
Revenue
Revenue by service line is as follows:
(In millions)
Royalty Fees
Company-Owned Merry Maids Branches
Janitorial National Accounts
Sales of Products
Other
Total revenue
Year Ended December 31,
2015
2014
2016
% of Revenue
2016
$
$
120
8
43
16
14
200
$
$
117
42
41
18
14
232
$
$
118
62
36
23
14
253
60 %
4 %
21 %
8 %
7 %
100 %
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The increase in royalty fees was primarily driven by higher disaster restoration services and a $2 million increase attributable
to the branch conversions. Approximately $33 million of the decline in revenue from company-owned Merry Maids branches was
attributable to the branch conversions with the remainder of the decline attributable to a decrease in new unit sales. The increase in
revenue from janitorial national accounts was driven by increased sales activity. We intend to continue to focus on expanding our
market share in janitorial national accounts. The decrease in sales of products was driven by lower franchisee demand.
In 2014, we began converting company-owned Merry Maids locations to franchises. During the year ended December 31,
2016, we converted 28 company-owned Merry Maids branches to franchises, and as of October 10, 2016, the branch conversion
process was complete. As a result of the completion of the branch conversions, we do not expect any significant future revenues from
company-owned Merry Maids branches. We expect this decline to be offset, in part, by modest increases in royalty fees.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
The decrease in royalty fees was primarily driven by lower disaster restoration services, offset, in part, by a $1 million
increase attributable to the branch conversions. Approximately $17 million of the decline in revenue from company-owned Merry
Maids branches was attributable to the branch conversions with the remainder of the decline attributable to a decrease in new unit
sales. The increase in revenue from janitorial national accounts was driven by strong sales activity. The decrease in sales of products
was driven by lower franchisee demand.
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2016 Annual Report 59
$
$
$
$
$
$
Adjusted EBITDA
(In millions)
Year Ended December 31, 2014
Impact of change in revenue
Sale of Merry Maids branches
Sales and marketing costs
Cost reduction initiatives
Year Ended December 31, 2015
Impact of change in revenue
Sale of Merry Maids branches
Incentive compensation
Cost reduction initiatives
Other
Year Ended December 31, 2016
Corporate
2014.
Adjusted EBITDA
(In millions)
Year Ended December 31, 2014
Insurance program
Other
Other
Year Ended December 31, 2015
Insurance program
Year Ended December 31, 2016
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
Adjusted EBITDA
(In millions)
Year Ended December 31, 2014
Impact of change in revenue
Sale of Merry Maids branches
Sales and marketing costs
Cost reduction initiatives
Year Ended December 31, 2015
Impact of change in revenue
Sale of Merry Maids branches
Incentive compensation
Cost reduction initiatives
Other
Year Ended December 31, 2016
78
(5)
(2)
3
3
77
(1)
(3)
1
4
1
79
$
$
$
78
(5)
(2)
3
3
77
(1)
(3)
1
4
1
79
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The impact of the decrease in revenue on Adjusted EBITDA was driven by the decrease in revenue from company-owned
Merry Maids branches and sales of products, offset, in part, by the increase in royalty fees and relatively low margin revenue from
janitorial national accounts.
The impact of the decrease in revenue on Adjusted EBITDA was driven by the decrease in revenue from company-owned
Merry Maids branches and sales of products, offset, in part, by the increase in royalty fees and relatively low margin revenue from
janitorial national accounts.
We realized a reduction in Adjusted EBITDA of $3 million as a result of the branch conversions.
We realized a reduction in Adjusted EBITDA of $3 million as a result of the branch conversions.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
The impact of the decrease in revenue on Adjusted EBITDA was driven by the decrease in royalty fees, revenue from
The impact of the decrease in revenue on Adjusted EBITDA was driven by the decrease in royalty fees, revenue from
company-owned Merry Maids branches and sales of products, offset, in part, by the increase in relatively low margin revenue from
janitorial national accounts.
company-owned Merry Maids branches and sales of products, offset, in part, by the increase in relatively low margin revenue from
janitorial national accounts.
We realized a reduction in Adjusted EBITDA of $2 million as a result of the branch conversions.
We realized a reduction in Adjusted EBITDA of $2 million as a result of the branch conversions.
Corporate reported a $6 million increase in Adjusted EBITDA for the year ended December 31, 2016 compared to the year
Corporate reported a $6 million increase in Adjusted EBITDA for the year ended December 31, 2016 compared to the year
ended December 31, 2015. Adjusted EBITDA for Corporate for the year ended December 31, 2015 was comparable to December 31,
ended December 31, 2015. Adjusted EBITDA for Corporate for the year ended December 31, 2015 was comparable to December 31,
2014.
The following table provides a summary of changes in Corporate’s Adjusted EBITDA:
The following table provides a summary of changes in Corporate’s Adjusted EBITDA:
Adjusted EBITDA
Corporate
(In millions)
Year Ended December 31, 2014
Insurance program
Other
Year Ended December 31, 2015
Insurance program
Other
Year Ended December 31, 2016
(9)
4
(4)
(9)
5
1
(3)
$
$
$
(9)
4
(4)
(9)
5
1
(3)
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The decrease in expense related to our automobile, general liability and workers’ compensation insurance program was
The decrease in expense related to our automobile, general liability and workers’ compensation insurance program was
driven by the impact of increased reserves of $4 million and $9 million recorded in 2016 and 2015, respectively, driven by
unfavorable claims trends. The unfavorable claims trends for 2016 were impacted by a charge of $3 million in connection with civil
claims related to an incident at a family’s residence in Palm Beach County, Florida, and the unfavorable claims trends for 2015 were
impacted by a charge of $3 million in connection with civil claims related to an incident at a resort in St. John in the U.S. Virgin
Islands. Each of the $3 million charges are amounts equal to our insurance deductible under our general liability insurance program.
driven by the impact of increased reserves of $4 million and $9 million recorded in 2016 and 2015, respectively, driven by
unfavorable claims trends. The unfavorable claims trends for 2016 were impacted by a charge of $3 million in connection with civil
claims related to an incident at a family’s residence in Palm Beach County, Florida, and the unfavorable claims trends for 2015 were
impacted by a charge of $3 million in connection with civil claims related to an incident at a resort in St. John in the U.S. Virgin
Islands. Each of the $3 million charges are amounts equal to our insurance deductible under our general liability insurance program.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
The decrease in expense related to our automobile, general liability and workers’ compensation insurance program was
The decrease in expense related to our automobile, general liability and workers’ compensation insurance program was
driven by the impact of increased reserves of $9 million and $13 million recorded in 2015 and 2014, respectively, driven by
unfavorable claims trends. The unfavorable claims trends for 2015 were impacted by a charge of $3 million in connection with civil
driven by the impact of increased reserves of $9 million and $13 million recorded in 2015 and 2014, respectively, driven by
unfavorable claims trends. The unfavorable claims trends for 2015 were impacted by a charge of $3 million in connection with civil
2016 Annual Report 60
2016 Annual Report 60
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claims related to an incident at a resort in St. John in the U.S. Virgin Islands. The $3 million charge is an amount equal to our
insurance deductible under our general liability insurance program.
Discontinued Operations
TruGreen Spin-off
On January 14, 2014, we completed a separation transaction (the “TruGreen Spin-off”), resulting in the spin-off of the assets
and certain liabilities of the business that comprises the lawn, tree and shrub care services previously conducted by ServiceMaster
primarily under the TruGreen brand name (collectively, the “TruGreen Business”) through a tax-free, pro rata dividend to our
stockholders. As a result of the completion of the TruGreen Spin-off, TruGreen Holding Corporation (“New TruGreen”) operates the
TruGreen Business as a private independent company.
In connection with the TruGreen Spin-off, we entered into a transition services agreement with New TruGreen pursuant to
which we provide New TruGreen with specified communications, public relations, finance and accounting, tax, treasury, internal
audit, human resources operations and benefits, risk management and insurance, supply management, real estate management,
marketing, facilities, information technology and other support services. The charges for the transition services are designed to allow
us to fully recover the direct costs of providing the services, plus specified margins and any out-of-pocket costs and expenses. The
services provided under the transition services agreement terminated at various specified times on or prior to December 31, 2016,
except certain information technology services which we have entered into an agreement with New TruGreen to extend through June
30, 2018. New TruGreen may terminate the extended transition services agreement for convenience upon 90 days written notice.
Under this transition services agreement, in the years ended December 31, 2016, 2015 and 2014, we recorded $9 million, $25
million and $36 million, respectively, of fees from New TruGreen, which is included as a reduction, net of costs incurred, in Selling
and administrative expenses in the consolidated statement of operations and comprehensive income (loss). As of December 31, 2016,
all amounts owed by New TruGreen under this agreement have been paid.
During the year ended December 31, 2014, we processed certain of New TruGreen’s accounts payable transactions. Through
this process, in the year ended December 31, 2014, $97 million was paid on New TruGreen’s behalf, all of which was repaid by New
TruGreen.
In addition, we, New TruGreen and TruGreen Limited Partnership entered into (1) a separation and distribution agreement
containing key provisions relating to the separation of the TruGreen Business and the distribution of New TruGreen common stock to
our stockholders (including relating to specified TruGreen legal matters with respect to which we have agreed to retain liability, as
well as insurance coverage, non-competition, indemnification and other matters), (2) an employee matters agreement allocating
liabilities and responsibilities relating to employee benefit plans and programs and other related matters and (3) a tax matters
agreement governing the respective rights, responsibilities and obligations of the parties thereto with respect to taxes, including
allocating liabilities for income taxes attributable to New TruGreen and its subsidiaries generally to us for tax periods (or portions
thereof) ending on or before January 14, 2014 and generally to New TruGreen for tax periods (or portions thereof) beginning after that
date.
Financial Information of Discontinued Operations
Loss income from discontinued operations, net of income taxes, for all periods presented includes the operating results of the
previously sold businesses.
The operating results of discontinued operations are as follows:
Year Ended December 31,
2015
$
2016
(In millions)
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
Trade name impairment(1)
Restructuring charges
Loss before income taxes(1)
Benefit for income taxes(1)
Loss from discontinued operations, net of income taxes(1)
___________________________________
(1) During the year ended December 31, 2014, the Company recorded a pre-tax non-cash impairment charge of $139 million ($84
million, net of tax) associated with the trade name at its former TruGreen business, which is reported in Loss from discontinued
operations, net of income taxes in the consolidated statements of operations and comprehensive income (loss).
— $
—
3
—
—
(3)
(1)
(2) $
— $
—
1
—
—
(1)
—
(1) $
6
12
14
139
3
(161)
(61)
(100)
2014
$
2701784_Text_1cPages.indd 45
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2016 Annual Report 61
Liquidity and Capital Resources
Liquidity
Liquidity and Capital Resources
Liquidity
We are highly leveraged, and a substantial portion of our liquidity needs are due to service requirements on our significant
We are highly leveraged, and a substantial portion of our liquidity needs are due to service requirements on our significant
indebtedness. The agreements governing 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 December 31, 2016, we were in compliance with the covenants under the
agreements that were in effect on such date.
indebtedness. The agreements governing 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 December 31, 2016, 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
Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as
required, borrowings under the Credit Facilities. We expect that cash provided from operations and available capacity under the
Revolving Credit Facility will provide sufficient funds to operate our business, make expected capital expenditures and meet our
liquidity requirements for the following 12 months, including payment of interest and principal on our debt. Cash and short- and long-
term marketable securities totaled $335 million as of December 31, 2016, compared with $377 million as of December 31, 2015. As
of December 31, 2016, there were $35 million of letters of credit outstanding and $265 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.
required, borrowings under the Credit Facilities. We expect that cash provided from operations and available capacity under the
Revolving Credit Facility will provide sufficient funds to operate our business, make expected capital expenditures and meet our
liquidity requirements for the following 12 months, including payment of interest and principal on our debt. Cash and short- and long-
term marketable securities totaled $335 million as of December 31, 2016, compared with $377 million as of December 31, 2015. As
of December 31, 2016, there were $35 million of letters of credit outstanding and $265 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.
On February 23, 2016, our board of directors authorized a three-year share repurchase program, under which we may
repurchase up to $300 million of outstanding shares of our common stock. As of December 31, 2016, we have repurchased $60
million of outstanding shares, which is included in treasury stock on the consolidated statements of financial position. Additionally,
for January 1, 2017 through February 17, 2017, we purchased 1.1 million shares of common stock at an average price paid per share
of $37.50.
On February 23, 2016, our board of directors authorized a three-year share repurchase program, under which we may
repurchase up to $300 million of outstanding shares of our common stock. As of December 31, 2016, we have repurchased $60
million of outstanding shares, which is included in treasury stock on the consolidated statements of financial position. Additionally,
for January 1, 2017 through February 17, 2017, we purchased 1.1 million shares of common stock at an average price paid per share
of $37.50.
In 2016, we settled all civil claims of the affected families related to the U.S. Virgin Islands and Florida fumigation matters,
In 2016, we settled all civil claims of the affected families related to the U.S. Virgin Islands and Florida fumigation matters,
and payments in connection with those claims totaled $90 million ($56 million, net of tax). We have also sought to resolve by plea
agreement the federal criminal consequences related to the U.S. Virgin Islands matter pursuant to which we expect to pay
approximately $10 million. See Note 9 to the consolidated financial statements for more details.
and payments in connection with those claims totaled $90 million ($56 million, net of tax). We have also sought to resolve by plea
agreement the federal criminal consequences related to the U.S. Virgin Islands matter pursuant to which we expect to pay
approximately $10 million. See Note 9 to the consolidated financial statements for more details.
We have submitted to the IRS a voluntary correction proposal to remedy an administrative error related to our Profit Sharing
We have submitted to the IRS a voluntary correction proposal to remedy an administrative error related to our Profit Sharing
and Retirement Plan. Our current estimate of the cost of the correction ranges from $25 million to approximately $92 million. See
Note 11 to the consolidated financial statements for more details.
and Retirement Plan. Our current estimate of the cost of the correction ranges from $25 million to approximately $92 million. See
Note 11 to the consolidated financial statements for more details.
Cash and short- and long-term marketable securities include balances associated with regulatory requirements at American
Cash and short- and long-term marketable securities include balances associated with regulatory requirements at American
Home Shield. See “—Limitations on Distributions and Dividends by Subsidiaries.” American Home Shield’s investment portfolio has
been invested in a combination of high-quality, debt securities and equity securities. We closely monitor the performance of the
investments. From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any
changes to such requirements. These reviews may result in identifying current reserve levels above or below minimum statutory
reserve requirements, in which case we may adjust our reserves. The reviews may also identify opportunities to satisfy certain
regulatory reserve requirements through alternate financial vehicles.
Home Shield. See “—Limitations on Distributions and Dividends by Subsidiaries.” American Home Shield’s investment portfolio has
been invested in a combination of high-quality, debt securities and equity securities. We closely monitor the performance of the
investments. From time to time, we review the statutory reserve requirements to which our regulated entities are subject and any
changes to such requirements. These reviews may result in identifying current reserve levels above or below minimum statutory
reserve requirements, in which case we may adjust our reserves. The reviews may also identify opportunities to satisfy certain
regulatory reserve requirements through alternate financial vehicles.
As of December 31, 2016, we had posted $31 million in letters of credit, which were issued under the Revolving Credit
As of December 31, 2016, we had posted $31 million in letters of credit, which were issued under the Revolving Credit
Facility, and $95 million of cash, which is included in Restricted cash on the consolidated statements of financial position, as
collateral under our automobile, general liability and workers’ compensation insurance program. This amount is not related to the
payments made in connection with fumigation related matters. We may from time to time change the amount of cash or marketable
securities used to satisfy collateral requirements under our automobile, general liability and workers’ compensation insurance
program. The amount of cash or marketable securities utilized to satisfy these collateral requirements will depend on the relative cost
of the issuance of letters of credit under the Revolving Credit Facility and our cash position. Any change in cash or marketable
securities used as collateral would result is a corresponding change in our available borrowing capacity under the Revolving Credit
Facility.
Facility, and $95 million of cash, which is included in Restricted cash on the consolidated statements of financial position, as
collateral under our automobile, general liability and workers’ compensation insurance program. This amount is not related to the
payments made in connection with fumigation related matters. We may from time to time change the amount of cash or marketable
securities used to satisfy collateral requirements under our automobile, general liability and workers’ compensation insurance
program. The amount of cash or marketable securities utilized to satisfy these collateral requirements will depend on the relative cost
of the issuance of letters of credit under the Revolving Credit Facility and our cash position. Any change in cash or marketable
securities used as collateral would result is a corresponding change in our available borrowing capacity under the Revolving Credit
Facility.
Additionally, under the terms of our fuel swap contracts, we are required to post collateral in the event the fair value of the
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 December 31, 2016, the estimated fair value of our fuel swap contracts was a net asset of $5 million, and we had posted $3 million
in letters of credit as collateral under our fuel hedging program, which were also issued under the Revolving Credit Facility. The
continued use of letters of credit for this purpose in the future could limit our ability to post letters of credit for other purposes and
could limit our borrowing availability under the Revolving Credit Facility. However, we do not expect the fair value of the
outstanding fuel swap contracts to materially impact our financial position or liquidity.
contracts exceeds a certain agreed upon liability level and in other circumstances required by the agreement with the counterparty. As
of December 31, 2016, the estimated fair value of our fuel swap contracts was a net asset of $5 million, and we had posted $3 million
in letters of credit as collateral under our fuel hedging program, which were also issued under the Revolving Credit Facility. The
continued use of letters of credit for this purpose in the future could limit our ability to post letters of credit for other purposes and
could limit our borrowing availability under the Revolving Credit Facility. However, we do not expect the fair value of the
outstanding fuel swap contracts to materially impact our financial position or liquidity.
We may from time to time repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or
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.
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.
2016 Annual Report 62
2016 Annual Report 62
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Refinancing of Indebtedness
On November 8, 2016, we entered into a $1,650 million Term Loan Facility and a $300 million Revolving Credit Facility
and sold $750 million of 2024 Notes. Borrowings under the Term Loan Facility and the 2024 Notes were used to repay the remaining
outstanding $2,356 million in aggregate principal amount of the Old Term Loan Facility. In connection with the repayment, we
recorded a loss on extinguishment of debt of $32 million in the year ended December 31, 2016, which includes the write-off of $14
million of original issue discount and $18 million of debt issuance costs. In addition, $38 million of proceeds was used to pay debt
issuance costs of $34 million and original issue discount of $4 million in connection with the Term Loan Facility, the Revolving
Credit Facility and the 2024 Notes.
On November 7, 2016, we entered into a seven-year interest rate swap agreement effective November 8, 2016. The notional
amount of the agreement was $650 million. Under the terms of the agreement, we will pay a fixed rate of interest of 1.493 percent on
the $650 million notional amount, and we will receive a floating rate of interest (based on one-month LIBOR, subject to a floor of
zero percent) on the notional amount. Therefore, during the term of the agreement, the effective interest rate on $650 million of the
Term Loan Facility is fixed at a rate of 1.493 percent, plus the incremental borrowing margin of 2.50 percent. On November 8, 2016,
the Company terminated the then-existing interest rate swap agreements and paid $10 million in connection with the terminations.
Fleet and Equipment Financing Arrangements
We have entered into a fleet management services agreement (the “Fleet Agreement”) which, among other things, allows us
to obtain fleet vehicles through a leasing program. We expect to fulfill substantially all of our vehicle fleet needs through the leasing
program under the Fleet Agreement. For the year ended December 31, 2016, we acquired $61 million of vehicles through the leasing
program under the Fleet Agreement. All leases under the Fleet Agreement are capital 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. We anticipate new lease financings for the full year 2017 will range from approximately $30
million to $40 million.
Limitations on Distributions and Dividends by Subsidiaries
We are a holding company, and as such have no independent operations or material assets other than ownership of equity
interests in our subsidiaries. We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses,
including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us
depends on their operating results, cash requirements and financial condition and general business conditions, as well as restrictions
under the laws of our subsidiaries’ jurisdictions.
The agreements governing the Credit Facilities may restrict the ability of our subsidiaries to pay dividends, make loans or
otherwise transfer assets to us. Further, our subsidiaries are permitted under the terms of the Credit Facilities and other indebtedness to
incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans
by such subsidiaries to us.
Furthermore, there are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These
restrictions are related to regulatory requirements at American Home Shield and to a subsidiary borrowing arrangement at SMAC. The
payments of ordinary and extraordinary dividends by our home warranty and similar subsidiaries (through which we conduct our
American Home Shield business) are subject to significant regulatory restrictions under the laws and regulations of the states in which
they operate. Among other things, such laws and regulations require certain such subsidiaries to maintain minimum capital and net
worth requirements and may limit the amount of ordinary and extraordinary dividends and other payments that these subsidiaries can
pay to us. As of December 31, 2016, the total net assets subject to these third-party restrictions was $173 million. We expect that such
limitations will be in effect for the foreseeable future. None of our subsidiaries are obligated to make funds available to us through the
payment of dividends.
We consider undistributed earnings of our foreign subsidiaries as of December 31, 2016 to be indefinitely reinvested and,
accordingly, no U.S. income taxes have been provided thereon. Cumulative undistributed earnings of our foreign subsidiaries
amounted to $60 million and $56 million as of December 31, 2016 and 2015, respectively. Should these earnings become taxable, we
could be subject to U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes in various jurisdictions.
The amount of cash associated with indefinitely reinvested foreign earnings was approximately $23 million and $17 million as of
December 31, 2016 and December 31, 2015, respectively. We have not repatriated, nor do we anticipate the need to repatriate, funds
to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated
with our domestic debt service requirements.
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2016 Annual Report 63
(In millions)
Net cash provided from (used for):
Operating activities
Investing activities
Financing activities
Discontinued operations
Effect of exchange rate changes on cash
Cash increase (decrease) during the period
Operating Activities
December 31, 2014.
Cash Flows
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of
Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of
cash flows, are summarized in the following table.
cash flows, are summarized in the following table.
Year Ended December 31,
2016
2015
2014
$
$
325
$
(133)
(102)
—
—
89
$
398
(98)
(381)
(11)
(2)
$
(92) $
289
(56)
(312)
(15)
—
(95)
(In millions)
Net cash provided from (used for):
Operating activities
Investing activities
Financing activities
Discontinued operations
Effect of exchange rate changes on cash
Cash increase (decrease) during the period
Operating Activities
Year Ended December 31,
2015
2014
2016
$
$
325
(133)
(102)
—
—
89
$
$
$
398
(98)
(381)
(11)
(2)
(92) $
289
(56)
(312)
(15)
—
(95)
debt.
Investing Activities
Net cash provided from operating activities from continuing operations decreased $73 million to $325 million for the year
Net cash provided from operating activities from continuing operations decreased $73 million to $325 million for the year
ended December 31, 2016 compared to $398 million for the year ended December 31, 2015 and $289 million for the year ended
ended December 31, 2016 compared to $398 million for the year ended December 31, 2015 and $289 million for the year ended
December 31, 2014.
Net cash provided from operating activities in 2016 comprised $431 million in earnings adjusted for non-cash charges, offset,
Net cash provided from operating activities in 2016 comprised $431 million in earnings adjusted for non-cash charges, offset,
in part, by $90 million in payments related to fumigation matters and a $16 million increase in cash required for working capital (a
$22 million increase excluding the working capital impact of accrued interest, restructuring and taxes). For the year ended December
31, 2016, working capital requirements were negatively impacted by timing of payments related to self-insured claims.
in part, by $90 million in payments related to fumigation matters and a $16 million increase in cash required for working capital (a
$22 million increase excluding the working capital impact of accrued interest, restructuring and taxes). For the year ended December
31, 2016, working capital requirements were negatively impacted by timing of payments related to self-insured claims.
Net cash provided from operating activities in 2015 comprised $406 million in earnings adjusted for non-cash charges,
Net cash provided from operating activities in 2015 comprised $406 million in earnings adjusted for non-cash charges,
offset, in part, by $1 million in payments related to fumigation matters and a $7 million increase in cash required for working capital
(an $18 million decrease excluding the working capital impact of accrued interest, restructuring and taxes). For the year ended
December 31, 2015, working capital requirements were negatively impacted by the timing of interest payments driven by the
redemption of the 2020 Notes, offset, in part, by favorable changes in the payment terms with certain of our vendors.
offset, in part, by $1 million in payments related to fumigation matters and a $7 million increase in cash required for working capital
(an $18 million decrease excluding the working capital impact of accrued interest, restructuring and taxes). For the year ended
December 31, 2015, working capital requirements were negatively impacted by the timing of interest payments driven by the
redemption of the 2020 Notes, offset, in part, by favorable changes in the payment terms with certain of our vendors.
Net cash provided from operating activities in 2014 comprised $303 million in earnings adjusted for non-cash charges, offset,
Net cash provided from operating activities in 2014 comprised $303 million in earnings adjusted for non-cash charges, offset,
in part, by a $14 million increase in cash required for working capital (a $3 million decrease excluding the working capital impact of
accrued interest, restructuring and taxes). Accrued interest balances were reduced in 2014 as a result of the reduction in long-term
in part, by a $14 million increase in cash required for working capital (a $3 million decrease excluding the working capital impact of
accrued interest, restructuring and taxes). Accrued interest balances were reduced in 2014 as a result of the reduction in long-term
debt.
Investing Activities
Net cash used for investing activities from continuing operations was $133 million for the year ended December 31, 2016
Net cash used for investing activities from continuing operations was $133 million for the year ended December 31, 2016
compared to $98 million for the year ended December 31, 2015 and $56 million for the year ended December 31, 2014.
compared to $98 million for the year ended December 31, 2015 and $56 million for the year ended December 31, 2014.
Capital expenditures increased to $56 million in 2016 from $40 million in 2015 and $35 million in 2014 and included
recurring capital needs and information technology projects. We anticipate capital expenditures for the full year 2017 will range from
$50 million to $60 million, reflecting recurring capital needs and the continuation of investments in information systems and
productivity enhancing technology. We expect to fulfill our ongoing vehicle fleet needs through vehicle capital leases. We have no
additional material capital commitments at this time.
Capital expenditures increased to $56 million in 2016 from $40 million in 2015 and $35 million in 2014 and included
recurring capital needs and information technology projects. We anticipate capital expenditures for the full year 2017 will range from
$50 million to $60 million, reflecting recurring capital needs and the continuation of investments in information systems and
productivity enhancing technology. We expect to fulfill our ongoing vehicle fleet needs through vehicle capital leases. We have no
additional material capital commitments at this time.
Proceeds from the sale of equipment and other assets was $8 million, $14 million and $2 million in 2016, 2015 and 2014,
Proceeds from the sale of equipment and other assets was $8 million, $14 million and $2 million in 2016, 2015 and 2014,
respectively, primarily driven by the branch conversions at Merry Maids. The branches were sold for a total purchase price of $9
million, $17 million and $2 million, respectively. In 2016 and 2015, we received cash of $6 million and $13 million and provided
financing of $2 million and $4 million respectively. In 2014, we provided financing of $2 million. As of October 10, 2016, the branch
conversion process was complete.
respectively, primarily driven by the branch conversions at Merry Maids. The branches were sold for a total purchase price of $9
million, $17 million and $2 million, respectively. In 2016 and 2015, we received cash of $6 million and $13 million and provided
financing of $2 million and $4 million respectively. In 2014, we provided financing of $2 million. As of October 10, 2016, the branch
conversion process was complete.
Cash payments for acquisitions totaled $121 million in 2016, compared with $92 million in 2015 and $58 million in 2014. On
June 27, 2016, we acquired OneGuard for $61 million consisting of net cash consideration of $52 million and deferred payments of $9
million. On November 30, 2016, we acquired Landmark for $39 million consisting of net cash consideration of $35 million and
deferred payments of $5 million. Consideration paid for tuck-in acquisitions consisted of cash payments and debt payable to sellers.
We expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions.
Cash payments for acquisitions totaled $121 million in 2016, compared with $92 million in 2015 and $58 million in 2014. On
June 27, 2016, we acquired OneGuard for $61 million consisting of net cash consideration of $52 million and deferred payments of $9
million. On November 30, 2016, we acquired Landmark for $39 million consisting of net cash consideration of $35 million and
deferred payments of $5 million. Consideration paid for tuck-in acquisitions consisted of cash payments and debt payable to sellers.
We expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic acquisitions.
Cash flows provided from purchases, sales and maturities of securities, net, in 2016, 2015 and 2014 were $43 million, $26
million and $40 million, respectively, and were driven by the maturity and sale of marketable securities at American Home Shield.
Cash flows provided from purchases, sales and maturities of securities, net, in 2016, 2015 and 2014 were $43 million, $26
million and $40 million, respectively, and were driven by the maturity and sale of marketable securities at American Home Shield.
Cash flows used for notes receivable, net, were $3 million in 2016 and $6 million in 2015 and 2014 and were a result of
Cash flows used for notes receivable, net, were $3 million in 2016 and $6 million in 2015 and 2014 and were a result of
increased financing provided by SMAC to our franchisees and retail customers of our operating units.
increased financing provided by SMAC to our franchisees and retail customers of our operating units.
2016 Annual Report 64
2016 Annual Report 64
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Financing Activities
Net cash used for financing activities from continuing operations was $102 million for the year ended December 31, 2016
compared to $381 million for the year ended December 31, 2015 and $312 million for the year ended December 31, 2014.
During 2016, we entered into a $1,650 Term Loan Facility and sold $750 million of 2024 Notes and used the proceeds to
repay the remaining outstanding $2,356 million in aggregate principal amount of the Old Term Facility. Additionally, we made
scheduled principal payments on long-term debt of $61 million, paid $4 million in original issue discount, paid $34 million in debt
issuance costs, repurchased $60 million of common stock and received $13 million from the issuance of common stock through the
exercise of stock options and the sale of shares under the Employee Stock Purchase Plan.
During 2015, we borrowed an incremental $583 million, made scheduled principal payments on long-term debt of $45
million and redeemed $390 million and $488 million in aggregate principal amount of our 8% 2020 Notes and 7% 2020 Notes,
respectively, at a redemption price of 106.0% and 105.25%, respectively, of the principal amounts. Additionally, we paid $2 million in
original issue discount, paid $5 million in debt issuance costs, paid $49 million for the call premium paid on the retirement of debt and
received $16 million from the issuance of common stock through the exercise of stock options and the sale of shares under the
Employee Stock Purchase Plan.
On July 1, 2014, we completed the initial public offering of 41,285,000 shares of our common stock at a price of $17.00 per
share, and we terminated the agreements governing the then-existing term loan facility and the then-existing revolving credit facility
and entered into the Old Credit Facilities. The net proceeds and use of proceeds in connection with the offering and related
refinancing, which are included in financing activities from continuing operations during 2014, are as follows:
(In millions)
Net proceeds from the initial public offering
Borrowings under the Old Term Loan Facility
Repayment of the then-existing term loan facility
Partial redemption of 8% 2020 Notes
Partial redemption of 7% 2020 Notes
Call premium paid on the retirement of debt
Original issue discount paid in connection with the Old Term Loan Facility
Debt issuance costs paid in connection with the Old Term Loan Facility
Net cash used for financing activities in connection with the initial public offering
663
1,825
(2,187)
(210)
(263)
(35)
(18)
(24)
(249)
$
$
In addition to the aforementioned financing activities in connection with our initial public offering, during 2014, we made
scheduled principal payments on long-term debt of $38 million and contributed $35 million to New TruGreen in connection with the
TruGreen Spin-off. Additionally, during 2014, we paid $6 million for the purchase of common stock and RSUs and received $16
million from the issuance of common stock.
Contractual Obligations
The following table presents our contractual obligations and commitments as of December 31, 2016.
(In millions)
Principal repayments*
Capital leases*
Estimated interest payments(1)
Non-cancelable operating leases(2)
Purchase obligations(3)
Insurance claims*
Other, including deferred compensation trust*
Total amount
__________________________________
Total
2,826
88
978
134
89
232
8
4,355
Less than 1 Yr
32
$
27
129
21
65
111
2
387
$
$
$
$
$
1 - 3 Yrs
3 - 5 Yrs
158
39
241
30
22
51
1
542
$
$
41
20
233
18
2
22
1
337
More than 5 Yrs
2,595
$
2
375
65
—
48
4
3,089
$
*
(1)
These items are reported in the consolidated statements of financial position.
These amounts represent future interest payments related to existing debt obligations based on fixed and variable interest
rates and principal maturities specified in the associated debt agreements. As of December 31, 2016, payments related to
variable debt are based on applicable rates at December 31, 2016 plus the specified margin in the associated debt agreements
for each period presented. As of December 31, 2016, the estimated debt balance (including capital leases) as of each fiscal
year end from 2017 through 2021 is $2,855 million, $2,701 million, $2,658 million, $2,620 million and $2,597 million,
respectively. The weighted-average interest rate on the estimated debt balances at each fiscal year end from 2017 through
2021 is expected to be 4.4 percent. See Note 12 to the consolidated financial statements for the terms and maturities of
existing debt obligations.
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2016 Annual Report 65
(2)
(3)
These amounts primarily represent future payments relating to real estate operating leases. A portion of our vehicle fleet and
(2)
some equipment are leased through cancelable operating leases and are therefore excluded in the table above.
These amounts primarily represent future payments relating to real estate operating leases. A portion of our vehicle fleet and
some equipment are leased through cancelable operating leases and are therefore excluded in the table above.
These obligations include commitments for various products and services including, among other things, inventory
(3)
purchases, telecommunications services, marketing and advertising services and other professional services. Arrangements
are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be
purchased, a pricing structure and approximate timing of the transactions. Most arrangements are cancelable without a
significant penalty and with short notice (usually 30-120 days) and amounts reflected above include our minimum contractual
obligation (inclusive of applicable cancellation penalties). For obligations with significant penalties associated with
termination, the minimum required expenditures over the term of the agreement have been included in the table above.
These obligations include commitments for various products and services including, among other things, inventory
purchases, telecommunications services, marketing and advertising services and other professional services. Arrangements
are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be
purchased, a pricing structure and approximate timing of the transactions. Most arrangements are cancelable without a
significant penalty and with short notice (usually 30-120 days) and amounts reflected above include our minimum contractual
obligation (inclusive of applicable cancellation penalties). For obligations with significant penalties associated with
termination, the minimum required expenditures over the term of the agreement have been included in the table above.
Due to the uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits at
December 31, 2016, we are unable to reasonably estimate the period of cash settlement with the respective taxing authority.
Accordingly, $13 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See the
discussion of income taxes in Note 5 to the consolidated financial statements.
Due to the uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits at
December 31, 2016, we are unable to reasonably estimate the period of cash settlement with the respective taxing authority.
Accordingly, $13 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See the
discussion of income taxes in Note 5 to the consolidated financial statements.
Financial Position—Continuing Operations
Financial Position—Continuing Operations
The following discussion describes changes in our financial position from December 31, 2015 to December 31, 2016.
The following discussion describes changes in our financial position from December 31, 2015 to December 31, 2016.
Receivables increased from prior year levels, primarily related to customer growth at American Home Shield.
Receivables increased from prior year levels, primarily related to customer growth at American Home Shield.
Property and equipment increased from prior year levels, reflecting purchases for recurring capital needs and information
Property and equipment increased from prior year levels, reflecting purchases for recurring capital needs and information
technology projects and the acquisition of vehicles under the Fleet Agreement, offset, in part, by depreciation expense.
technology projects and the acquisition of vehicles under the Fleet Agreement, offset, in part, by depreciation expense.
Goodwill increased from prior year levels due to the OneGuard and Landmark acquisitions and several pest control and
Goodwill increased from prior year levels due to the OneGuard and Landmark acquisitions and several pest control and
termite acquisitions, offset, in part, by reductions due to the Merry Maids branch conversions. See Notes 4 and 6 to the consolidated
termite acquisitions, offset, in part, by reductions due to the Merry Maids branch conversions. See Notes 4 and 6 to the consolidated
financial statements for more details.
Restricted cash represents amounts posted as collateral under our automobile, general liability and workers’ compensation
Restricted cash represents amounts posted as collateral under our automobile, general liability and workers’ compensation
insurance program.
financial statements for more details.
insurance program.
Marketable securities decreased from prior year levels, primarily due to the sale of securities at American Home Shield.
Marketable securities decreased from prior year levels, primarily due to the sale of securities at American Home Shield.
Deferred revenue increased from prior year levels, primarily reflecting customer growth American Home Shield.
Deferred revenue increased from prior year levels, primarily reflecting customer growth American Home Shield.
Long-term debt increased from prior year levels primarily due to additional borrowings under the Fleet Agreement and Credit
Long-term debt increased from prior year levels primarily due to additional borrowings under the Fleet Agreement and Credit
Facilities. See Note 12 to the consolidated financial statements for more details.
Facilities. See Note 12 to the consolidated financial statements for more details.
Deferred taxes increased from prior year levels, primarily due to the current year deferred tax provision and current year
Deferred taxes increased from prior year levels, primarily due to the current year deferred tax provision and current year
deferred taxes related to unrealized gain on derivatives. See Note 5 to the consolidated financial statements for more details.
deferred taxes related to unrealized gain on derivatives. See Note 5 to the consolidated financial statements for more details.
Other long-term obligations, primarily self-insured claims decreased from prior year levels, primarily due to settlements of
Other long-term obligations, primarily self-insured claims decreased from prior year levels, primarily due to settlements of
insured fumigation related matters.
insured fumigation related matters.
Total shareholders’ equity was $686 million as of December 31, 2016 compared to $545 million as of December 31, 2015.
The increase was primarily driven by the $173 million of comprehensive income offset, in part, by $60 million of share repurchases.
See the consolidated statements of shareholders’ equity for further information.
Total shareholders’ equity was $686 million as of December 31, 2016 compared to $545 million as of December 31, 2015.
The increase was primarily driven by the $173 million of comprehensive income offset, in part, by $60 million of share repurchases.
See the consolidated statements of shareholders’ equity for further information.
Financial Position—Discontinued Operations
Financial Position—Discontinued Operations
The assets and liabilities related to discontinued operations have been classified in a separate caption on the consolidated
The assets and liabilities related to discontinued operations have been classified in a separate caption on the consolidated
statements of financial position.
Off-Balance Sheet Arrangements
statements of financial position.
Off-Balance Sheet Arrangements
As of December 31, 2016, we did not have any significant off-balance sheet arrangements.
As of December 31, 2016, 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
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
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.
The preparation of the consolidated financial statements requires management to make certain estimates and assumptions
The preparation of the consolidated financial statements requires management to make certain estimates and assumptions
required under GAAP which may differ from actual results. The following are our most critical accounting policies, which are those
that require management’s most difficult, subjective and complex judgments, requiring the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent periods. The following discussion is not intended to represent a
comprehensive list of our accounting policies. For a detailed description of the application of these and other accounting policies, see
Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K.
required under GAAP which may differ from actual results. The following are our most critical accounting policies, which are those
that require management’s most difficult, subjective and complex judgments, requiring the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent periods. The following discussion is not intended to represent a
comprehensive list of our accounting policies. For a detailed description of the application of these and other accounting policies, see
Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K.
Self-insurance accruals
Self-insurance accruals
2016 Annual Report 66
2016 Annual Report 66
Critical Accounting Policies and Estimates
that could arise if we had engaged in such relationships.
Critical Accounting Policies and Estimates
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We carry insurance policies on insurable risks at levels which we believe to be appropriate, including workers’ compensation,
auto and general liability risks. We purchase insurance from third-party insurance carriers. These policies typically incorporate
significant deductibles or self-insured retentions. We are responsible for all claims that fall within the retention limits. In determining
our accrual for self-insured claims, we use historical claims experience to establish both the current year accrual and the underlying
provision for future losses. This actuarially determined provision and related accrual include both known claims, as well as incurred
but not reported claims. We adjust our estimate of accrued self-insured claims when required to reflect changes based on factors such
as changes in health care costs, accident frequency and claim severity. We believe the use of actuarial methods to account for these
liabilities provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation
technique in this area is inherently sensitive given the magnitude of claims involved and the length of time until the ultimate cost is
known. We believe our recorded obligations for these expenses are consistently measured. Nevertheless, changes in healthcare costs,
accident frequency and claim severity can materially affect the estimates for these liabilities.
Home Warranty Claims Accruals
Home warranty contracts are typically one year in duration. Home warranty claims costs are expensed as incurred. We
recognize revenue over the life of these contracts in proportion to the expected direct costs. Those costs bear a direct relationship to
the fulfillment of our obligations under the contracts and are representative of the relative value provided to the customer (proportional
performance method). Accruals for home warranty claims at American Home Shield are made based on our claims experience and
actuarial projections. The Company’s actuary performs a reserve analysis utilizing generally accepted actuarial methods that
incorporate cumulative historical claims experience and information provided by the Company. We regularly review our estimates of
claims costs and adjust the estimates when appropriate. We believe the use of actuarial methods to account for these liabilities
provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation technique in
this area is inherently sensitive given the magnitude of claims involved. We believe our recorded obligations for these expenses are
consistently measured. Nevertheless, changes in claims costs can materially affect the estimates for these liabilities.
Income Taxes
We record deferred income tax balances based on the net tax effects of temporary differences between the carrying value of
assets and liabilities for financial reporting purposes and income tax purposes. Based on the evaluation of all available information,
the Company recognizes future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is
considered more likely than not. We record valuation allowances against our deferred tax assets, when necessary. Realization of
deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At
least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. Significant
judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax
rate is then applied to the year-to-date income before income taxes, excluding infrequently occurring or unusual items, to determine
the year-to-date income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in
which they occur. As the year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction
during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year.
When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. Our current and
deferred tax provisions are based on estimates and assumptions that could differ from the final positions reflected in our income tax
returns. We adjust our current and deferred tax provisions based on our income tax returns which are generally filed in the third or
fourth quarters of the subsequent year.
Our income tax returns are audited by U.S. state, U.S. federal and foreign tax authorities, and we are typically engaged in
various tax examinations at any given time. Uncertain tax positions often arise due to uncertainty or differing interpretations of the
application of tax rules throughout the various jurisdictions in which we operate. On a quarterly basis, we evaluate the probability that
a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on
factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our
assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment
changes. While management believes that these judgments and estimates are appropriate and reasonable under the circumstances,
actual resolution of these matters may differ from recorded estimated amounts. We recognize interest and penalties related to income
tax matters in income tax expense.
Property and Equipment, Intangible Assets and Goodwill
Fixed assets and intangible assets with finite lives are depreciated and amortized on a straight-line basis over their estimated
useful lives. These lives are based on our previous experience for similar assets, potential market obsolescence and other industry and
business data. As required by accounting standards for the impairment or disposal of long-lived assets, our fixed assets and finite-lived
intangible assets are tested for recoverability whenever events or changes in circumstances indicate their carrying amounts may not be
recoverable. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, an impairment
loss would be recognized equal to the difference between the carrying amount and the fair value of the asset. Changes in the estimated
useful lives or in the asset values could cause us to adjust our book value or future expense accordingly.
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2016 Annual Report 67
As required under accounting standards for goodwill and other intangibles, goodwill is not subject to amortization, and
As required under accounting standards for goodwill and other intangibles, goodwill is not subject to amortization, and
intangible assets with indefinite useful lives are not amortized until their useful lives are determined to no longer be indefinite.
Goodwill and intangible assets that are not subject to amortization are subject to assessment for impairment by applying a fair-value
based test on an annual basis or more frequently if circumstances indicate a potential impairment. We adopted the provisions of ASU
2011-08, ‘‘Testing Goodwill for Impairment,’’ in the fourth quarter of 2011. This Accounting Standards Update (‘‘ASU’’), gives
entities the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill
impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not
greater than its carrying amount, the two-step impairment test would not be required. For the 2016, 2015 and 2014 annual goodwill
impairment analysis performed as of October 1 of each year, we did not perform qualitative assessments on any reporting unit, but
instead completed Step 1 of the goodwill impairment test for all reporting units.
intangible assets with indefinite useful lives are not amortized until their useful lives are determined to no longer be indefinite.
Goodwill and intangible assets that are not subject to amortization are subject to assessment for impairment by applying a fair-value
based test on an annual basis or more frequently if circumstances indicate a potential impairment. We adopted the provisions of ASU
2011-08, ‘‘Testing Goodwill for Impairment,’’ in the fourth quarter of 2011. This Accounting Standards Update (‘‘ASU’’), gives
entities the option of performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill
impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not
greater than its carrying amount, the two-step impairment test would not be required. For the 2016, 2015 and 2014 annual goodwill
impairment analysis performed as of October 1 of each year, we did not perform qualitative assessments on any reporting unit, but
instead completed Step 1 of the goodwill impairment test for all reporting units.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value
of a reporting unit to its carrying amount, including goodwill. In performing the first step, we determine the fair value of a reporting
unit using a combination of a discounted cash flow, or ‘‘DCF,’’ analysis, a market-based comparable approach and a market-based
transaction approach. Determining fair value requires the exercise of significant judgment, including judgment about appropriate
discount rates, terminal growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company
earnings multiples for the market-based comparable approach and relevant transaction multiples for the market-based transaction
approach. The cash flows employed in the DCF analyses are based on our most recent annual operating plan and, for years beyond the
annual operating plan, our estimates, which are based on estimated growth rates. The discount rates used in the DCF analyses are
intended to reflect the risks inherent in the future cash flows of the respective reporting units. In addition, the market-based
comparable and transaction approaches utilize comparable company public trading values, comparable company historical results,
research analyst estimates and, where available, values observed in private market transactions. If the estimated fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is
not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill
impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting
unit’s goodwill with its goodwill carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair
value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If
the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an
amount equal to that excess.
The impairment test for other intangible assets not subject to amortization involves a comparison of the estimated fair value
of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are
determined using a DCF valuation analysis. The DCF methodology used to value trade names is known as the relief from royalty
method and entails identifying the hypothetical cash flows generated by an assumed royalty rate that a third-party would pay to license
the trade names and discounting them back to the valuation date. Significant judgments inherent in this analysis include the selection
of appropriate discount rates and hypothetical royalty rates, estimating the amount and timing of estimated future cash flows
attributable to the hypothetical royalty rates and identification of appropriate terminal growth rate assumptions. The discount rates
used in the DCF analyses are intended to reflect the risk inherent in the projected future cash flows generated by the respective
intangible assets.
of a reporting unit to its carrying amount, including goodwill. In performing the first step, we determine the fair value of a reporting
unit using a combination of a discounted cash flow, or ‘‘DCF,’’ analysis, a market-based comparable approach and a market-based
transaction approach. Determining fair value requires the exercise of significant judgment, including judgment about appropriate
discount rates, terminal growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company
earnings multiples for the market-based comparable approach and relevant transaction multiples for the market-based transaction
approach. The cash flows employed in the DCF analyses are based on our most recent annual operating plan and, for years beyond the
annual operating plan, our estimates, which are based on estimated growth rates. The discount rates used in the DCF analyses are
intended to reflect the risks inherent in the future cash flows of the respective reporting units. In addition, the market-based
comparable and transaction approaches utilize comparable company public trading values, comparable company historical results,
research analyst estimates and, where available, values observed in private market transactions. If the estimated fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is
not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill
impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting
unit’s goodwill with its goodwill carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair
value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If
the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an
amount equal to that excess.
The impairment test for other intangible assets not subject to amortization involves a comparison of the estimated fair value
of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are
determined using a DCF valuation analysis. The DCF methodology used to value trade names is known as the relief from royalty
method and entails identifying the hypothetical cash flows generated by an assumed royalty rate that a third-party would pay to license
the trade names and discounting them back to the valuation date. Significant judgments inherent in this analysis include the selection
of appropriate discount rates and hypothetical royalty rates, estimating the amount and timing of estimated future cash flows
attributable to the hypothetical royalty rates and identification of appropriate terminal growth rate assumptions. The discount rates
used in the DCF analyses are intended to reflect the risk inherent in the projected future cash flows generated by the respective
intangible assets.
Goodwill and indefinite-lived intangible assets, primarily our trade names, are assessed annually for impairment during the
Goodwill and indefinite-lived intangible assets, primarily our trade names, are assessed annually for impairment during the
fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. Our goodwill is assigned to
three reporting units: Terminix, American Home Shield and Franchise Services Group. The October 1, 2016 estimated fair values for
all reporting units were substantially in excess of their respective carrying values, and we do not believe the reporting units were at
risk of impairment as of December 31, 2016. Our 2016, 2015, and 2014 annual impairment analyses, which were performed as of
October 1 of each year, did not result in any goodwill or trade name impairments to continuing operations.
fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. Our goodwill is assigned to
three reporting units: Terminix, American Home Shield and Franchise Services Group. The October 1, 2016 estimated fair values for
all reporting units were substantially in excess of their respective carrying values, and we do not believe the reporting units were at
risk of impairment as of December 31, 2016. Our 2016, 2015, and 2014 annual impairment analyses, which were performed as of
October 1 of each year, did not result in any goodwill or trade name impairments to continuing operations.
Stock-Based Compensation
Stock-Based Compensation
Stock-based compensation expense for stock options is estimated at the grant date based on an award’s fair value as
Stock-based compensation expense for stock options is estimated at the grant date based on an award’s fair value as
calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-
Scholes model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions
used in the Black-Scholes model change significantly, stock-based compensation expense for future grants may differ materially from
that recorded in the current period related to options granted to date. In addition, we estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our
actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly. See Note 17 to the
calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-
Scholes model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions
used in the Black-Scholes model change significantly, stock-based compensation expense for future grants may differ materially from
that recorded in the current period related to options granted to date. In addition, we estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our
actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly. See Note 17 to the
consolidated financial statements for more details.
Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability
Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability
has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters
has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters
Contingent Liabilities
consolidated financial statements for more details.
Contingent Liabilities
2016 Annual Report 68
2016 Annual Report 68
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require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal
counsel. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future
remediation alternatives and costs.
Newly Issued Accounting Standards
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability
of our financial statements. In the year ended December 31, 2016, we adopted Accounting Standards Update (“ASU”) 2016-09,
“Improvements to Employee Share-Based Payment Accounting,” ASU 2016-15, “Classification of Certain Cash Receipts and
Cash Payments” and ASU 2016-18, “Restricted Cash.” See Note 2 to the consolidated financial statements for further information
on these adoptions and other newly issued accounting standards.
Information Regarding Forward-Looking Statements
This report contains forward-looking statements and cautionary statements. Some of the 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 include, without limitation, all matters that are not historical facts. They appear in a number of places throughout this report
and include, without limitation, statements regarding our intentions, beliefs, assumptions or current expectations concerning, among
other things, financial position; results of operations; cash flows; prospects; growth strategies or expectations; customer retention; the
continuation of acquisitions, including the integration of any acquired company and risks relating to any such acquired company; fuel
prices; attraction and retention of key personnel; the impact of fuel swaps; the valuation of marketable securities; estimates of accruals
for self-insured claims related to workers’ compensation, auto and general liability risks; estimates of accruals for home warranty
claims; estimates of future payments under operating and capital 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” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” above, could cause actual results and outcomes to differ from those reflected in the
forward-looking statements. Additional factors that could cause actual results and outcomes to differ from those reflected in forward-
looking statements include, without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
resolution of fumigation related matters, including approval of the terms of the New Plea Agreement by the District Court
related to the criminal aspects of the U.S. Virgin Islands fumigation incident;
lawsuits, enforcement actions and other claims by third parties or governmental authorities;
the 401(k) Plan correction contribution and other employee benefit plan compliance issues;
compliance with, or violation of, environmental, health and safety laws and regulations;
weakening general economic conditions, especially as they may affect home sales, unemployment and consumer confidence
or spending levels;
our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations;
our ability to successfully implement our business strategies;
adverse credit and financial markets impeding access, increasing financing costs or causing our customers to incur liquidity
issues leading to some of our services not being purchased or cancelled;
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;
increase in prices for fuel and raw materials, and in minimum wage levels;
changes in the source and intensity of competition in our market segments;
adverse weather conditions;
2016 Annual Report 69
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•
•
•
•
•
•
•
•
•
•
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 substantial 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.
•
•
•
•
•
•
•
•
•
•
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 substantial 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.
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
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.
performance, unless expressed as such, and should only be viewed as historical data.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The economy and its impact on discretionary consumer spending, labor wages, fuel prices and other material costs, home
resales, unemployment rates, insurance costs and medical costs could have a material adverse impact on future results of operations.
The economy and its impact on discretionary consumer spending, labor wages, fuel prices and other material costs, home
resales, unemployment rates, insurance costs and medical costs could have a material adverse impact on future results of operations.
We do not hold or issue derivative financial instruments for trading or speculative purposes. We have entered into specific
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.
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
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-
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.
rate debt and by utilizing interest rate swaps.
On November 7, 2016, we entered into a seven-year interest rate swap agreement effective November 8, 2016. The notional
amount of the agreement was $650 million. Under the terms of the agreement, we will pay a fixed rate of interest of 1.493 percent on
the $650 million notional amount, and we will receive a floating rate of interest (based on one-month LIBOR, subject to a floor of
zero percent) on the notional amount. Therefore, during the term of the agreement, the effective interest rate on $650 million of the
Term Loan Facility is fixed at a rate of 1.493 percent, plus the incremental borrowing margin of 2.50 percent.
On November 7, 2016, we entered into a seven-year interest rate swap agreement effective November 8, 2016. The notional
amount of the agreement was $650 million. Under the terms of the agreement, we will pay a fixed rate of interest of 1.493 percent on
the $650 million notional amount, and we will receive a floating rate of interest (based on one-month LIBOR, subject to a floor of
zero percent) on the notional amount. Therefore, during the term of the agreement, the effective interest rate on $650 million of the
Term Loan Facility is fixed at a rate of 1.493 percent, plus the incremental borrowing margin of 2.50 percent.
We believe our exposure to interest rate fluctuations, when viewed on both a gross and net basis, is material to our overall
We believe our exposure to interest rate fluctuations, when viewed on both a gross and net basis, is material to our overall
results of operations. A significant portion of our outstanding debt, including debt under the Credit Facilities, bears interest at variable
rates. As a result, increases in interest rates would increase the cost of servicing our indebtedness and could materially reduce our
profitability and cash flows. As of December 31, 2016, each one percentage point change in interest rates would result in an
approximate $10 million change in the annual interest expense on our Term Loan Facility after considering the impact of the effective
interest rate swap. Assuming all revolving loans were fully drawn as of December 31, 2016, each one percentage point change in
interest rates would result in an approximate $3 million change in annual interest expense on our Revolving Credit Facility. The
impact of increases in interest rates could be more significant for us than it would be for some other companies because of our
substantial indebtedness.
results of operations. A significant portion of our outstanding debt, including debt under the Credit Facilities, bears interest at variable
rates. As a result, increases in interest rates would increase the cost of servicing our indebtedness and could materially reduce our
profitability and cash flows. As of December 31, 2016, each one percentage point change in interest rates would result in an
approximate $10 million change in the annual interest expense on our Term Loan Facility after considering the impact of the effective
interest rate swap. Assuming all revolving loans were fully drawn as of December 31, 2016, each one percentage point change in
interest rates would result in an approximate $3 million change in annual interest expense on our Revolving Credit Facility. The
impact of increases in interest rates could be more significant for us than it would be for some other companies because of our
substantial indebtedness.
2016 Annual Report 70
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The following table summarizes information about our debt as of December 31, 2016 (after considering the impact of the
effective interest rate swaps), including the principal cash payments and related weighted-average interest rates by expected maturity
dates based on applicable rates at December 31, 2016.
(In millions)
Debt:
Fixed rate
Average interest rate
Variable rate
Average interest rate
Interest Rate Swaps:
Receive variable/pay fixed
Average pay rate(1)
Average receive rate(1)
2017
2018
Expected Year of Maturity
2020
2019
2021
Thereafter
Total
Fair
Value
$
$
$
$
17
5.1 %
42
3.3 %
$
$
100
6.7 %
54
3.2 %
$
$
9
5.0 %
34
3.3 %
$
$
7
5.0 %
31
3.3 %
— $ 1,678
5.0 %
23
3.3 %
5.1 %
919
3.3 %
$
$ 1,811
$ 1,825
5.2 %
$ 1,103
$ 1,106
3.3 %
$
650
1.5 %
0.8 %
__________________________________
(1)
Before the application of the applicable borrowing margin.
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 14 million gallons of fuel in 2017. As of December 31, 2016, a ten
percent change in fuel prices would result in a change of approximately $3 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 December 31, 2016, we had
fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $33 million, maturing through 2018. The
estimated fair value of these contracts as of December 31, 2016 was a net asset of $5 million. These fuel swap contracts provide a
fixed price for approximately 63 percent and 40 percent of our estimated fuel usage for 2017 and 2018, respectively.
2701784_Text_1cPages.indd 55
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2016 Annual Report 71
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ServiceMaster Global Holdings, Inc.
Memphis, Tennessee
To the Board of Directors and Shareholders of
ServiceMaster Global Holdings, Inc.
Memphis, Tennessee
We have audited the accompanying consolidated statements of financial position of ServiceMaster Global Holdings, Inc. and
We have audited the accompanying consolidated statements of financial position of ServiceMaster Global Holdings, Inc. and
subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and
comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2016.
Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial
statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and
comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2016.
Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial
statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
ServiceMaster Global Holdings, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
ServiceMaster Global Holdings, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company retrospectively adopted Accounting Standards
As discussed in Note 2 to the consolidated financial statements, the Company retrospectively adopted Accounting Standards
Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments and
ASU 2016-09 - Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments and
ASU 2016-09 - Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 24, 2017, expressed an unqualified opinion on the Company’s internal control over financial reporting.
the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 24, 2017, expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
February 24, 2017
/s/ Deloitte & Touche LLP
Memphis, Tennessee
February 24, 2017
2016 Annual Report 72
2016 Annual Report 72
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Consolidated Statements of Operations and Comprehensive Income (Loss)
(In millions, except per share data)
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
Amortization expense
401(k) Plan corrective contribution
Fumigation related matters
Insurance reserve adjustment
Impairment of software and other related costs
Consulting agreement termination fees
Restructuring charges
Gain on sale of Merry Maids branches
Interest expense
Interest and net investment income
Loss on extinguishment of debt
Income from Continuing Operations before Income Taxes
Provision for income taxes
Equity in losses of joint venture
Income from Continuing Operations
Loss from discontinued operations, net of income taxes
Net Income (Loss)
Other Comprehensive Income (Loss), Net of Income Taxes:
Net unrealized losses on securities
Net unrealized gains (losses) on derivative instruments
Foreign currency translation loss
Other Comprehensive Income (Loss), Net of Income Taxes
Total Comprehensive Income (Loss)
Weighted-average common shares outstanding - Basic
Weighted-average common shares outstanding - Diluted
Basic Earnings (Loss) Per Share:
Income from Continuing Operations
Loss from discontinued operations, net of income taxes
Net Income (Loss)
Diluted Earnings (Loss) Per Share:
Income from Continuing Operations
Loss from discontinued operations, net of income taxes
Net Income (Loss)
$
$
$
$
$
Year Ended December 31,
2016
2015
2014
2,746 $
1,448
711
33
2
93
23
1
—
17
(2)
153
(6)
32
241
85
(1)
155
(1)
155 $
(2)
20
—
18
173 $
2,594 $
1,375
666
38
23
9
—
—
—
5
(7)
167
(9)
58
270
107
—
162
(2)
160 $
(3)
(2)
(8)
(13)
147 $
135.3
137.3
135.0
136.6
1.15 $
—
1.14
1.13 $
—
1.13
1.20 $
(0.01)
1.19
1.19 $
(0.01)
1.17
2,457
1,298
669
52
—
—
—
47
21
11
(1)
219
(7)
65
84
40
—
43
(100)
(57)
(1)
(6)
(5)
(13)
(70)
112.8
113.8
0.38
(0.88)
(0.50)
0.38
(0.88)
(0.50)
See accompanying Notes to the Consolidated Financial Statements.
2701784_Text_1cPages.indd 57
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2016 Annual Report 73
Consolidated Statements of Financial Position
(In millions, except share data)
Consolidated Statements of Financial Position
(In millions, except share data)
Receivables, less allowances of $22 and $23, respectively
$
$
Intangible assets, primarily trade names, service marks and trademarks, net
Assets:
Current Assets:
Cash and cash equivalents
Marketable securities
Inventories
Prepaid expenses and other assets
Deferred customer acquisition costs
Total Current Assets
Other Assets:
Property and equipment, net
Goodwill
Long-term marketable securities
Restricted cash
Notes receivable
Other assets
Total Assets
Current Liabilities:
Accounts payable
Accrued liabilities:
Liabilities and Shareholders' Equity:
Payroll and related expenses
Self-insured claims and related expenses
Accrued interest payable
Other
Deferred revenue
Current portion of long-term debt
Total Current Liabilities
Long-Term Debt
Other Long-Term Liabilities:
Deferred taxes
Other long-term obligations, primarily self-insured claims
Total Other Long-Term Liabilities
Commitments and Contingencies (Note 9)
Shareholders’ Equity:
Common stock $0.01 par value (authorized 2,000,000,000 shares with 144,339,338 shares
issued and 135,030,283 outstanding at December 31, 2016 and 143,170,897 shares issued
and 135,511,176 outstanding at December 31, 2015)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
7,659,721 shares at December 31, 2015)
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
Less common stock held in treasury, at cost (9,309,055 shares at December 31, 2016 and
$
5,386
$
December 31,
As of
2016
As of
December 31,
2015
As of
December 31,
2016
As of
December 31,
2015
$
$
$
$
291
25
536
43
70
34
998
210
2,247
1,708
95
37
19
71
5,386
112
54
111
16
60
629
59
1,042
2,772
719
167
886
2
2,274
(1,405)
(3)
(182)
686
Assets:
Current Assets:
Cash and cash equivalents
Marketable securities
Receivables, less allowances of $22 and $23, respectively
Inventories
Prepaid expenses and other assets
Deferred customer acquisition costs
Total Current Assets
Other Assets:
Property and equipment, net
Goodwill
Intangible assets, primarily trade names, service marks and trademarks, net
Restricted cash
Notes receivable
Long-term marketable securities
Other assets
Total Assets
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable
Accrued liabilities:
Payroll and related expenses
Self-insured claims and related expenses
Accrued interest payable
Other
Deferred revenue
Current portion of long-term debt
Total Current Liabilities
Long-Term Debt
Other Long-Term Liabilities:
Deferred taxes
Other long-term obligations, primarily self-insured claims
Total Other Long-Term Liabilities
296
24
487
40
54
32
933
160
2,129
1,704
—
32
57
83
5,098
110
64
106
10
59
552
54
955
2,698
687
213
901
Commitments and Contingencies (Note 9)
Shareholders’ Equity:
Common stock $0.01 par value (authorized 2,000,000,000 shares with 144,339,338 shares
issued and 135,030,283 outstanding at December 31, 2016 and 143,170,897 shares issued
and 135,511,176 outstanding at December 31, 2015)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Less common stock held in treasury, at cost (9,309,055 shares at December 31, 2016 and
7,659,721 shares at December 31, 2015)
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
2
2,245
(1,560)
(21)
(122)
545
5,098
$
$
$
$
$
$
$
291
25
536
43
70
34
998
210
2,247
1,708
95
37
19
71
5,386
112
54
111
16
60
629
59
1,042
2,772
719
167
886
296
24
487
40
54
32
933
160
2,129
1,704
—
32
57
83
5,098
110
64
106
10
59
552
54
955
2,698
687
213
901
2
2,274
(1,405)
(3)
(182)
686
5,386
$
2
2,245
(1,560)
(21)
(122)
545
5,098
See accompanying Notes to the Consolidated Financial Statements.
See accompanying Notes to the Consolidated Financial Statements.
2016 Annual Report 74
2016 Annual Report 74
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Consolidated Statements of Shareholders’ Equity
(In millions)
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury
Shares
Amount
Total
Equity
Treasury
Total
Equity
Shares
Common
Stock
1 $
—
—
—
—
—
—
—
—
—
—
—
2 $
—
—
Accumulated
Deficit
—
—
—
—
—
—
—
2 $
—
—
—
—
—
—
—
2 $
Balance December 31, 2013
Net loss
Other comprehensive income, net of tax
Total comprehensive loss
Net assets distributed to New TruGreen
Issuance of common stock
Issuance of common stock through IPO
Exercise of stock options
Vesting of RSUs
DSUs converted into common stock
Repurchase of common stock
Stock-based employee compensation
Balance December 31, 2014
Net income
Other comprehensive loss, net of tax
Total comprehensive income (loss)
99 $
Issuance of common stock
—
Exercise of stock options
—
DSUs converted into common stock
—
Repurchase of common stock
—
Stock-based employee compensation
—
Excess tax benefits from stock-based compensation
41
Balance December 31, 2015
1
Net income
—
Other comprehensive income, net of tax
—
Total comprehensive income
—
Issuance of common stock
—
Exercise of stock options
142 $
Repurchase of common stock
—
Stock-based employee compensation
—
Balance December 31, 2016
—
—
1
—
—
—
—
143 $
—
—
—
—
1
—
—
144 $
99 $
—
—
—
—
—
41
1
—
Consolidated Statements of Shareholders’ Equity
—
(In millions)
—
—
142 $
—
Additional
—
Paid-in
Capital
—
1,523 $
—
—
1
—
—
—
—
—
—
6
—
663
143 $
10
—
(1)
—
(1)
—
—
—
8
1
2,207 $
—
—
—
—
144 $
—
1
15
(1)
—
10
13
2,245 $
—
—
—
2
10
—
16
2,274 $
1,523 $
—
—
—
—
6
663
10
(1)
(1)
—
8
2,207 $
—
—
—
(1,390) $
1
(57)
15
—
(1)
(57)
—
(274)
10
—
13
—
2,245 $
—
—
—
—
—
—
—
2
—
10
(1,720) $
—
160
16
—
2,274 $
160
—
—
—
—
—
—
(1,560) $
155
—
155
—
—
—
—
(1,405) $
1 $
—
—
—
—
—
—
—
—
—
—
—
2 $
—
—
—
—
—
—
—
—
—
2 $
—
—
—
—
—
—
—
2 $
(1,390) $
(57)
—
(57)
(274)
—
—
—
—
—
—
—
Accumulated
(1,720) $
Other
160
Comprehensive
—
Income
(Loss)
160
7
—
—
—
(13)
—
(13)
—
(1)
—
—
—
—
(1,560) $
—
155
—
—
—
155
—
—
—
—
(8)
—
—
—
(13)
(1,405) $
(13)
—
—
—
—
—
—
(21)
—
18
18
—
—
—
—
(3)
See accompanying Notes to the Consolidated Financial Statements
7
—
(13)
(13)
(1)
—
—
—
—
—
—
—
(8)
—
(13)
Shares
(13)
—
—
—
—
—
—
(21)
—
18
18
—
—
—
—
(3)
(7) $
—
—
—
—
—
—
—
—
—
—
—
(8) $
—
—
Amount
—
—
—
—
—
—
—
(8) $
—
—
—
—
—
(2)
—
(9) $
(118) $
—
—
—
—
—
—
—
—
1
(5)
—
(122) $
—
—
—
(118) $
—
—
—
—
1
—
(1)
—
—
—
—
—
(122) $
—
—
—
—
1
—
(5)
—
—
—
(122) $
(60)
—
—
—
(182) $
—
—
—
1
(1)
—
—
(122) $
—
—
—
—
—
(60)
—
(182) $
(7) $
—
—
—
—
—
—
—
—
—
—
—
(8) $
—
—
—
—
—
—
—
—
—
(8) $
—
—
—
—
—
(2)
—
(9) $
23
(57)
(13)
(70)
(275)
6
663
10
(1)
—
(5)
8
359
160
(13)
147
23
1
(57)
15
(13)
—
(70)
(1)
(275)
10
6
13
663
545
10
155
(1)
18
—
173
(5)
2
8
10
359
(60)
160
16
(13)
686
147
1
15
—
(1)
10
13
545
155
18
173
2
10
(60)
16
686
2016 Annual Report 75
Balance December 31, 2013
Net loss
Other comprehensive income, net of tax
Total comprehensive loss
Net assets distributed to New TruGreen
Issuance of common stock
Issuance of common stock through IPO
Exercise of stock options
Vesting of RSUs
DSUs converted into common stock
Repurchase of common stock
Stock-based employee compensation
Balance December 31, 2014
Net income
Other comprehensive loss, net of tax
Total comprehensive income (loss)
Issuance of common stock
Exercise of stock options
DSUs converted into common stock
Repurchase of common stock
Balance December 31, 2015
Net income
Other comprehensive income, net of tax
Total comprehensive income
Issuance of common stock
Exercise of stock options
Repurchase of common stock
Stock-based employee compensation
Balance December 31, 2016
Stock-based employee compensation
Excess tax benefits from stock-based compensation
See accompanying Notes to the Consolidated Financial Statements
2701784_Text_1cPages.indd 59
3/11/17 11:48 AM
2016 Annual Report 75
Year Ended December 31,
2015
2016
2014
$
296 $
389 $
Consolidated Statements of Cash Flows
(In millions)
Consolidated Statements of Cash Flows
(In millions)
Cash and Cash Equivalents and Restricted Cash at Beginning of Period
Cash Flows from Operating Activities from Continuing Operations:
Net Income (Loss)
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
Loss from discontinued operations, net of income taxes
Year Ended December 31,
2016
2015
2014
$
296 $
389 $
155
160
484
(57)
100
—
48
52
8
—
—
—
—
47
(1)
65
29
8
(4)
7
(34)
(1)
(1)
39
1
(17)
3
(3)
289
(35)
2
(58)
(11)
51
(85)
79
—
(56)
Cash and Cash Equivalents and Restricted Cash at Beginning of Period
Cash Flows from Operating Activities from Continuing Operations:
Net Income (Loss)
Adjustments to reconcile net income (loss) to net cash provided from operating activities:
Loss from discontinued operations, net of income taxes
Equity in losses of joint venture
Depreciation expense
Amortization expense
Amortization of debt issuance costs
401(k) Plan corrective contribution
Fumigation related matters
Payments on fumigation related matters
Insurance reserve adjustment
Impairment of software and other related costs
Gain on sale of Merry Maids branches
Loss on extinguishment of debt
Deferred income tax provision
Stock-based compensation expense
Gain on sale of marketable securities
Other
Change in working capital, net of acquisitions:
Receivables
Inventories and other current assets
Accounts payable
Deferred revenue
Accrued liabilities
Accrued interest payable
Accrued restructuring charges
Current income taxes
Net Cash Provided from Operating Activities from Continuing Operations
Cash Flows from Investing Activities from Continuing Operations:
Property additions
Sale of equipment and other assets
Other business acquisitions, net of cash acquired
Purchases of available-for-sale securities
Sales and maturities of available-for-sale securities
Origination of notes receivable
Collections on notes receivable
Other investments
Net Cash Used for Investing Activities from Continuing Operations
Cash Flows from Financing Activities from Continuing Operations:
1,825
(2,698)
(18)
(24)
(35)
(35)
(6)
679
(312)
(11)
(2)
(3)
(15)
—
(95)
389
Borrowings of debt
Payments of debt
Discount paid on issuance of debt
Debt issuance costs paid
Call premium paid on retirement of debt
Contribution to TruGreen Holding Corporation
Repurchase of common stock and RSU vesting
Issuance of common stock
Net Cash Used for Financing Activities from Continuing Operations
Cash Flows from Discontinued Operations:
Cash used for operating activities
Cash used for investing activities
Cash used for financing activities
Net Cash Used for Discontinued Operations
Effect of Exchange Rate Changes on Cash
Cash Increase (Decrease) During the Period
Cash and Cash Equivalents and Restricted Cash at End of Period
Equity in losses of joint venture
Depreciation expense
Amortization expense
Amortization of debt issuance costs
401(k) Plan corrective contribution
Fumigation related matters
Payments on fumigation related matters
Insurance reserve adjustment
Impairment of software and other related costs
Gain on sale of Merry Maids branches
Loss on extinguishment of debt
Deferred income tax provision
Stock-based compensation expense
Gain on sale of marketable securities
Change in working capital, net of acquisitions:
Other
Receivables
Inventories and other current assets
Accounts payable
Deferred revenue
Accrued liabilities
Accrued interest payable
Accrued restructuring charges
Current income taxes
Net Cash Provided from Operating Activities from Continuing Operations
Cash Flows from Investing Activities from Continuing Operations:
Net Cash Used for Investing Activities from Continuing Operations
Cash Flows from Financing Activities from Continuing Operations:
Property additions
Sale of equipment and other assets
Other business acquisitions, net of cash acquired
Purchases of available-for-sale securities
Sales and maturities of available-for-sale securities
Origination of notes receivable
Collections on notes receivable
Other investments
Borrowings of debt
Payments of debt
Discount paid on issuance of debt
Debt issuance costs paid
Call premium paid on retirement of debt
Contribution to TruGreen Holding Corporation
Repurchase of common stock and RSU vesting
Issuance of common stock
Net Cash Used for Financing Activities from Continuing Operations
Cash Flows from Discontinued Operations:
Cash used for operating activities
Cash used for investing activities
Cash used for financing activities
Net Cash Used for Discontinued Operations
Effect of Exchange Rate Changes on Cash
Cash Increase (Decrease) During the Period
61
33
1
1
5
2
93
(90)
23
1
(2)
32
22
13
(3)
(3)
(40)
(6)
7
44
(28)
6
7
(8)
325
(56)
8
(121)
(100)
(6)
49
97
(3)
(133)
2,400
(2,417)
(4)
(34)
—
—
(60)
13
(102)
—
—
—
—
—
89
2
—
47
38
23
5
9
(1)
—
—
(7)
58
60
10
(6)
8
(44)
5
18
38
1
(24)
(2)
2
398
(40)
14
(92)
(6)
32
(98)
92
—
(98)
583
(923)
(2)
(5)
(49)
—
—
16
(381)
(11)
—
—
(11)
(2)
(92)
Cash and Cash Equivalents and Restricted Cash at End of Period
$
386 $
296 $
155
1
1
61
33
5
2
93
(90)
23
1
(2)
32
22
13
(3)
(3)
(40)
(6)
7
44
(28)
6
7
(8)
325
(56)
8
(121)
(6)
49
(100)
97
(3)
(133)
2,400
(2,417)
(4)
(34)
—
—
(60)
13
(102)
—
—
—
—
—
89
386 $
$
484
(57)
100
—
48
52
8
—
—
—
—
47
(1)
65
29
8
(4)
7
(34)
(1)
(1)
39
1
(17)
3
(3)
289
(35)
2
(58)
(11)
51
(85)
79
—
(56)
160
2
—
47
38
5
23
9
(1)
—
—
(7)
58
60
10
(6)
8
(44)
5
18
38
1
(24)
(2)
2
398
(40)
14
(92)
(6)
32
(98)
92
—
(98)
583
(923)
(2)
(5)
(49)
—
—
16
(381)
(11)
—
—
(11)
(2)
(92)
296 $
1,825
(2,698)
(18)
(24)
(35)
(35)
(6)
679
(312)
(11)
(2)
(3)
(15)
—
(95)
389
See accompanying Notes to the Consolidated Financial Statements.
See accompanying Notes to the Consolidated Financial Statements.
2016 Annual Report 76
2016 Annual Report 76
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3/11/17 11:18 AM
SERVICEMASTER GLOBAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
ServiceMaster is a leading provider of essential residential and commercial services. The Company’s services include termite
and pest control, home warranties, disaster restoration, janitorial, residential cleaning, cabinet and wood furniture repair and home
inspection. The Company provides these services through an extensive service network of company-owned, franchised and licensed
locations operating primarily under the following leading brands: Terminix, American Home Shield, ServiceMaster Restore,
ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec. All consolidated Company subsidiaries are wholly-owned.
Intercompany transactions and balances have been eliminated.
On June 25, 2014, the Company’s registration statement on Form S-1 for our initial public offering was declared effective by
the SEC. On July 1, 2014, the Company completed the offering of 41,285,000 shares of its common stock at a price of $17.00 per
share. During 2015, through secondary public offerings of the Company’s common stock, the selling stockholders completed the
offering of an additional 80,711,763 shares of common stock. Since completion of the secondary public offerings in 2015, the Equity
Sponsors have not held a significant amount of the Company’s common stock.
Note 2. Significant Accounting Policies
Consolidation
The consolidated financial statements of the Company include all of its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements requires management to make certain estimates and assumptions
required under GAAP which may differ from actual results. The more significant areas requiring the use of management estimates
relate to revenue recognition; the allowance for uncollectible receivables; accruals for self-insured retention limits related to medical,
workers’ compensation, auto and general liability insurance claims; accruals for home warranties and termite damage claims; the
possible outcome of outstanding litigation; accruals for income tax liabilities as well as deferred tax accounts; the deferral and
amortization of customer acquisition costs; share based compensation; useful lives for depreciation and amortization expense; the
valuation of marketable securities; and the valuation of tangible and intangible assets. In 2016, there were no changes in the significant
areas that require estimates or in the underlying methodologies used in determining the amounts of these associated estimates.
The allowance for receivables is developed based on several factors including overall customer credit quality, historical
write-off experience and specific account analyses that project the ultimate collectability of the outstanding balances. As such, these
factors may change over time causing the allowance level to vary.
The Company carries insurance policies on insurable risks at levels which it believes to be appropriate, including workers’
compensation, auto and general liability risks. The Company purchases insurance policies from third-party insurance carriers, which
typically incorporate significant deductibles or self-insured retentions. The Company is responsible for all claims that fall below the
retention limits. In determining the Company’s accrual for self-insured claims, the Company uses historical claims experience to
establish both the current year accrual and the underlying provision for future losses. This actuarially determined provision and related
accrual include known claims, as well as incurred but not reported claims. The Company adjusts its estimate of accrued self-insured
claims when required to reflect changes based on factors such as changes in health care costs, accident frequency and claim severity.
The Company seeks to reduce the potential amount of loss arising from self-insured claims by insuring certain levels of risk.
While insurance agreements are designed to limit the Company’s losses from large exposure and permit recovery of a portion of direct
unpaid losses, insurance does not relieve the Company of its ultimate liability. Accordingly, the accruals for insured claims represent
the Company’s total unpaid gross losses. Insurance recoverables, which are reported within Prepaid expenses and other assets and
Other assets, relate to estimated insurance recoveries on the insured claims reserves.
Accruals for home warranty claims in the American Home Shield business are made based on the Company’s claims
experience and actuarial projections. Termite damage claim accruals in the Terminix business are recorded based on both the
historical rates of claims incurred within a contract year and the cost per claim. Current activity could differ causing a change in
estimates. The Company has certain liabilities with respect to existing or potential claims, lawsuits, and other proceedings. The
Company accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated.
Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified.
The Company records deferred income tax balances based on the net tax effects of temporary differences between the
carrying value of assets and liabilities for financial reporting purposes and income tax purposes. The Company records its deferred tax
items based on the estimated value of the tax basis. The Company adjusts tax estimates when required to reflect changes based on
factors such as changes in tax laws, relevant court decisions, results of tax authority reviews and statutes of limitations. The Company
records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.
The Company recognizes potential interest and penalties related to its uncertain tax positions in income tax expense.
2016 Annual Report 77
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Revenue
Revenue
Revenues from pest control services, as well as liquid and fumigation termite applications, are recognized as the services are
provided. The Company eradicates termites through the use of non-baiting methods (e.g., fumigation or liquid treatments) and baiting
systems. Termite services using baiting systems and termite inspection and protection contracts are frequently sold through annual
contracts. Service costs for these contracts are expensed as incurred. The Company recognizes revenue over the life of these contracts
in proportion to the expected direct costs. Those costs bear a direct relationship to the fulfillment of the Company’s obligations under
the contracts and are representative of the relative value provided to the customer (proportional performance method). The Company
regularly reviews its estimates of direct costs for its termite bait contracts and termite inspection and protection contracts and adjusts
the estimates when appropriate.
Home warranty contracts are typically one year in duration. Home warranty claims costs are expensed as incurred. The
Company recognizes revenue over the life of these contracts in proportion to the expected direct costs. Those costs bear a direct
relationship to the fulfillment of the Company’s obligations under the contracts and are representative of the relative value provided to
the customer (proportional performance method). The Company regularly reviews its estimates of claims costs and adjusts the
estimates when appropriate.
Revenues from pest control services, as well as liquid and fumigation termite applications, are recognized as the services are
provided. The Company eradicates termites through the use of non-baiting methods (e.g., fumigation or liquid treatments) and baiting
systems. Termite services using baiting systems and termite inspection and protection contracts are frequently sold through annual
contracts. Service costs for these contracts are expensed as incurred. The Company recognizes revenue over the life of these contracts
in proportion to the expected direct costs. Those costs bear a direct relationship to the fulfillment of the Company’s obligations under
the contracts and are representative of the relative value provided to the customer (proportional performance method). The Company
regularly reviews its estimates of direct costs for its termite bait contracts and termite inspection and protection contracts and adjusts
the estimates when appropriate.
Home warranty contracts are typically one year in duration. Home warranty claims costs are expensed as incurred. The
Company recognizes revenue over the life of these contracts in proportion to the expected direct costs. Those costs bear a direct
relationship to the fulfillment of the Company’s obligations under the contracts and are representative of the relative value provided to
the customer (proportional performance method). The Company regularly reviews its estimates of claims costs and adjusts the
estimates when appropriate.
The Company has franchise agreements in its Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids,
The Company has franchise agreements in its Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids,
Furniture Medic and AmeriSpec businesses. Franchise revenue (which in the aggregate represents approximately five percent of
annual consolidated revenue from continuing operations) consists principally of continuing monthly fees based upon the franchisee’s
customer-level revenue. Monthly fee revenue is recognized when the related customer-level revenue generating activity is performed
by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial fees resulting from the sale of a
franchise or a license. These initial franchise or license fees are pre-established fixed amounts and are recognized as revenue when
collectability is reasonably assured and all material services or conditions relating to the sale have been substantially performed. Total
profits from the franchised operations were $83 million, $75 million, and $71 million for the years ended December 31, 2016, 2015
and 2014, respectively. The portion of total franchise fee income related to initial fees received from the sale of franchises was
immaterial to the Company’s consolidated financial statements for all periods.
Furniture Medic and AmeriSpec businesses. Franchise revenue (which in the aggregate represents approximately five percent of
annual consolidated revenue from continuing operations) consists principally of continuing monthly fees based upon the franchisee’s
customer-level revenue. Monthly fee revenue is recognized when the related customer-level revenue generating activity is performed
by the franchisee and collectability is reasonably assured. Franchise revenue also includes initial fees resulting from the sale of a
franchise or a license. These initial franchise or license fees are pre-established fixed amounts and are recognized as revenue when
collectability is reasonably assured and all material services or conditions relating to the sale have been substantially performed. Total
profits from the franchised operations were $83 million, $75 million, and $71 million for the years ended December 31, 2016, 2015
and 2014, respectively. The portion of total franchise fee income related to initial fees received from the sale of franchises was
immaterial to the Company’s consolidated financial statements for all periods.
Revenues are presented net of sales taxes collected and remitted to government taxing authorities on the consolidated
Revenues are presented net of sales taxes collected and remitted to government taxing authorities on the consolidated
statements of operations and comprehensive income (loss).
statements of operations and comprehensive income (loss).
The Company had $629 million and $552 million of deferred revenue as of December 31, 2016 and 2015, respectively.
The Company had $629 million and $552 million of deferred revenue as of December 31, 2016 and 2015, respectively.
Deferred revenue consists primarily of payments received for annual contracts relating to home warranties, termite baiting, termite
Deferred revenue consists primarily of payments received for annual contracts relating to home warranties, termite baiting, termite
inspection and pest control services.
Customer acquisition costs, which are incremental and direct costs of obtaining a customer, are deferred and amortized over
Customer acquisition costs, which are incremental and direct costs of obtaining a customer, are deferred and amortized over
the life of the related contract in proportion to revenue recognized. These costs include sales commissions and direct selling costs
which can be shown to have resulted in a successful sale. Deferred customer acquisition costs amounted to $34 million and
$32 million as of December 31, 2016 and 2015, respectively.
the life of the related contract in proportion to revenue recognized. These costs include sales commissions and direct selling costs
which can be shown to have resulted in a successful sale. Deferred customer acquisition costs amounted to $34 million and
$32 million as of December 31, 2016 and 2015, respectively.
Advertising
Advertising
On an interim basis, certain advertising costs are deferred and recognized approximately in proportion to the revenue over the
year and are not deferred beyond the calendar year-end. Certain other advertising costs are expensed when the advertising occurs. The
cost of direct-response advertising at Terminix, consisting primarily of direct-mail and digital promotions, is capitalized and amortized
over its expected period of future benefits. Deferred advertising costs are included in Prepaid expenses and other assets on the
consolidated statements of financial position. Advertising expense for the years ended December 31, 2016, 2015 and 2014 was $110
On an interim basis, certain advertising costs are deferred and recognized approximately in proportion to the revenue over the
year and are not deferred beyond the calendar year-end. Certain other advertising costs are expensed when the advertising occurs. The
cost of direct-response advertising at Terminix, consisting primarily of direct-mail and digital promotions, is capitalized and amortized
over its expected period of future benefits. Deferred advertising costs are included in Prepaid expenses and other assets on the
consolidated statements of financial position. Advertising expense for the years ended December 31, 2016, 2015 and 2014 was $110
million, $113 million and $122 million, respectively.
Deferred Customer Acquisition Costs
inspection and pest control services.
Deferred Customer Acquisition Costs
Inventories are recorded at the lower of cost (primarily on a weighted-average cost basis) or market. The Company’s
Inventories are recorded at the lower of cost (primarily on a weighted-average cost basis) or market. The Company’s
inventory primarily consists of finished goods to be used on the customers’ premises or sold to franchisees.
inventory primarily consists of finished goods to be used on the customers’ premises or sold to franchisees.
Inventory
million, $113 million and $122 million, respectively.
Inventory
2016 Annual Report 78
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Property and Equipment, Intangible Assets and Goodwill
Property and equipment consist of the following:
(In millions)
Land
Buildings and improvements
Technology and communications
Machinery, production equipment and vehicles
Office equipment, furniture and fixtures
Less accumulated depreciation
Net property and equipment
Estimated
Useful Lives
(Years)
N/A
10 - 40
3 - 7
3 - 9
5 - 7
As of December 31,
2016
2015
6
38
230
202
20
496
(286)
210
$
$
6
38
200
146
17
408
(248)
160
$
$
Depreciation of property and equipment, including depreciation of assets held under capital leases was $61 million,
$47 million and $48 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company recorded an impairment charge of $1 million in the year ended December 31, 2016 relating to its decision in
the second quarter of 2016 to replace certain software pursuant to our ServSmart initiative.
The Company recorded an impairment charge of $47 million ($28 million, net of tax) in the year ended December 31, 2014
related to its decision in the first quarter of 2014 to abandon its efforts to deploy a new operating system at American Home Shield.
This impairment represented an adjustment of the carrying value of the asset to its estimated fair value of zero on a non-recurring
basis.
As of December 31, 2016 and 2015, goodwill was $2,247 million and $2,129 million, respectively, and intangible assets
consisted primarily of indefinite-lived trade names in the amount of $1,608 million and other intangible assets in the amount of
$100 million and $96 million, respectively.
Fixed assets and intangible assets with finite lives are depreciated and amortized on a straight-line basis over their estimated
useful lives. These lives are based on the Company’s previous experience for similar assets, potential market obsolescence and other
industry and business data. As required by accounting standards for the impairment or disposal of long-lived assets, the Company’s
fixed assets and finite-lived intangible assets are tested for recoverability whenever events or changes in circumstances indicate their
carrying amounts may not be recoverable. If the carrying value is no longer recoverable based upon the undiscounted future cash
flows of the asset, an impairment loss would be recognized equal to the difference between the carrying amount and the fair value of
the asset. Changes in the estimated useful lives or in the asset values could cause the Company to adjust its book value or future
expense accordingly.
As required under accounting standards for goodwill and other intangibles, goodwill is not subject to amortization, and
intangible assets with indefinite useful lives are not amortized until their useful lives are determined to no longer be indefinite.
Goodwill and intangible assets that are not subject to amortization are subject to assessment for impairment by applying a fair-value
based test on an annual basis or more frequently if circumstances indicate a potential impairment. The Company adopted the
provisions of ASU 2011-08, “Testing Goodwill for Impairment,” in the fourth quarter of 2011. This ASU gives entities the option of
performing a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If
entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not greater than its
carrying amount, the two-step impairment test would not be required. For the 2016, 2015 and 2014 annual goodwill impairment
analysis performed as of October 1 of each year, the Company did not perform qualitative assessments on any reporting unit, but
instead completed Step 1 of the goodwill impairment test for all reporting units.
Goodwill and indefinite-lived intangible assets, primarily the Company’s trade names, are assessed annually for impairment
during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. The Company’s
2016, 2015, and 2014 annual impairment analyses, which were performed as of October 1 of each year, did not result in any goodwill
or trade name impairments to continuing operations.
Restricted Cash
Restricted cash consists of cash held in trust as collateral under the Company’s automobile, general liability and workers’
compensation insurance program.
Restricted Net Assets
There are third-party restrictions on the ability of certain of the Company’s subsidiaries to transfer funds to the Company.
These restrictions are related to regulatory requirements at American Home Shield and to a subsidiary borrowing arrangement at
SMAC. The payment of ordinary and extraordinary dividends by the Company’s home warranty and similar subsidiaries (through
which the Company conducts its American Home Shield business) are subject to significant regulatory restrictions under the laws and
2016 Annual Report 79
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information relating to the fair value of financial instruments.
Stock-Based Compensation
payment of dividends.
Financial Instruments and Credit Risk
regulations of the states in which they operate. Among other things, such laws and regulations require certain such subsidiaries to
maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other
payments that these subsidiaries can pay to the Company. As of December 31, 2016, the total net assets subject to these third-party
restrictions was $173 million. None of the Company’s subsidiaries are obligated to make funds available to the Company through the
regulations of the states in which they operate. Among other things, such laws and regulations require certain such subsidiaries to
maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other
payments that these subsidiaries can pay to the Company. As of December 31, 2016, the total net assets subject to these third-party
restrictions was $173 million. None of the Company’s subsidiaries are obligated to make funds available to the Company through the
payment of dividends.
Financial Instruments and Credit Risk
The Company has entered into specific financial arrangements 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 the Company’s financial statements. The Company does not hold or
issue derivative financial instruments for trading or speculative purposes. The Company has historically hedged a significant portion
of its annual fuel consumption. The Company has also historically hedged the interest payments on a portion of its variable rate debt
through the use of interest rate swap agreements. All of the Company’s fuel swap contracts and interest rate swap contracts are
classified as cash flow hedges, and, as such, the hedging instruments are recorded on the consolidated statements of financial position
as either an asset or liability at fair value, with the effective portion of changes in the fair value attributable to the hedged risks
recorded in accumulated other comprehensive income (loss).
The Company has entered into specific financial arrangements 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 the Company’s financial statements. The Company does not hold or
issue derivative financial instruments for trading or speculative purposes. The Company has historically hedged a significant portion
of its annual fuel consumption. The Company has also historically hedged the interest payments on a portion of its variable rate debt
through the use of interest rate swap agreements. All of the Company’s fuel swap contracts and interest rate swap contracts are
classified as cash flow hedges, and, as such, the hedging instruments are recorded on the consolidated statements of financial position
as either an asset or liability at fair value, with the effective portion of changes in the fair value attributable to the hedged risks
recorded in accumulated other comprehensive income (loss).
Financial instruments, which potentially subject the Company to financial and credit risk, consist principally of investments
Financial instruments, which potentially subject the Company to financial and credit risk, consist principally of investments
and receivables. Investments consist primarily of publicly traded debt, certificates of deposit and common equity securities. The
Company periodically reviews its portfolio of investments to determine whether there has been an other than temporary decline in the
value of the investments from factors such as deterioration in the financial condition of the issuer or the market(s) in which the issuer
competes. The majority of the Company’s receivables and notes receivable have little concentration of credit risk due to the large
number of customers with relatively small balances and their dispersion across geographical areas. The Company maintains an
allowance for losses based upon the expected collectability of receivables. See Note 18 to the consolidated financial statements for
and receivables. Investments consist primarily of publicly traded debt, certificates of deposit and common equity securities. The
Company periodically reviews its portfolio of investments to determine whether there has been an other than temporary decline in the
value of the investments from factors such as deterioration in the financial condition of the issuer or the market(s) in which the issuer
competes. The majority of the Company’s receivables and notes receivable have little concentration of credit risk due to the large
number of customers with relatively small balances and their dispersion across geographical areas. The Company maintains an
allowance for losses based upon the expected collectability of receivables. See Note 18 to the consolidated financial statements for
information relating to the fair value of financial instruments.
Stock-Based Compensation
Stock-based compensation expense for stock options is estimated at the grant date based on an award’s fair value as
Stock-based compensation expense for stock options is estimated at the grant date based on an award’s fair value as
calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-
Scholes model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions
used in the Black-Scholes model change significantly, stock-based compensation expense for future grants may differ materially from
that recorded in the current period related to options granted to date. In addition, the Company estimates the expected forfeiture rate
and only recognizes expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical
experience. To the extent the actual forfeiture rate is different from the estimate, stock-based compensation expense is adjusted
accordingly. See Note 17 to the consolidated financial statements for more details.
calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-
Scholes model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions
used in the Black-Scholes model change significantly, stock-based compensation expense for future grants may differ materially from
that recorded in the current period related to options granted to date. In addition, the Company estimates the expected forfeiture rate
and only recognizes expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical
experience. To the extent the actual forfeiture rate is different from the estimate, stock-based compensation expense is adjusted
accordingly. See Note 17 to the consolidated financial statements for more details.
Income Taxes
Income Taxes
The Company and its subsidiaries file consolidated U.S. federal income tax returns. State and local returns are filed both on a
The Company and its subsidiaries file consolidated U.S. federal income tax returns. State and local returns are filed both on a
separate company basis and on a combined unitary basis with the Company. Current and deferred income taxes are provided for on a
separate company basis. The Company accounts for income taxes using an asset and liability approach for the expected future tax
consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred income taxes are
provided to reflect the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.
Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized. The
Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in its tax
return. The Company recognizes potential interest and penalties related to its uncertain tax positions in income tax expense.
separate company basis and on a combined unitary basis with the Company. Current and deferred income taxes are provided for on a
separate company basis. The Company accounts for income taxes using an asset and liability approach for the expected future tax
consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred income taxes are
provided to reflect the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.
Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized. The
Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in its tax
return. The Company recognizes potential interest and penalties related to its uncertain tax positions in income tax expense.
Earnings Per Share
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of
common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average
number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that
would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options,
restricted stock units (“RSUs”) and performance shares are reflected in diluted net income (loss) per share by applying the treasury
stock method. See Note 19 to the consolidated financial statements for more details.
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of
common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average
number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that
would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options,
restricted stock units (“RSUs”) and performance shares are reflected in diluted net income (loss) per share by applying the treasury
stock method. See Note 19 to the consolidated financial statements for more details.
Newly Issued Accounting Standards
Newly Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue from Contracts with Customers” to provide a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers. This model supersedes most current revenue recognition guidance, including industry-specific
guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services.” Entities have the option of using either a full retrospective or modified approach to adopt the guidance. ASU 2014-09 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for
“Revenue from Contracts with Customers” to provide a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers. This model supersedes most current revenue recognition guidance, including industry-specific
guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services.” Entities have the option of using either a full retrospective or modified approach to adopt the guidance. ASU 2014-09 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for
2016 Annual Report 80
2016 Annual Report 80
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fiscal years, and interim period within those years, beginning after December 15, 2016. The Company currently expects to adopt the
new revenue standards in the first quarter of 2018 utilizing the full retrospective transition method. The Company does not expect
adoption of the new revenue standards to have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial
Liabilities” to change how entities measure certain equity investments, to require the disclosure of changes in the fair value of
financial liabilities measured under the fair value option that are attributable to a company’s own credit, and to change certain other
disclosure requirements. The changes in ASU 2016-01 specifically require that the changes in fair value of all investments in equity
securities be recognized in net income. The Company is impacted as unrealized gains or losses on the Company’s available-for-sale
securities are currently recognized in other comprehensive income. The amendments in ASU 2016-01 are effective for fiscal years,
and interim periods within those years, beginning after December 15, 2017, and will be adopted prospectively.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which is the final standard on accounting for leases.
While both lessees and lessors are affected by the new guidance, the effects on lessees are much more significant. The most significant
change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not
considered short-term leases. Entities are required to use a modified retrospective approach to adopt the guidance. The amendments in
ASU 2016-02 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption
is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on the Company’s consolidated
financial statements and currently expects that most of the operating lease commitments will be subject to the new standard and
recognized as operating lease liabilities and right-of-use assets upon adoption of ASU 2016-02, which will increase the amount of total
assets and total liabilities that is reported relative to such amounts prior to adoption.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” to require
the recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled and the
presentation of excess tax benefits as an operating activity on the statement of cash flows as part of the FASB’s simplification
initiative. Under previous guidance, an entity generally recorded excess tax benefits and certain tax deficiencies in additional paid-in
capital instead of through income tax expense or benefit in the income statement and presented excess tax benefits as a financing
activity rather than an operating activity in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2016. As allowed, the Company has elected to early adopt the amendments of ASU
2016-09. The adoption of ASU 2016-09 has been accounted for as a change in accounting principle prospectively for the income
statement effect, as required, and retrospectively for the cash flow statement effect, as allowed. As a result of the implementation of
ASU 2016-09, $13 million of excess tax benefits for the year ended December 31, 2015 were retrospectively presented as an operating
activity within the consolidated statements of cash flows.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments” to reduce the
diversity in practice in how certain transactions are classified in the statement of cash flows. In particular, under previous guidance,
debt prepayment or debt extinguishment costs paid by a borrower in connection with settling a debt financing arrangement before the
maturity date were inconsistently classified in the statement of cash flows as either operating activities or financing activities by
borrowers. The Company has historically presented debt prepayment costs as cash outflows for operating activities. ASU 2016-15
requires that cash payments for debt prepayment or extinguishment costs be classified as cash outflows for financing activities. ASU
2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. As allowed, the
Company has elected to early adopt the amendments of ASU 2016-15 and has applied the applicable amendments retrospectively as
required. As a result of the implementation of ASU 2016-15, $49 million and $35 million of call premium paid on retirement of debt
for the years ended December 31, 2015 and 2014, respectively, was retrospectively presented as a financing activity within the
consolidated statements of cash flows. ASU 2016-15 contains additional clarifications on the classification of certain transactions in
the statement of cash flows, which the Company has applied retrospectively, as applicable.
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash” to add and clarify guidance on the classification and
presentation of restricted cash in the statement of cash flows. ASU 2016-18 states than an entity should include in its cash and cash
equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents;
should disclose a reconciliation between the statement of financial position and the statement of cash flows when the statement of
financial position includes more than one line item for cash, cash equivalents, restricted cash and restricted cash equivalents; and
should not present changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents,
restricted cash and restricted cash equivalents as cash flow activities in the statement of cash flows. The Company is impacted due to
activity associated with the Company’s restricted cash balance. As allowed, the Company has elected to early adopt the amendments
of ASU 2016-18 and has applied the applicable amendments retrospectively as required. As a result of the implementation of ASU
2016-18, the Company has included Restricted cash within the beginning and ending cash amounts presented in the consolidated
statements of cash flows. In Note 15 to the consolidated financial statements, we have provided a reconciliation of the cash and cash
equivalents and restricted cash balances reported within the consolidated statements of financial position to the amounts reported in
the consolidated statements of cash flows.
2701784_Text_1cPages.indd 65
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2016 Annual Report 81
Note 3. Business Segment Reporting
Franchise Services Group.
Note 3. Business Segment Reporting
The business of the Company is conducted through three reportable segments: Terminix, American Home Shield and
The business of the Company is conducted through three reportable segments: Terminix, American Home Shield and
Franchise Services Group.
In accordance with accounting standards for segments, the Company’s reportable segments are strategic business units that
In accordance with accounting standards for segments, the Company’s reportable segments are strategic business units that
offer different services. The Terminix segment provides termite and pest control services to residential and commercial customers and
distributes pest control products. The American Home Shield segment provides home warranties for household systems and
appliances. The Franchise Services Group segment provides residential and commercial disaster restoration, janitorial and cleaning
services through franchises primarily under the ServiceMaster, ServiceMaster Restore and ServiceMaster Clean brand names, home
cleaning services through franchises primarily under the Merry Maids brand name, cabinet and wood furniture repair primarily under
the Furniture Medic brand name and home inspection services primarily under the AmeriSpec brand name. Corporate includes
SMAC, the Company’s financing subsidiary exclusively dedicated to providing financing to its franchisees and retail customers of its
operating units, and the Company’s headquarters operations (substantially all of which costs are allocated to the Company’s reportable
segments), which provide various technology, marketing, finance, legal and other support services to the reportable segments. The
composition of the Company’s reportable segments is consistent with that used by the Company’s chief operating decision maker (the
“CODM”) to evaluate performance and allocate resources.
offer different services. The Terminix segment provides termite and pest control services to residential and commercial customers and
distributes pest control products. The American Home Shield segment provides home warranties for household systems and
appliances. The Franchise Services Group segment provides residential and commercial disaster restoration, janitorial and cleaning
services through franchises primarily under the ServiceMaster, ServiceMaster Restore and ServiceMaster Clean brand names, home
cleaning services through franchises primarily under the Merry Maids brand name, cabinet and wood furniture repair primarily under
the Furniture Medic brand name and home inspection services primarily under the AmeriSpec brand name. Corporate includes
SMAC, the Company’s financing subsidiary exclusively dedicated to providing financing to its franchisees and retail customers of its
operating units, and the Company’s headquarters operations (substantially all of which costs are allocated to the Company’s reportable
segments), which provide various technology, marketing, finance, legal and other support services to the reportable segments. The
composition of the Company’s reportable segments is consistent with that used by the Company’s chief operating decision maker (the
“CODM”) to evaluate performance and allocate resources.
Information regarding the accounting policies used by the Company is described in Note 2 to the consolidated financial
Information regarding the accounting policies used by the Company is described in Note 2 to the consolidated financial
statements. The Company derives substantially all of its revenue from customers and franchisees in the United States with
approximately two percent generated in foreign markets. Operating expenses of the business units consist primarily of direct costs and
indirect costs allocated from Corporate. Identifiable assets are those used in carrying out the operations of the business unit and
include intangible assets directly related to its operations.
statements. The Company derives substantially all of its revenue from customers and franchisees in the United States with
approximately two percent generated in foreign markets. Operating expenses of the business units consist primarily of direct costs and
indirect costs allocated from Corporate. Identifiable assets are those used in carrying out the operations of the business unit and
include intangible assets directly related to its operations.
The Company uses Reportable Segment Adjusted EBITDA as its measure of segment profitability. Accordingly, the CODM
The Company uses Reportable Segment Adjusted EBITDA as its measure of segment profitability. Accordingly, the CODM
evaluates performance and allocates resources based primarily on Reportable Segment Adjusted EBITDA. Reportable Segment
Adjusted EBITDA is defined as net income (loss) before: unallocated corporate expenses; loss from discontinued operations, net of
income taxes; provision for income taxes; loss on extinguishment of debt; interest expense; depreciation and amortization expense;
401(k) Plan corrective contribution; fumigation related matters; insurance reserve adjustment; non-cash stock-based compensation
expense; restructuring charges; gain on sale of Merry Maids branches; non-cash impairment of software and other related costs; non-
cash impairment of property and equipment; management and consulting fees; consulting agreement termination fees; and other non-
operating expenses. The Company’s definition of Reportable Segment Adjusted EBITDA may not be calculated or comparable to
similarly titled measures of other companies. The Company believes 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, consulting agreements and equity-based, long-term incentive plans.
evaluates performance and allocates resources based primarily on Reportable Segment Adjusted EBITDA. Reportable Segment
Adjusted EBITDA is defined as net income (loss) before: unallocated corporate expenses; loss from discontinued operations, net of
income taxes; provision for income taxes; loss on extinguishment of debt; interest expense; depreciation and amortization expense;
401(k) Plan corrective contribution; fumigation related matters; insurance reserve adjustment; non-cash stock-based compensation
expense; restructuring charges; gain on sale of Merry Maids branches; non-cash impairment of software and other related costs; non-
cash impairment of property and equipment; management and consulting fees; consulting agreement termination fees; and other non-
operating expenses. The Company’s definition of Reportable Segment Adjusted EBITDA may not be calculated or comparable to
similarly titled measures of other companies. The Company believes 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, consulting agreements and equity-based, long-term incentive plans.
2016 Annual Report 82
2016 Annual Report 82
2701784_Text_1cPages.indd 66
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Information for continuing operations for each reportable segment and Corporate is presented below:
(In millions)
Revenue:
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Revenue
Corporate
Total Revenue
Reportable Segment Adjusted EBITDA:(1)
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Adjusted EBITDA
Identifiable Assets:
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Identifiable Assets
Corporate
Total Identifiable Assets(2)
Depreciation & Amortization Expense:
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Depreciation & Amortization Expense
Corporate
Total Depreciation & Amortization Expense(3)
Capital Expenditures:
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Capital Expenditures
Corporate
Total Capital Expenditures
________________________________
2016
Year Ended December 31,
2015
2014
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,524
1,020
200
2,744
2
2,746
371
220
79
670
2,820
1,312
480
4,612
774
5,386
58
13
7
78
16
94
11
10
2
22
33
56
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,444
917
232
2,592
2
2,594
347
205
77
630
2,764
1,137
492
4,394
705
5,098
59
9
8
75
9
84
9
7
3
19
21
40
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,370
828
253
2,450
7
2,457
309
179
78
566
2,663
1,063
506
4,232
796
5,028
73
9
8
90
10
100
7
10
4
21
15
35
2701784_Text_1cPages.indd 67
3/11/17 11:18 AM
2016 Annual Report 83
(1)
Presented below is a reconciliation of Reportable Segment Adjusted EBITDA to Net Income (Loss):
(1)
Presented below is a reconciliation of Reportable Segment Adjusted EBITDA to Net Income (Loss):
(In millions)
Reportable Segment Adjusted EBITDA:
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Adjusted EBITDA
Unallocated corporate expenses
Depreciation and amortization expense
401(k) Plan corrective contribution
Fumigation related matters
Insurance reserve adjustment
Non-cash stock-based compensation expense
Restructuring charges
Gain on sale of Merry Maids branches
Non-cash impairment of software and other related costs
Management and consulting fees
Consulting agreement termination fees
Loss from discontinued operations, net of income taxes
Provision for income taxes
Loss on extinguishment of debt
Interest expense
Other non-operating expenses
Net Income (Loss)
___________________________________
$
$
$
$
Year Ended December 31,
2016
2015
2014
371
220
79
670
$
$
(3) $
(94)
(2)
(93)
(23)
(13)
(17)
2
(1)
—
—
(1)
(85)
(32)
(153)
—
155
$
347
205
77
630
$
$
(9) $
(84)
(23)
(9)
—
(10)
(5)
7
—
—
—
(2)
(107)
(58)
(167)
(3)
160
$
(In millions)
Reportable Segment Adjusted EBITDA:
Terminix
American Home Shield
Franchise Services Group
Reportable Segment Adjusted EBITDA
Unallocated corporate expenses
Depreciation and amortization expense
401(k) Plan corrective contribution
Fumigation related matters
Insurance reserve adjustment
Non-cash stock-based compensation expense
Restructuring charges
Gain on sale of Merry Maids branches
Non-cash impairment of software and other related costs
Management and consulting fees
Consulting agreement termination fees
Loss from discontinued operations, net of income taxes
Provision for income taxes
Loss on extinguishment of debt
Interest expense
Other non-operating expenses
Net Income (Loss)
___________________________________
309
179
78
566
(9)
(100)
—
—
—
(8)
(11)
1
(47)
(4)
(21)
(100)
(40)
(65)
(219)
—
(57)
$
$
$
$
2016
Year Ended December 31,
2015
2014
$
371
220
79
670
$
(3) $
$
347
205
77
630
$
(9) $
(94)
(2)
(93)
(23)
(13)
(17)
2
(1)
—
—
(1)
(85)
(32)
(153)
—
155
$
(84)
(23)
(9)
—
(10)
(5)
7
—
—
—
(2)
(107)
(58)
(167)
(3)
160
$
309
179
78
566
(9)
(100)
—
—
—
(8)
(11)
1
(47)
(4)
(21)
(100)
(40)
(65)
(219)
—
(57)
(2)
(3)
Assets of discontinued operations are not included in the business segment table.
There are no adjustments necessary to reconcile total depreciation and amortization as presented in the business segment
table to consolidated totals. Amortization of debt issue costs is not included in the business segment table. See Note 4 to the
consolidated financial statements for information relating to segment goodwill.
(2)
(3)
Assets of discontinued operations are not included in the business segment table.
There are no adjustments necessary to reconcile total depreciation and amortization as presented in the business segment
table to consolidated totals. Amortization of debt issue costs is not included in the business segment table. See Note 4 to the
consolidated financial statements for information relating to segment goodwill.
Note 4. Goodwill and Intangible Assets
Note 4. Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a
Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a
fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. The Company’s annual
assessment date is October 1. There were no goodwill or trade name impairment charges recorded in continuing operations during the
years ended December 31, 2016, 2015, and 2014. There were no accumulated impairment losses recorded in continuing operations as
of December 31, 2016, 2015 and 2014.
fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. The Company’s annual
assessment date is October 1. There were no goodwill or trade name impairment charges recorded in continuing operations during the
years ended December 31, 2016, 2015, and 2014. There were no accumulated impairment losses recorded in continuing operations as
of December 31, 2016, 2015 and 2014.
The table below summarizes the goodwill balances for continuing operations by reportable segment:
The table below summarizes the goodwill balances for continuing operations by reportable segment:
(In millions)
Balance as of December 31, 2014
Acquisitions
Disposals
Other (1)
Acquisitions
Disposals
Balance as of December 31, 2015
Balance as of December 31, 2016
___________________________________
(1)
Reflects the impact of foreign exchange rates.
American
Franchise
Terminix
Home Shield
Services Group
Total
$
1,497
74
—
(4)
34
—
1,567
381
—
—
—
381
90
—
191
—
(9)
(1)
182
—
(6)
2,069
74
(9)
(5)
2,129
124
(6)
2,247
$
1,601
$
471
$
175
$
(In millions)
Balance as of December 31, 2014
Acquisitions
Disposals
Other (1)
Balance as of December 31, 2015
Acquisitions
Disposals
Balance as of December 31, 2016
___________________________________
(1)
Reflects the impact of foreign exchange rates.
$
Terminix
1,497
74
—
(4)
1,567
34
—
American
Home Shield
381
—
—
—
381
90
—
Franchise
Services Group
191
—
(9)
(1)
182
—
(6)
$
1,601
$
471
$
175
$
Total
2,069
74
(9)
(5)
2,129
124
(6)
2,247
2016 Annual Report 84
2016 Annual Report 84
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The table below summarizes the other intangible asset balances for continuing operations:
(In millions)
Trade names(1)
Customer relationships
Franchise agreements
Other
Total
___________________________________
$
$
(1)
Not subject to amortization.
Gross
As of December 31, 2016
Accumulated
Amortization
—
(538)
(67)
(42)
(647) $
$
1,608
594
88
65
2,356
Net
Gross
1,608
56
21
23
1,708
$
$
1,608
571
88
53
2,320
As of December 31, 2015
Accumulated
Amortization
$
— $
Net
1,608
53
25
18
1,704
(517)
(63)
(36)
(616)
Amortization expense of $33 million, $38 million and $52 million was recorded in the years ended December 31, 2016, 2015
and 2014, respectively. For the existing intangible assets, the Company anticipates amortization expense of $26 million, $21 million,
$15 million, $13 million and $9 million in 2017, 2018, 2019, 2020 and 2021, respectively.
During the year ended December 31, 2014, the Company recorded a pre-tax non-cash impairment charge of $139 million
($84 million, net of tax) associated with the trade name at its former TruGreen business, which is reported in Loss from discontinued
operations, net of income taxes in the consolidated statements of operations and comprehensive income (loss).
Note 5. Income Taxes
As of December 31, 2016, 2015 and 2014, the Company has $13 million, $16 million and $13 million, respectively, of tax
benefits primarily reflected in state tax returns that have not been recognized for financial reporting purposes (“unrecognized tax
benefits”). At December 31, 2016 and 2015, $9 million and $12 million, respectively, of unrecognized tax benefits would impact the
effective tax rate if recognized. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
(In millions)
Gross unrecognized tax benefits at beginning of period
Increases in tax positions for prior years
Decrease in tax positions for prior years
Increases in tax positions for current year
Lapse in statute of limitations
Gross unrecognized tax benefits at end of period
Year Ended December 31,
2015
2016
2014
16
—
(5)
3
(1)
13
$
$
13
—
—
3
(1)
16
$
$
8
1
—
7
(1)
13
$
$
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.
The Company files consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state and foreign
jurisdictions. In the ordinary course of business, the Company is subject to review by domestic and foreign taxing authorities. For U.S.
federal income tax purposes, the Company participates in the IRS’s Compliance Assurance Process whereby its U.S. federal income
tax returns are reviewed by the IRS both prior to and after their filing. The U.S. federal income tax returns filed by the Company
through the year ended December 31, 2014 have been audited by the IRS. In the fourth quarter of 2016, the IRS completed the audits
of the Company’s tax returns for the year ended December 31, 2014 with no additional payments. The IRS commenced examinations
of the Company’s U.S. federal income tax returns for 2015 in the first quarter of 2015. The examination is anticipated to be completed
by the second quarter of 2017. Five state tax authorities are in the process of auditing state income tax returns of various subsidiaries.
The Company is no longer subject to state and local or foreign income tax examinations by tax authorities for years before 2008.
The Company’s policy is to recognize potential interest and penalties related to its tax positions within the tax provision.
Total interest and penalties included in the consolidated statements of income are immaterial. As of December 31, 2016 and 2015, the
Company had accrued for the payment of interest and penalties of approximately $1 million.
2701784_Text_1cPages.indd 69
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2016 Annual Report 85
The components of income (loss) from continuing operations before income taxes are as follows:
The components of income (loss) from continuing operations before income taxes are as follows:
(In millions)
U.S.
Foreign
Income from Continuing Operations before Income Taxes
Year Ended December 31,
2016
2015
2014
$
$
238
3
241
$
$
266
4
270
$
$
(In millions)
U.S.
Foreign
Income from Continuing Operations before Income Taxes
79
5
84
Year Ended December 31,
2015
2016
2014
$
$
238
3
241
$
$
266
4
270
$
$
79
5
84
The reconciliation of income tax computed at the U.S. federal statutory tax rate to the Company’s effective income tax rate
The reconciliation of income tax computed at the U.S. federal statutory tax rate to the Company’s effective income tax rate
for continuing operations is as follows:
for continuing operations is as follows:
Tax at U.S. federal statutory rate
State and local income taxes, net of U.S. federal benefit
Tax credits
Other permanent items
Stock option forfeitures
Remeasurement of prior year tax positions
Excess tax benefits from stock-based compensation
Other, including foreign rate differences and reserves
Effective rate
Year Ended December 31,
2016
35.0 %
2015
35.0 %
4.7
(0.9)
1.5
—
(1.9)
(3.0)
—
3.2
(0.8)
2.4
—
—
—
—
35.4 %
39.8 %
2014
35.0 %
12.3
(3.1)
1.8
1.6
—
—
0.6
48.2 %
Tax at U.S. federal statutory rate
State and local income taxes, net of U.S. federal benefit
Tax credits
Other permanent items
Stock option forfeitures
Remeasurement of prior year tax positions
Excess tax benefits from stock-based compensation
Other, including foreign rate differences and reserves
Effective rate
Year Ended December 31,
2015
2016
2014
35.0 %
4.7
(0.9)
1.5
—
(1.9)
(3.0)
—
35.4 %
35.0 %
3.2
(0.8)
2.4
—
—
—
—
39.8 %
35.0 %
12.3
(3.1)
1.8
1.6
—
—
0.6
48.2 %
The effective tax rate for discontinued operations for the years ended December 31, 2016, 2015 and 2014 was a tax benefit of
The effective tax rate for discontinued operations for the years ended December 31, 2016, 2015 and 2014 was a tax benefit of
37.7 percent, 37.7 percent and 38.1 percent, respectively. The effective tax rate for the year ending December 31, 2014 was impacted
by the impairment of non-deductible goodwill.
37.7 percent, 37.7 percent and 38.1 percent, respectively. The effective tax rate for the year ending December 31, 2014 was impacted
by the impairment of non-deductible goodwill.
Income tax expense from continuing operations is as follows:
Income tax expense from continuing operations is as follows:
(In millions )
Current:
U.S. federal
Foreign
State and local
Deferred:
U.S. federal
Foreign
State and local
Year Ended December 31,
2016
2015
2014
$
$
$
$
50
2
12
64
17
(2)
6
22
85
33
2
12
47
59
—
1
60
(In millions )
Current:
U.S. federal
Foreign
State and local
Deferred:
U.S. federal
Foreign
State and local
Provision for income taxes
—
3
9
11
27
—
2
29
40
Year Ended December 31,
2015
2016
2014
$
$
50
2
12
64
17
(2)
6
22
85
$
$
33
2
12
47
59
—
1
60
107
$
$
—
3
9
11
27
—
2
29
40
Provision for income taxes
$
107
$
Deferred income tax expense results from timing differences in the recognition of income and expense for income tax and
financial reporting purposes. Deferred income tax balances reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax purposes. The deferred tax asset primarily reflects the impact of
future tax deductions related to the Company’s accruals and certain net operating loss carryforwards. The deferred tax liability is
primarily attributable to the basis differences related to intangible assets. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized. The valuation allowance for deferred tax assets as of
December 31, 2016 was $7 million.
Deferred income tax expense results from timing differences in the recognition of income and expense for income tax and
financial reporting purposes. Deferred income tax balances reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax purposes. The deferred tax asset primarily reflects the impact of
future tax deductions related to the Company’s accruals and certain net operating loss carryforwards. The deferred tax liability is
primarily attributable to the basis differences related to intangible assets. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized. The valuation allowance for deferred tax assets as of
December 31, 2016 was $7 million.
2016 Annual Report 86
2016 Annual Report 86
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Significant components of the Company’s deferred tax balances are as follows:
(In millions)
Long-term deferred tax assets (liabilities):
Intangible assets(1)
Property and equipment
Prepaid expenses and deferred customer acquisition costs
Receivables allowances
Self-insured claims and related expenses
Accrued liabilities
Other long-term obligations
Net operating loss and tax credit carryforwards
Less valuation allowance
Net Long-term deferred tax liability(2)
___________________________________
As of December 31,
2016
2015
(727) $
(34)
(18)
13
11
28
(19)
36
(7)
(717) $
(719)
(21)
(17)
13
11
30
(14)
37
(7)
(687)
$
$
(1)
(2)
The deferred tax liability relates primarily to the difference in the tax versus book basis of intangible assets. The Company
had $759 million and $760 million of deferred tax liability included in this net deferred tax liability as of December 31, 2016
and 2015, respectively, that will not actually be paid unless certain business units of the Company are sold.
As of December 31, 2016, includes a deferred tax asset of $2 million recorded in Other assets on the consolidated statement
of financial position.
As of December 31, 2016, the Company had deferred tax assets, net of valuation allowances, of $29 million for federal and
state net operating loss and capital loss carryforwards, which expire at various dates up to 2036. The Company also had deferred tax
assets, net of valuation allowances, of less than $1 million for federal and state credit carryforwards which expire at various dates up
to 2026. The federal and state net operating loss carryforwards in the filed income tax returns included unrecognized tax benefits taken
in prior years. The net operating losses for which a deferred tax asset is recognized for financial statement purposes in accordance with
ASC 740 are presented net of these unrecognized tax benefits.
For the year ended December 31, 2011, the Company reorganized certain foreign subsidiaries in conjunction with its
international growth initiatives and evaluated its liquidity requirements in the United States and the capital requirements of its foreign
subsidiaries. Based on these factors, the Company considers undistributed earnings of its foreign subsidiaries as of December 31, 2016
to be indefinitely reinvested. Accordingly, the Company has not recorded any material deferred taxes for U.S. or foreign withholding
taxes on the excess of the amount for financial reporting purposes over the tax basis of investments in foreign subsidiaries that are
essentially permanent in duration. Cumulative undistributed earnings of the Company’s foreign subsidiaries amounted to $60 million
and $56 million as of December 31, 2016 and 2015, respectively. This amount becomes taxable upon a repatriation of assets from the
subsidiary or a sale or liquidation of the subsidiary. Should these earnings become taxable, the Company could be subject to U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding taxes in various jurisdictions. Determination of the
amount of any unrecognized deferred income tax liability on this temporary difference is not practicable due to the complexities of the
hypothetical calculation. The amount of cash associated with indefinitely reinvested foreign earnings was approximately $23 million
and $17 million as of December 31, 2016 and 2015, respectively. The Company does not anticipate the need to repatriate funds to the
United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with
domestic debt service requirements.
Note 6. Acquisitions
Acquisitions have been accounted for using the acquisition method and, accordingly, the results of operations of the acquired
businesses have been included in the consolidated financial statements since their dates of acquisition. The assets and liabilities of
these businesses were recorded in the financial statements at their estimated fair values as of the acquisition dates.
2016
On June 27, 2016, the Company acquired OneGuard for a total purchase price of $61 million. The Company recorded
goodwill of $57 million and other intangibles, primarily customer relationships, of $15 million related to this acquisition.
On November 30, 2016, the Company acquired Landmark for a total purchase price of $39 million. The Company recorded
goodwill of $33 million and other intangibles, primarily customer relationships, of $17 million related to this acquisition. As of
December 31, 2016, the purchase price allocation for this acquisition has not been finalized. In particular, the Company is still
evaluating the fair value of certain intangible assets. As the Company finalizes the fair value of assets acquired and liabilities assumed,
additional purchase price adjustments may be recorded during the measurement period in 2017.
During the year ended December 31, 2016, the Company completed several pest control and termite acquisitions. The total
purchase price for these acquisitions was $43 million. The Company recorded goodwill of $34 million and other intangibles, primarily
customer relationships, of $6 million related to these acquisitions.
2016 Annual Report 87
2701784_Text_1cPages.indd 71
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Prior Years
acquisition.
During the year ended December 31, 2015, the Company completed several pest control and termite acquisitions. The total
During the year ended December 31, 2015, the Company completed several pest control and termite acquisitions. The total
purchase price for these acquisitions was $125 million. The Company recorded goodwill of $74 million and other intangibles,
primarily customer relationships, of $46 million related to these acquisitions.
purchase price for these acquisitions was $125 million. The Company recorded goodwill of $74 million and other intangibles,
primarily customer relationships, of $46 million related to these acquisitions.
On February 28, 2014, the Company acquired HSA. The total purchase price for this acquisition was $32 million. The
On February 28, 2014, the Company acquired HSA. The total purchase price for this acquisition was $32 million. The
Company recorded goodwill of $34 million and other intangibles, primarily customer relationships, of $18 million related to this
Company recorded goodwill of $34 million and other intangibles, primarily customer relationships, of $18 million related to this
acquisition.
During the year ended December 31, 2014, the Company completed several pest control, termite and franchise acquisitions.
During the year ended December 31, 2014, the Company completed several pest control, termite and franchise acquisitions.
The total purchase price for these acquisitions was $32 million. The Company recorded goodwill of $20 million and other intangibles,
primarily customer relationships, of $11 million related to these acquisitions.
The total purchase price for these acquisitions was $32 million. The Company recorded goodwill of $20 million and other intangibles,
primarily customer relationships, of $11 million related to these acquisitions.
Supplemental cash flow information regarding the Company’s acquisitions is as follows:
Supplemental cash flow information regarding the Company’s acquisitions is as follows:
Prior Years
Year Ended December 31,
2016
2015
2014
$
$
$
$
184
(40)
144
121
23
144
$
$
$
$
126
—
125
92
33
125
$
$
$
$
(In millions)
Assets acquired
Liabilities assumed
Net assets acquired
99
(34)
64
58
6
64
Net cash paid
Seller financed debt
Purchase price
Note 7. Discontinued Operations
TruGreen Spin-off
2016
Year Ended December 31,
2015
2014
$
$
$
$
184
(40)
144
121
23
144
$
$
$
$
126
—
125
92
33
125
$
$
$
$
99
(34)
64
58
6
64
On January 14, 2014, the Company completed the TruGreen Spin-off resulting in the spin-off of the assets and certain
liabilities of the TruGreen Business through a tax-free, pro rata dividend to the Company’s stockholders. As a result of the completion
of the TruGreen Spin-off, New TruGreen operates the TruGreen Business as a private independent company. The following is a
summary of the assets and liabilities distributed to New TruGreen as part of the TruGreen spin-off on January 14, 2014:
On January 14, 2014, the Company completed the TruGreen Spin-off resulting in the spin-off of the assets and certain
liabilities of the TruGreen Business through a tax-free, pro rata dividend to the Company’s stockholders. As a result of the completion
of the TruGreen Spin-off, New TruGreen operates the TruGreen Business as a private independent company. The following is a
summary of the assets and liabilities distributed to New TruGreen as part of the TruGreen spin-off on January 14, 2014:
(In millions)
Assets:
Cash and cash equivalents
Receivables, net
Inventories and other current assets
Property and equipment, net
Intangible assets, net
Other long-term assets
Total Assets
Liabilities:
Current liabilities
Long-term debt and other long-term liabilities
Total Liabilities
Net assets distributed to New TruGreen
57
22
39
181
216
6
521
149
97
246
275
$
$
$
$
$
$
$
$
$
$
57
22
39
181
216
6
521
149
97
246
275
(In millions)
Assets acquired
Liabilities assumed
Net assets acquired
Net cash paid
Seller financed debt
Purchase price
Note 7. Discontinued Operations
TruGreen Spin-off
(In millions)
Assets:
Cash and cash equivalents
Receivables, net
Inventories and other current assets
Property and equipment, net
Intangible assets, net
Other long-term assets
Total Assets
Liabilities:
Current liabilities
Long-term debt and other long-term liabilities
Total Liabilities
Net assets distributed to New TruGreen
The historical results of the TruGreen Business, including the results of operations, cash flows and related assets and
The historical results of the TruGreen Business, including the results of operations, cash flows and related assets and
liabilities, are reported as discontinued operations for all periods presented herein.
liabilities, are reported as discontinued operations for all periods presented herein.
In connection with the TruGreen Spin-off, the Company entered into a transition services agreement with New TruGreen
In connection with the TruGreen Spin-off, the Company entered into a transition services agreement with New TruGreen
pursuant to which the Company provides New TruGreen with specified communications, public relations, finance and accounting, tax,
treasury, internal audit, human resources operations and benefits, risk management and insurance, supply management, real estate
management, marketing, facilities, information technology and other support services. The charges for the transition services are
designed to allow the Company to fully recover the direct costs of providing the services, plus specified margins and any out-of-
pocket costs and expenses. The services provided under the transition services agreement terminated at various specified times on or
prior to December 31, 2016, except certain information technology services which the Company has entered into an agreement with
New TruGreen to extend through June 30, 2018. New TruGreen may terminate the extended transition services agreement for
convenience upon 90 days written notice.
pursuant to which the Company provides New TruGreen with specified communications, public relations, finance and accounting, tax,
treasury, internal audit, human resources operations and benefits, risk management and insurance, supply management, real estate
management, marketing, facilities, information technology and other support services. The charges for the transition services are
designed to allow the Company to fully recover the direct costs of providing the services, plus specified margins and any out-of-
pocket costs and expenses. The services provided under the transition services agreement terminated at various specified times on or
prior to December 31, 2016, except certain information technology services which the Company has entered into an agreement with
New TruGreen to extend through June 30, 2018. New TruGreen may terminate the extended transition services agreement for
convenience upon 90 days written notice.
Under this transition services agreement, in the years ended December 31, 2016, 2015 and 2014, the Company recorded $9
Under this transition services agreement, in the years ended December 31, 2016, 2015 and 2014, the Company recorded $9
million, $25 million and $36 million, respectively, of fees from New TruGreen, which is included as a reduction, net of costs incurred,
million, $25 million and $36 million, respectively, of fees from New TruGreen, which is included as a reduction, net of costs incurred,
2016 Annual Report 88
2016 Annual Report 88
2701784_Text_1cPages.indd 72
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in Selling and administrative expenses in the consolidated statement of operations and comprehensive income (loss). As of December
31, 2016, all amounts owed by New TruGreen under this agreement have been paid.
During the year ended December 31, 2014, the Company processed certain of New TruGreen’s accounts payable
transactions. Through this process, in the year ended December 31, 2014, $97 million was paid on New TruGreen’s behalf, all of
which was repaid by New TruGreen.
In addition, the Company, New TruGreen and TruGreen Limited Partnership entered into (1) a separation and distribution
agreement containing key provisions relating to the separation of the TruGreen Business and the distribution of New TruGreen
common stock to the Company’s stockholders (including relating to specified TruGreen legal matters with respect to which the
Company has agreed to retain liability, as well as insurance coverage, non-competition, indemnification and other matters), (2) an
employee matters agreement allocating liabilities and responsibilities relating to employee benefit plans and programs and other
related matters and (3) a tax matters agreement governing the respective rights, responsibilities and obligations of the parties thereto
with respect to taxes, including allocating liabilities for income taxes attributable to New TruGreen and its subsidiaries generally to the
Company for tax periods (or portions thereof) ending on or before January 14, 2014 and generally to New TruGreen for tax periods
(or portions thereof) beginning after that date.
TruGreen Intangible Assets
Indefinite lived intangible assets, primarily the Company’s trade names, are assessed annually for impairment during the
fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances.
Intangible Assets – Prior Years
As a result of the TruGreen Spin-off, the Company was required to perform an interim impairment analysis as of January 14,
2014 on the TruGreen trade name. The assumptions were developed with the view of the TruGreen Business as a stand-alone
company, resulting in an increase in the assumed discount rate of 350 bps, as compared to the discount rate used in the October 1,
2013 impairment test for the TruGreen trade name. This interim impairment analysis resulted in a pre-tax non-cash trade name
impairment charge of $139 million ($84 million, net of tax) to reduce the carrying value of the TruGreen trade name to its estimated
fair value. This impairment charge was recorded in Loss from discontinued operations, net of income taxes, in the year ended
December 31, 2014. The impairment of the TruGreen trade name represented an adjustment of the carrying value of the asset to its
estimated fair value on a non-recurring basis using significant unobservable inputs on the date of the TruGreen Spin-off.
Financial Information for Discontinued Operations
Loss from discontinued operations, net of income taxes, for all periods presented includes the operating results of the
previously sold businesses.
The operating results of discontinued operations are as follows:
(In millions)
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
Trade name impairment(1)
Restructuring charges
Loss before income taxes(1)
Benefit for income taxes(1)
Loss from discontinued operations, net of income taxes(1)
___________________________________
(1)
Year Ended December 31,
2015
2016
2014
— $
—
1
—
—
(1)
—
(1) $
— $
—
3
—
—
(3)
(1)
(2) $
6
12
14
139
3
(161)
(61)
(100)
$
$
During the year ended December 31, 2014, the Company recorded a pre-tax non-cash impairment charge of $139 million
($84 million, net of tax) associated with the trade name at its former TruGreen business, which is reported in Loss from
discontinued operations, net of income taxes in the consolidated statements of operations and comprehensive income (loss).
2701784_Text_1cPages.indd 73
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2016 Annual Report 89
Note 8. Restructuring Charges
Note 8. Restructuring Charges
The Company incurred restructuring charges of $17 million ($11 million, net of tax), $5 million ($3 million, net of tax) and
$11 million ($7 million, net of tax) for the years ended December 31, 2016, 2015 and 2014, respectively. Restructuring charges were
The Company incurred restructuring charges of $17 million ($11 million, net of tax), $5 million ($3 million, net of tax) and
$11 million ($7 million, net of tax) for the years ended December 31, 2016, 2015 and 2014, respectively. Restructuring charges were
comprised of the following:
Year Ended December 31,
2016
2015
2014
$
$
$
—
7
2
5
3
17
$
3
—
1
1
—
5
$
$
2
—
3
6
—
11
(In millions)
Terminix(1)
American Home Shield(2)
Franchise Services Group(3)
Corporate(4)
Headquarters relocation(5)
Total restructuring charges
___________________________________
Year Ended December 31,
2015
2016
2014
7
2
—
5
3
17
$
$
3
—
1
1
—
5
$
$
2
—
3
6
—
11
$
$
(1)
(2)
(3)
(4)
For the year ended December 31, 2016, these charges include $1 million of severance costs and $3 million of stock-based
compensation expense due to the modification of non-vested stock options and RSUs as part of the severance agreement with
the former president of Terminix. Additionally, $4 million, $3 million and $2 million for the years ended December 31, 2016,
2015 and 2014, respectively, relate to lease termination and severance costs driven by Terminix’s branch optimization
(1)
program.
Represents lease termination and other costs driven by the decision to consolidate the stand-alone operations of HSA
acquired in February 2014 with those of American Home Shield.
Represents severance costs related to the reorganization of the Franchise Services Group.
For the year ended December 31, 2016, these charges include professional fees of $2 million and accelerated depreciation of
$2 million related to the early termination of a long-term human resources outsourcing agreement. Additionally, for the years
ended December 31, 2016, 2015, and 2014, these charges include severance and other costs of $2 million, $1 million, and $6
million, respectively, related to an initiative to enhance capabilities and reduce costs in the Company’s headquarters functions
that provide company-wide administrative services for its operations.
(2)
(3)
(4)
(5)
Represents impairment charges of $1 million and professional fees and other costs of $1 million related to the relocation of
(5)
For the year ended December 31, 2016, these charges include $1 million of severance costs and $3 million of stock-based
compensation expense due to the modification of non-vested stock options and RSUs as part of the severance agreement with
the former president of Terminix. Additionally, $4 million, $3 million and $2 million for the years ended December 31, 2016,
2015 and 2014, respectively, relate to lease termination and severance costs driven by Terminix’s branch optimization
program.
Represents lease termination and other costs driven by the decision to consolidate the stand-alone operations of HSA
acquired in February 2014 with those of American Home Shield.
Represents severance costs related to the reorganization of the Franchise Services Group.
For the year ended December 31, 2016, these charges include professional fees of $2 million and accelerated depreciation of
$2 million related to the early termination of a long-term human resources outsourcing agreement. Additionally, for the years
ended December 31, 2016, 2015, and 2014, these charges include severance and other costs of $2 million, $1 million, and $6
million, respectively, related to an initiative to enhance capabilities and reduce costs in the Company’s headquarters functions
that provide company-wide administrative services for its operations.
Represents impairment charges of $1 million and professional fees and other costs of $1 million related to the relocation of
the Company’s headquarters.
The pretax charges discussed above are reported in Restructuring charges in the consolidated statements of operations and
The pretax charges discussed above are reported in Restructuring charges in the consolidated statements of operations and
comprehensive (loss) income.
A reconciliation of the beginning and ending balances of accrued restructuring charges, which are included in Accrued
A reconciliation of the beginning and ending balances of accrued restructuring charges, which are included in Accrued
liabilities—Other on the consolidated statements of financial position, is presented as follows:
liabilities—Other on the consolidated statements of financial position, is presented as follows:
Accrued
Restructuring
Charges
$
$
4
5
(7)
1
17
(16)
3
(In millions)
Balance as of December 31, 2014
Costs incurred
Costs paid or otherwise settled
Balance as of December 31, 2015
Costs incurred
Costs paid or otherwise settled
Balance as of December 31, 2016
Accrued
Restructuring
Charges
$
$
4
5
(7)
1
17
(16)
3
comprised of the following:
(In millions)
Terminix(1)
American Home Shield(2)
Franchise Services Group(3)
Corporate(4)
Headquarters relocation(5)
Total restructuring charges
___________________________________
the Company’s headquarters.
comprehensive (loss) income.
(In millions)
Balance as of December 31, 2014
Costs incurred
Costs paid or otherwise settled
Balance as of December 31, 2015
Costs incurred
Costs paid or otherwise settled
Balance as of December 31, 2016
Note 9. Commitments and Contingencies
Note 9. Commitments and Contingencies
The Company leases certain property and equipment under various operating lease arrangements. Most of the property leases
The Company leases certain property and equipment under various operating lease arrangements. Most of the property leases
provide that the Company pay taxes, insurance and maintenance applicable to the leased premises. As leases for existing locations
expire, the Company expects to renew the leases or substitute another location and lease.
provide that the Company pay taxes, insurance and maintenance applicable to the leased premises. As leases for existing locations
expire, the Company expects to renew the leases or substitute another location and lease.
Rental expense for the years ended December 31, 2016, 2015 and 2014 was $29 million, $29 million and $31 million,
Rental expense for the years ended December 31, 2016, 2015 and 2014 was $29 million, $29 million and $31 million,
respectively. Based on leases in place as of December 31, 2016, future long-term non-cancelable operating lease payments will be
approximately $21 million in 2017, $17 million in 2018, $13 million in 2019, $11 million in 2020, $7 million in 2021 and $65 million
in 2022 and thereafter.
respectively. Based on leases in place as of December 31, 2016, future long-term non-cancelable operating lease payments will be
approximately $21 million in 2017, $17 million in 2018, $13 million in 2019, $11 million in 2020, $7 million in 2021 and $65 million
in 2022 and thereafter.
In the normal course of business, the Company periodically enters into agreements that incorporate indemnification
In the normal course of business, the Company periodically enters into agreements that incorporate indemnification
provisions. While the maximum amount to which the Company may be exposed under such agreements cannot be estimated, the
Company does not expect these guarantees and indemnifications to have a material effect on the Company’s business, financial
condition, results of operations or cash flows.
provisions. While the maximum amount to which the Company may be exposed under such agreements cannot be estimated, the
Company does not expect these guarantees and indemnifications to have a material effect on the Company’s business, financial
condition, results of operations or cash flows.
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The Company carries insurance policies on insurable risks at levels that it believes to be appropriate, including workers’
compensation, automobile and general liability risks. The Company purchases insurance policies from third-party insurance carriers,
which typically incorporate significant deductibles or self-insured retentions. The Company is responsible for all claims that fall below
the retention limits, exceed our coverage limits or are otherwise not covered by our insurance policies. In determining the Company’s
accrual for self-insured claims, the Company uses historical claims experience to establish both the current year accrual and the
underlying provision for future losses. This actuarially determined provision and related accrual include known claims, as well as
incurred but not reported claims. The Company adjusts its estimate of accrued self-insured claims when required to reflect changes
based on factors such as changes in health care costs, accident frequency and claim severity.
A reconciliation of beginning and ending accrued self-insured claims, which are included in Accrued liabilities—Self-insured
claims and related expenses and Other long-term obligations, primarily self-insured claims on the consolidated statements of financial
position, net of insurance recoverables, which are included in Prepaid expenses and other assets and Other assets on the consolidated
statements of financial position, is presented as follows:
(In millions)
Balance as of December 31, 2014
Provision for self-insured claims
Cash payments
Balance as of December 31, 2015
Provision for self-insured claims(1)
Cash payments
Balance as of December 31, 2016
___________________________________
Accrued
Self-insured
Claims, Net
104
41
(31)
114
58
(51)
120
$
$
(1)
Includes a charge of $23 million recorded in the year ended December 31, 2016 for an adjustment to the Company’s accrued
self-insured claims related to automobile, general liability and workers’ compensation risks. The adjustment is based on the
Company’s detailed annual assessment of this actuarially determined accrual, which the Company completes in the second
quarter of each year. This adjustment relates to coverage periods of 2015 and prior.
Accruals for home warranty claims in the American Home Shield business are made based on the Company’s claims
experience and actuarial projections. Termite damage claim accruals in the Terminix business are recorded based on both the
historical rates of claims incurred within a contract year and the cost per claim. Current activity could differ causing a change in
estimates. The Company has certain liabilities with respect to existing or potential claims, lawsuits and other proceedings. The
Company accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated.
Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified.
For more information on the 401(k) Plan corrective contribution, see Note 11 to the consolidated financial statements.
In addition to the matters discussed above and the fumigation related matters discussed below, in the ordinary course of
conducting business activities, the Company and its subsidiaries become involved in judicial, administrative and regulatory
proceedings involving both private parties and governmental authorities. These proceedings include insured and uninsured matters that
are brought on an individual, collective, representative and class action basis, or other proceedings involving regulatory, employment,
general and commercial liability, automobile liability, wage and hour, environmental and other matters. The Company has entered into
settlement agreements in certain cases, including with respect to putative collective and class actions, which are subject to court or
other approvals. If one or more of the Company’s settlements are not finally approved, the Company could have additional or different
exposure, which could be material. Subject to the paragraphs below, the Company does not expect any of these proceedings to have a
material effect on its reputation, business, financial position, results of operations or cash flows; however, the Company can give no
assurance that the results of any such proceedings will not materially affect its reputation, business, financial position, results of
operations and cash flows.
Fumigation Related Matters
On July 21, 2016, TMX USVI and TMX LP, each an indirect, wholly-owned subsidiary of the Company, entered into the
Superseding Plea Agreement in connection with the investigation initiated by the DOJ into allegations that a local Terminix branch
used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands. The Superseding Plea Agreement was intended to
resolve four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act related to improper
applications of methyl bromide. Those charges were set forth in an Information, dated March 29, 2016, in the matter styled United
States of America v. The Terminix International Company Limited Partnership and Terminix International USVI, LLC. At a hearing
held on August 25, 2016, the District Court rejected the Superseding Plea Agreement. On August 31, 2016, the DOJ requested that
the charges be dismissed, reserving its right to re-file the charges, in light of ongoing discussions to resolve the matter. The District
Court granted that request, and the March 29, 2016 Information was dismissed.
On January 20, 2017, TMX USVI and TMX LP entered into the New Plea Agreement with the DOJ, which has been filed
with the District Court, and replaces the Superseding Plea Agreement. Under the New Plea Agreement, TMX USVI and TMX LP
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have agreed to plead guilty to four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act
related to improper applications of methyl bromide, as set forth in a new Information filed on January 20, 2017 with the District Court
that is substantially similar to the March 29, 2016 Information. Under the terms of the New Plea Agreement, the parties agree and
jointly recommend to the District Court that (i) TMX USVI and TMX LP each pay a fine of $4 million (total of $8 million); (ii) TMX
USVI pay $1 million to the EPA for costs incurred by the EPA for the response and clean-up of the affected units at the resort in St.
John; (iii) TMX USVI make a community service payment of $1 million to the National Fish and Wildlife Foundation for the purpose
of engaging a third party to provide training to pesticide applicators in the U.S. Virgin Islands; and (iv) both TMX USVI and TMX
LP serve a three-year probation period, subject to the special conditions of probation under the New Plea Agreement. The total
financial terms of the recommended sentence under the New Plea Agreement are equivalent in total amount to the financial terms
under the Superseding Plea Agreement. Unlike the Superseding Plea Agreement, however, the New Plea Agreement is non-binding
on the District Court. It is possible that the District Court could use its discretion to impose fines or other terms different than those in
the New Plea Agreement. If approved by the District Court, and upon compliance with the terms and conditions of the New Plea
Agreement, the New Plea Agreement will resolve the federal criminal consequences associated with the DOJ investigation. The New
Plea Agreement does not bind any other federal, state or local authority; however, the EPA has indicated that it does not intend to
initiate any administrative enforcement action or refer the matter to the DOJ for any civil enforcement action if the New Plea
Agreement is approved by the District Court.
have agreed to plead guilty to four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act
related to improper applications of methyl bromide, as set forth in a new Information filed on January 20, 2017 with the District Court
that is substantially similar to the March 29, 2016 Information. Under the terms of the New Plea Agreement, the parties agree and
jointly recommend to the District Court that (i) TMX USVI and TMX LP each pay a fine of $4 million (total of $8 million); (ii) TMX
USVI pay $1 million to the EPA for costs incurred by the EPA for the response and clean-up of the affected units at the resort in St.
John; (iii) TMX USVI make a community service payment of $1 million to the National Fish and Wildlife Foundation for the purpose
of engaging a third party to provide training to pesticide applicators in the U.S. Virgin Islands; and (iv) both TMX USVI and TMX
LP serve a three-year probation period, subject to the special conditions of probation under the New Plea Agreement. The total
financial terms of the recommended sentence under the New Plea Agreement are equivalent in total amount to the financial terms
under the Superseding Plea Agreement. Unlike the Superseding Plea Agreement, however, the New Plea Agreement is non-binding
on the District Court. It is possible that the District Court could use its discretion to impose fines or other terms different than those in
the New Plea Agreement. If approved by the District Court, and upon compliance with the terms and conditions of the New Plea
Agreement, the New Plea Agreement will resolve the federal criminal consequences associated with the DOJ investigation. The New
Plea Agreement does not bind any other federal, state or local authority; however, the EPA has indicated that it does not intend to
initiate any administrative enforcement action or refer the matter to the DOJ for any civil enforcement action if the New Plea
Agreement is approved by the District Court.
The Company has recorded within Fumigation related matters in the consolidated statement of operations and comprehensive
The Company has recorded within Fumigation related matters in the consolidated statement of operations and comprehensive
income charges of $2 million and $8 million in the years ended December 31, 2016 and 2015, respectively, in connection with the
aforementioned criminal matter. The New Plea Agreement and the payments contemplated thereunder would not resolve any civil or
administrative claims for damages or other relief related to the U.S. Virgin Islands matter; however, the Company previously
disclosed that it has formalized the terms of the settlement agreement, which includes customary releases and confidentiality
provisions, and a civil court in Delaware has given the necessary approvals. Accordingly, the civil claims for all four members of the
Delaware family impacted are resolved. For the year ended December 31, 2016, the Company recorded within Fumigation related
matters in the consolidated statement of operations and comprehensive income a charge of $87 million in connection with the
settlement agreement. For the year ended December 31, 2015, the Company recorded within Cost of services rendered and products
sold in the consolidated statement of operations and comprehensive income a charge of $3 million related to the civil claims related to
the U.S. Virgin Islands matter, which is an amount equal to the Company’s insurance deductible under its general liability insurance
policies.
income charges of $2 million and $8 million in the years ended December 31, 2016 and 2015, respectively, in connection with the
aforementioned criminal matter. The New Plea Agreement and the payments contemplated thereunder would not resolve any civil or
administrative claims for damages or other relief related to the U.S. Virgin Islands matter; however, the Company previously
disclosed that it has formalized the terms of the settlement agreement, which includes customary releases and confidentiality
provisions, and a civil court in Delaware has given the necessary approvals. Accordingly, the civil claims for all four members of the
Delaware family impacted are resolved. For the year ended December 31, 2016, the Company recorded within Fumigation related
matters in the consolidated statement of operations and comprehensive income a charge of $87 million in connection with the
settlement agreement. For the year ended December 31, 2015, the Company recorded within Cost of services rendered and products
sold in the consolidated statement of operations and comprehensive income a charge of $3 million related to the civil claims related to
the U.S. Virgin Islands matter, which is an amount equal to the Company’s insurance deductible under its general liability insurance
policies.
The amount and extent of any further potential penalties, fines, sanctions, costs and damages that the federal or other
The amount and extent of any further potential penalties, fines, sanctions, costs and damages that the federal or other
governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of any additional
civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S. Virgin Islands
matter, which could be material, is not currently known or reasonably estimable, and any such further penalties, fines, sanctions, costs
or damages would not be covered under the Company’s general liability insurance policies. On December 16, 2016, the U.S. Virgin
Islands Department of Justice filed a civil complaint in the Superior Court of the Virgin Islands related to the aforementioned
fumigation incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster Company, LLC, The
Terminix International Company Limited Partnership, and Terminix International USVI, LLC. The Company has not recorded any
charge for this new civil lawsuit.
governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of any additional
civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S. Virgin Islands
matter, which could be material, is not currently known or reasonably estimable, and any such further penalties, fines, sanctions, costs
or damages would not be covered under the Company’s general liability insurance policies. On December 16, 2016, the U.S. Virgin
Islands Department of Justice filed a civil complaint in the Superior Court of the Virgin Islands related to the aforementioned
fumigation incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster Company, LLC, The
Terminix International Company Limited Partnership, and Terminix International USVI, LLC. The Company has not recorded any
charge for this new civil lawsuit.
On September 15, 2015, a lawsuit was filed in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County,
On September 15, 2015, a lawsuit was filed in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County,
Florida, styled Carl Robert McCaughey, et al. v. Terminix International Company Limited Partnership, Sunland Pest Control
Services, Inc., et al. The lawsuit alleges that fumigation of a Florida family’s residence by Sunland, a subcontractor of TMX LP,
resulted in serious injuries to one of the family’s children. The Company has formalized the terms of a settlement agreement, which
includes customary releases and confidentiality provisions, and a civil court in Florida has given the necessary
approvals. Accordingly, the civil claims of the affected family related to the Florida fumigation matter are now resolved, and the case
has been dismissed. Under the terms of the settlement agreement, in addition to the amounts that the Company’s insurance carriers
have agreed to pay to the family pursuant to our general liability insurance policies, the Company has paid $3 million, an amount
equal to the Company’s insurance deductible under its general liability insurance policies. In the year ended December 31, 2016, the
Company recorded within Cost of services rendered and products sold in the consolidated statement of operations and
comprehensive income a charge of $3 million in connection with civil claims related to the Florida fumigation matter.
Florida, styled Carl Robert McCaughey, et al. v. Terminix International Company Limited Partnership, Sunland Pest Control
Services, Inc., et al. The lawsuit alleges that fumigation of a Florida family’s residence by Sunland, a subcontractor of TMX LP,
resulted in serious injuries to one of the family’s children. The Company has formalized the terms of a settlement agreement, which
includes customary releases and confidentiality provisions, and a civil court in Florida has given the necessary
approvals. Accordingly, the civil claims of the affected family related to the Florida fumigation matter are now resolved, and the case
has been dismissed. Under the terms of the settlement agreement, in addition to the amounts that the Company’s insurance carriers
have agreed to pay to the family pursuant to our general liability insurance policies, the Company has paid $3 million, an amount
equal to the Company’s insurance deductible under its general liability insurance policies. In the year ended December 31, 2016, the
Company recorded within Cost of services rendered and products sold in the consolidated statement of operations and
comprehensive income a charge of $3 million in connection with civil claims related to the Florida fumigation matter.
Note 10. Related Party Transactions
Note 10. Related Party Transactions
On July 24, 2007, the Company was taken private pursuant to a merger transaction, and, following the completion of the
On July 24, 2007, the Company was taken private pursuant to a merger transaction, and, following the completion of the
merger and other subsequent transactions, the significant majority of the Company’s outstanding common stock was owned by
investment funds managed by, or affiliated with, the Equity Sponsors. Since completion of the Company’s initial public offering in
2014 and the Company’s secondary public offerings in 2015, the Equity Sponsors have not held a significant amount of the
merger and other subsequent transactions, the significant majority of the Company’s outstanding common stock was owned by
investment funds managed by, or affiliated with, the Equity Sponsors. Since completion of the Company’s initial public offering in
2014 and the Company’s secondary public offerings in 2015, the Equity Sponsors have not held a significant amount of the
Company’s common stock.
The Company was a party to a consulting agreement with CD&R under which CD&R provided the Company with ongoing
The Company was a party to a consulting agreement with CD&R under which CD&R provided the Company with ongoing
consulting and management advisory services. The annual consulting fee payable under the consulting agreement with CD&R was
$6 million. The Company was also a party to consulting agreements with StepStone, JPMorgan and Ridgemont. Pursuant to the
consulting and management advisory services. The annual consulting fee payable under the consulting agreement with CD&R was
$6 million. The Company was also a party to consulting agreements with StepStone, JPMorgan and Ridgemont. Pursuant to the
Consulting Agreements
Company’s common stock.
Consulting Agreements
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consulting agreements, the Company was required to pay aggregate annual consulting fees of $1 million to StepStone, JPMorgan and
Ridgemont. Under these agreements, the Company recorded consulting fees of $4 million for the year ended December 31, 2014
which is included in Selling and administrative expenses in the consolidated statements of operations and comprehensive income
(loss).
On July 1, 2014, in connection with the completion of the Company’s initial public offering, the Company paid the Equity
Sponsors aggregate fees of $21 million in connection with the termination of the consulting agreements, which is recorded in the year
ended December 31, 2014 in Consulting agreement termination fees in the consolidated statements of operations and comprehensive
income (loss). Due to the termination of the consulting agreements, there were no consulting fees recorded in the years ended
December 31, 2016 and 2015.
Note 11. Employee Benefit Plans
Discretionary contributions to the Company’s 401(k) plan were made in the amount of $15 million, $14 million and $12
million for the years ended December 31, 2016, 2015 and 2014, respectively.
In 2008, the Company amended its 401(k) Plan to implement a QACA under the safe harbor provisions of the Code. QACA
plans, in general, require automatic enrollment of employees into the retirement plan absent an affirmative election that such
employees do not wish to participate. Although the Company implemented processes to auto-enroll new hires after adopting the
QACA plan in 2008, it discovered that it did not auto-enroll then existing employees who were not participating in the 401(k) Plan. In
response, the Company implemented an auto-enrollment process for affected active employees and submitted to the IRS a voluntary
correction proposal to remedy the issue for prior years. The Company’s current estimate of the cost of the correction ranges from $25
million to approximately $92 million. The Company has recorded within Selling and administrative expenses in the consolidated
statement of operations and comprehensive income charges of $2 million and $23 million for the years ended December 31, 2016 and
2015, respectively. However, there can be no assurances as to the ultimate cost of the correction.
Note 12. Long-Term Debt
Long-term debt is summarized in the following table:
(In millions)
Senior secured term loan facility maturing in 2021(1)
Senior secured term loan facility maturing in 2023(2)
5.125% notes maturing in 2024(3)
Revolving credit facility maturing in 2021
7.10% notes maturing in 2018(4)
7.45% notes maturing in 2027(4)
7.25% notes maturing in 2038(4)
Vehicle capital leases(5)
Other
Less current portion
Total long-term debt
___________________________________
As of December 31,
2016
2015
$
— $
1,628
737
—
77
167
65
87
71
(59)
2,772
$
$
2,336
—
—
—
75
164
65
47
65
(54)
2,698
(1)
(2)
(3)
(4)
(5)
As of December 31, 2015, presented net of $21 million in unamortized debt issuance costs and $17 million in unamortized
original issue discount paid as described below under “––Term Loan Facility.”
As of December 31, 2016, presented net of $18 million in unamortized debt issuance costs and $4 million in unamortized
original issue discount paid as described below under “––Term Loan Facility.”
As of December 31, 2016, presented net of $13 million in unamortized debt issuance costs as described below under “––2024
Notes.”
As of December 31, 2016 and 2015, collectively presented net of $48 million and $53 million, respectively, of unamortized
fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown
above.
The Company has entered into the Fleet Agreement which, among other things, allows the Company to obtain fleet vehicles
through a leasing program. All leases under the Fleet Agreement are capital 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.
Term Loan Facility
On July 1, 2014, in connection with the Company’s initial public offering, the Company entered into the $1,825 million Old
Term Loan Facility, maturing July 1, 2021. Borrowings under the Old Term Loan Facility, together with $243 million of available
cash and $120 million of net proceeds of the initial public offering, were used to repay in full the $2,187 million outstanding under the
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then-existing term loan facility. In addition, $42 million of available cash was used to pay debt issuance costs of $24 million and
original issue discount of $18 million in connection with the Old Term Loan Facility.
then-existing term loan facility. In addition, $42 million of available cash was used to pay debt issuance costs of $24 million and
original issue discount of $18 million in connection with the Old Term Loan Facility.
On April 1, 2015, the Company entered into a first amendment to the Old Term Loan Facility, which provides for
incremental term loans in an aggregate principal amount of $175 million. On April 1, 2015, the Company used the net proceeds from
the incremental term loans, together with cash on hand, to redeem the remaining outstanding $200 million in aggregate principal
amount of the 8% 2020 Notes at a redemption price of 106.0% of the principal amount. In addition, $2 million of available cash was
used to pay debt issuance costs in connection with the incremental term loans.
On April 1, 2015, the Company entered into a first amendment to the Old Term Loan Facility, which provides for
incremental term loans in an aggregate principal amount of $175 million. On April 1, 2015, the Company used the net proceeds from
the incremental term loans, together with cash on hand, to redeem the remaining outstanding $200 million in aggregate principal
amount of the 8% 2020 Notes at a redemption price of 106.0% of the principal amount. In addition, $2 million of available cash was
used to pay debt issuance costs in connection with the incremental term loans.
On August 17, 2015, the Company entered into a second amendment to the Old Term Loan Facility, which provides for
On August 17, 2015, the Company entered into a second amendment to the Old Term Loan Facility, which provides for
incremental term loans in an aggregate principal amount of $400 million. On August 17, 2015, the Company used the net proceeds
from incremental term loans, together with cash on hand, to redeem the remaining outstanding $488 million in aggregate principal
amount of the 7% 2020 Notes at a redemption price of 105.25% of the principal amount. In addition, $5 million of available cash was
used to pay debt issuance costs of $3 million and original issue discount of $2 million in connection with the incremental term loans.
incremental term loans in an aggregate principal amount of $400 million. On August 17, 2015, the Company used the net proceeds
from incremental term loans, together with cash on hand, to redeem the remaining outstanding $488 million in aggregate principal
amount of the 7% 2020 Notes at a redemption price of 105.25% of the principal amount. In addition, $5 million of available cash was
used to pay debt issuance costs of $3 million and original issue discount of $2 million in connection with the incremental term loans.
On November 8, 2016, the Company entered into a $1,650 million Term Loan Facility maturing November 8, 2023.
Borrowings under the Term Loan Facility, together with the 2024 Notes, were used to repay the remaining outstanding $2,356 million
in aggregate principal amount of the Old Term Loan Facility. In connection with the repayment, the Company recorded a loss on
extinguishment of debt of $32 million in the year ended December 31, 2016, which includes the write-off of $14 million of original
issue discount and $18 million of debt issuance costs. In addition, $38 million of proceeds was used to pay debt issuance costs of $34
million and original issue discount of $4 million in connection with the Term Loan Facility, the Revolving Credit Facility and the
2024 Notes.
premium or penalty.
The interest rates applicable to the term loans under the Term Loan Facility are based on a fluctuating rate of interest
measured by reference to either, at The Company’s option, (i) an adjusted LIBOR (subject to a floor of zero percent) plus a margin of
2.50 percent per annum or (ii) an alternate base rate (subject to a floor of 1.00 percent) plus a margin of 1.50 percent per annum.
Voluntary prepayments of borrowings under the Term Loan Facility are permitted at any time, in minimum principal amounts, without
On November 8, 2016, the Company entered into a $1,650 million Term Loan Facility maturing November 8, 2023.
Borrowings under the Term Loan Facility, together with the 2024 Notes, were used to repay the remaining outstanding $2,356 million
in aggregate principal amount of the Old Term Loan Facility. In connection with the repayment, the Company recorded a loss on
extinguishment of debt of $32 million in the year ended December 31, 2016, which includes the write-off of $14 million of original
issue discount and $18 million of debt issuance costs. In addition, $38 million of proceeds was used to pay debt issuance costs of $34
million and original issue discount of $4 million in connection with the Term Loan Facility, the Revolving Credit Facility and the
2024 Notes.
The interest rates applicable to the term loans under the Term Loan Facility are based on a fluctuating rate of interest
measured by reference to either, at The Company’s option, (i) an adjusted LIBOR (subject to a floor of zero percent) plus a margin of
2.50 percent per annum or (ii) an alternate base rate (subject to a floor of 1.00 percent) plus a margin of 1.50 percent per annum.
Voluntary prepayments of borrowings under the 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
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 its 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 any notes issued under the
Company’s indenture dated as of August 15, 1997 be secured. The Term Loan Facility is secured on a pari passu basis with the
security interests created in the same collateral securing the Revolving Credit Facility.
Company and certain of its 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 any notes issued under the
Company’s indenture dated as of August 15, 1997 be secured. The Term Loan Facility is secured on a pari passu basis with the
security interests created in the same collateral securing the Revolving Credit Facility.
The Company has historically entered into interest rate swap agreements. Under the terms of these agreements, the Company
The Company has historically entered into interest rate swap agreements. Under the terms of these agreements, the Company
pays a fixed rate of interest on the stated notional amount and receives 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
On July 23, 2014, the Company entered into two four-year interest rate swap agreements effective August 1, 2014. The
aggregate notional amount of the agreements was $300 million. Under the terms of the agreements, the Company paid weighted-
average fixed rate of interest of 1.786 percent on the $300 million notional amount, and the Company received a floating rate of
interest (based on one-month LIBOR) on the notional amount. Therefore, during the term of the agreements, the effective interest rate
on $300 million of the Old Term Loan Facility was fixed at a rate of 1.786 percent, plus the incremental borrowing margin of 3.25
margin.
percent.
pays a fixed rate of interest on the stated notional amount and receives 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 July 23, 2014, the Company entered into two four-year interest rate swap agreements effective August 1, 2014. The
aggregate notional amount of the agreements was $300 million. Under the terms of the agreements, the Company paid weighted-
average fixed rate of interest of 1.786 percent on the $300 million notional amount, and the Company received a floating rate of
interest (based on one-month LIBOR) on the notional amount. Therefore, during the term of the agreements, the effective interest rate
on $300 million of the Old Term Loan Facility was fixed at a rate of 1.786 percent, plus the incremental borrowing margin of 3.25
percent.
On July 23, 2014, the Company entered into three forty-one month interest rate swap agreements effective March 1, 2015.
On July 23, 2014, the Company entered into three forty-one month interest rate swap agreements effective March 1, 2015.
The aggregate notional amount of the agreements was $400 million. Under the terms of the agreements, the Company paid a
weighted-average fixed rate of interest of 1.927 percent on the $400 million notional amount, and the Company received a floating
rate of interest (based on one-month LIBOR) on the notional amount. Therefore, during the term of the agreements, the effective
interest rate on $400 million of the Old Term Loan Facility was fixed at a rate of 1.927 percent, plus the incremental borrowing
margin of 3.25 percent.
The aggregate notional amount of the agreements was $400 million. Under the terms of the agreements, the Company paid a
weighted-average fixed rate of interest of 1.927 percent on the $400 million notional amount, and the Company received a floating
rate of interest (based on one-month LIBOR) on the notional amount. Therefore, during the term of the agreements, the effective
interest rate on $400 million of the Old Term Loan Facility was fixed at a rate of 1.927 percent, plus the incremental borrowing
margin of 3.25 percent.
On November 8, 2016, in connection with the repayment of the Old Term Loan Facility, the Company terminated the then-
On November 8, 2016, in connection with the repayment of the Old Term Loan Facility, the Company terminated the then-
existing interest rate swap agreements and paid $10 million in connection with the terminations. The fair value of the terminated
agreements of $10 million is recorded within accumulated other comprehensive income (loss) on the consolidated statements of
financial position and will be amortized into interest expense over the original term of the agreements.
existing interest rate swap agreements and paid $10 million in connection with the terminations. The fair value of the terminated
agreements of $10 million is recorded within accumulated other comprehensive income (loss) on the consolidated statements of
financial position and will be amortized into interest expense over the original term of the agreements.
On November 7, 2016 the Company entered into a seven-year interest rate swap agreement effective November 8, 2016. The
On November 7, 2016 the Company entered into a seven-year interest rate swap agreement effective November 8, 2016. The
notional amount of the agreement was $650 million. Under the terms of the agreement, the Company will pay a fixed rate of interest
of 1.493 percent on the $650 million notional amount, and the Company will receive a floating rate of interest (based on one-month
notional amount of the agreement was $650 million. Under the terms of the agreement, the Company will pay a fixed rate of interest
of 1.493 percent on the $650 million notional amount, and the Company will receive a floating rate of interest (based on one-month
2016 Annual Report 94
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LIBOR, subject to a floor of zero percent) on the notional amount. Therefore, during the term on the agreement, the effective interest
rate on $650 million of the Term Loan Facility is fixed at a rate of 1.493 percent, plus the incremental borrowing margin of 2.50
percent.
The changes in interest rate swap agreements, as well as the cumulative interest rate swaps outstanding, are as follows:
(In millions)
Interest rate swap agreements in effect as of December 31, 2014
Entered into effect
Interest rate swap agreements in effect as of December 31, 2015
Terminated
Entered into effect
Interest rate swap agreements in effect as of December 31, 2016
___________________________________
(1)
Before the application of the applicable borrowing margin.
Notional
Amount
Weighted
Average Fixed
Rate(1)
$
$
300
400
700
(700)
650
650
1.786 %
1.867 %
1.493 %
In accordance with accounting standards for derivative instruments and hedging activities, and as further described in
Note 18 to the consolidated financial statements, these interest rate swap agreements are classified as cash flow hedges, and, as such,
the hedging instruments are recorded on the consolidated statements of financial position as either an asset or liability at fair value,
with the effective portion of the changes in fair value attributable to the hedged risks recorded in accumulated other comprehensive
income (loss).
Revolving Credit Facility
On November 8, 2016, in connection with the Company’s refinancing, the Company terminated the Old Revolving Credit
Facility and entered into a $300 million Revolving Credit Facility. The maturity date for the Revolving Credit Facility is November 8,
2021. The Revolving Credit Facility provides for senior secured revolving loans and stand-by and other letters of credit. The
Revolving Credit Facility limits outstanding letters of credit to $225 million. As of December 31, 2016, there were $35 million of
letters of credit outstanding and $265 million of available borrowing capacity under the Revolving Credit Facility.
The Revolving Credit Facility and the guarantees thereof are secured by the same collateral securing the Term Loan Facility,
on a pari passu basis with the security interests created in the same collateral securing the Term Loan Facility.
The interest rates applicable to the loans under the Revolving Credit Facility are based on a fluctuating rate of interest
measured by reference to either, at the Company’s option, (i) an adjusted LIBOR plus a margin of 2.50 percent per annum or (ii) an
alternate base rate plus a margin of 1.50 percent per annum.
2024 Notes
On November 8, 2016, the Company sold $750 million of 2024 Notes. The 2024 Notes will mature on November 15, 2024
and bear interest at a rate of 5.125 percent per annum. The 2024 Notes are jointly and severally guaranteed on a senior unsecured basis
by the Company’s domestic subsidiaries that guarantee its indebtedness under the Credit Facilities (the “Guarantors”). The 2024 Notes
are not guaranteed by any of the Company’s non-U.S. subsidiaries, any subsidiaries subject to regulation as an insurance, home
warranty or similar company, or certain other subsidiaries (the “Non-Guarantors”).
The 2024 Notes are our unsecured obligations and rank equally in right of payment with all of our other existing and future
senior unsecured indebtedness. The subsidiary guarantees are senior unsecured obligations of the Guarantors and rank equally in right
of payment with all of the existing and future senior unsecured indebtedness of our Non-Guarantors. The 2024 Notes are effectively
junior to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
2020 Notes
On July 16, 2014, the Company used proceeds from the Company’s initial public offering to redeem $210 million in
aggregate principal amount of its 8% 2020 Notes and $263 million in aggregate principal amount of its 7% 2020 Notes. In connection
with the partial redemption of the 8% 2020 Notes and 7% 2020 Notes, the Company was required to pay a pre-payment premium of
$17 million and $18 million, respectively, and accrued interest of $7 million and $8 million, respectively. Additionally, in connection
with the partial redemption of the 2020 Notes and the repayment of the then-existing term loan facility, the Company recorded a loss
on extinguishment of debt of $65 million in the year ended December 31, 2014, which includes the pre-payment premiums on the 8%
2020 Notes and 7% 2020 Notes of $17 million and $18 million, respectively, and the write-off of $30 million of debt issuance costs.
On February 17, 2015, the Company redeemed $190 million in aggregate principal amount of its 8% 2020 Notes at a
redemption price of 106.0% of the principal amount using available cash. In connection with the partial redemption, the Company
recorded a loss on extinguishment of debt of $13 million in the year ended December 31, 2015, which includes a pre-payment
premium of $11 million and the write-off of $2 million of debt issuance costs.
2016 Annual Report 95
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and the write-off of $6 million of debt issuance costs.
Other
On April 1, 2015, the Company used the net proceeds from additional borrowings under the Old Term Loan Facility, together
On April 1, 2015, the Company used the net proceeds from additional borrowings under the Old Term Loan Facility, together
with cash on hand, to redeem the remaining outstanding $200 million in aggregate principal amount of its 8% 2020 Notes at a
redemption price of 106.0% of the principal amount. In connection with the redemption, the Company recorded a loss on
extinguishment of debt of $14 million in the year ended December 31, 2015, which includes a pre-payment premium of $12 million
and the write-off of $2 million of debt issuance costs.
with cash on hand, to redeem the remaining outstanding $200 million in aggregate principal amount of its 8% 2020 Notes at a
redemption price of 106.0% of the principal amount. In connection with the redemption, the Company recorded a loss on
extinguishment of debt of $14 million in the year ended December 31, 2015, which includes a pre-payment premium of $12 million
and the write-off of $2 million of debt issuance costs.
On August 17, 2015, the Company used the net proceeds from additional borrowings under the Old Term Loan Facility,
On August 17, 2015, the Company used the net proceeds from additional borrowings under the Old Term Loan Facility,
together with cash on hand, to redeem the remaining outstanding $488 million in aggregate principal amount of the 7% 2020 Notes at
a redemption price of 105.25% of the principal amount. In connection with the redemption, the Company recorded a loss on
extinguishment of debt of $31 million in the year ended December 31, 2015, which includes a pre-payment premium of $25 million
together with cash on hand, to redeem the remaining outstanding $488 million in aggregate principal amount of the 7% 2020 Notes at
a redemption price of 105.25% of the principal amount. In connection with the redemption, the Company recorded a loss on
extinguishment of debt of $31 million in the year ended December 31, 2015, which includes a pre-payment premium of $25 million
and the write-off of $6 million of debt issuance costs.
Other
The agreements governing the Term Loan Facility and the Revolving Credit Facility contain certain covenants that, among
other things, limit or restrict the incurrence of additional indebtedness, liens, sales of assets, certain payments (including dividends)
and transactions with affiliates, subject to certain exceptions. The Company was in compliance with the covenants under these
agreements at December 31, 2016.
The agreements governing the Term Loan Facility and the Revolving Credit Facility contain certain covenants that, among
other things, limit or restrict the incurrence of additional indebtedness, liens, sales of assets, certain payments (including dividends)
and transactions with affiliates, subject to certain exceptions. The Company was in compliance with the covenants under these
agreements at December 31, 2016.
As of December 31, 2016, future scheduled long-term debt payments are $59 million, $154 million, $43 million, $38 million
As of December 31, 2016, future scheduled long-term debt payments are $59 million, $154 million, $43 million, $38 million
and $23 million for the years ended December 31, 2017, 2018, 2019, 2020 and 2021, respectively. Certain of the Company’s assets,
including vehicles, equipment and a call center facility, are leased under capital leases with $88 million in remaining lease obligations
as of December 31, 2016. The long-term debt payments above include future capital lease payments of approximately $27 million in
2017, $21 million in 2018, $18 million in 2019, $14 million in 2020, and $6 million in 2021.
and $23 million for the years ended December 31, 2017, 2018, 2019, 2020 and 2021, respectively. Certain of the Company’s assets,
including vehicles, equipment and a call center facility, are leased under capital leases with $88 million in remaining lease obligations
as of December 31, 2016. The long-term debt payments above include future capital lease payments of approximately $27 million in
2017, $21 million in 2018, $18 million in 2019, $14 million in 2020, and $6 million in 2021.
Note 13. Cash and Marketable Securities
Note 13. Cash and Marketable Securities
Cash, money market funds and certificates of deposits with maturities of three months or less when purchased are included in
Cash, money market funds and certificates of deposits with maturities of three months or less when purchased are included in
Cash and cash equivalents on the consolidated statements of financial position. As of December 31, 2016 and 2015, the Company’s
investments consisted primarily of treasury bills (“Debt securities”) and common equity securities (“Equity securities”). The
amortized cost, fair value and gross unrealized gains and losses of the Company’s short- and long-term investments in Debt and
Equity securities are as follows:
Cash and cash equivalents on the consolidated statements of financial position. As of December 31, 2016 and 2015, the Company’s
investments consisted primarily of treasury bills (“Debt securities”) and common equity securities (“Equity securities”). The
amortized cost, fair value and gross unrealized gains and losses of the Company’s short- and long-term investments in Debt and
Equity securities are as follows:
Amortized
Unrealized
Cost
Gross
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
27
15
43
60
18
78
$
$
$
$
— $
1
1
1
3
4
$
$
$
— $
—
— $
— $
—
(1) $
27
17
44
60
21
81
(In millions)
Available-for-sale securities, December 31, 2016:
Debt securities
Equity securities
Total securities
Available-for-sale securities, December 31, 2015:
Debt securities
Equity securities
Total securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
27
15
43
60
18
78
$
$
$
$
— $
1
1
$
1
3
4
$
$
— $
—
— $
— $
—
(1) $
27
17
44
60
21
81
There were no unrealized losses which had been in a loss position for more than one year as of December 31, 2016 and 2015.
There were no unrealized losses which had been in a loss position for more than one year as of December 31, 2016 and 2015.
The aggregate fair value of the investments with unrealized losses was $24 million and $23 million as of December 31, 2016 and
The aggregate fair value of the investments with unrealized losses was $24 million and $23 million as of December 31, 2016 and
2015, respectively.
Available-for-sale securities, December 31, 2016:
Available-for-sale securities, December 31, 2015:
(In millions)
Debt securities
Equity securities
Total securities
Debt securities
Equity securities
Total securities
2015, respectively.
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Gains and losses on sales of investments, as determined on a specific identification basis, are included in investment income
in the period they are realized. The Company periodically reviews its portfolio of investments to determine whether there has been an
other than temporary decline in the value of the investments from factors such as deterioration in the financial condition of the issuer
or the market(s) in which the issuer competes. The table below summarizes proceeds, gross realized gains and gross realized losses
resulting from sales of available-for-sale securities. There were no impairment charges due to other than temporary declines in the
value of certain investments for the years ended December 31, 2016, 2015, and 2014.
(In millions)
Proceeds from sale of securities
Gross realized gains, pre-tax
Gross realized gains, net of tax
Gross realized losses, pre-tax
Gross realized losses, net of tax
Note 14. Comprehensive Income (Loss)
$
Year Ended December 31,
2015
2016
2014
$
42
4
2
—
—
$
22
7
4
—
—
43
5
3
(1)
(1)
Comprehensive income (loss), which primarily includes net income (loss), unrealized gain (loss) on marketable securities,
unrealized gain (loss) on derivative instruments and the effect of foreign currency translation gain (loss) is disclosed in the
consolidated statements of operations and comprehensive income (loss) and the consolidated statements of shareholders’ equity.
The following tables summarize the activity in accumulated other comprehensive income (loss), net of the related tax effects.
(In millions)
Balance as of December 31, 2014
Other comprehensive (loss) income before reclassifications:
Pre-tax amount
Tax (benefit) provision
After-tax amount
Amounts reclassified from accumulated other comprehensive
income (loss)(1)
Net current period other comprehensive loss
Balance as of December 31, 2015
Other comprehensive income before reclassifications:
Pre-tax amount
Tax provision
After-tax amount
Amounts reclassified from accumulated other comprehensive
income (loss)(1)
Net current period other comprehensive income (loss)
Balance as of December 31, 2016
___________________________________
Unrealized
(Losses) Gains on
Derivatives
Unrealized
Gains on
Available
-for-Sale
Securities
Foreign
Currency
Translation
Loss
Total
$
$
$
(6) $
6
$
(8) $
(13)
(5)
(9)
7
(2)
(7) $
20
8
13
7
20
12
$
1
—
1
(4)
(3)
2
1
1
—
(2)
(2)
1
$
$
(8)
—
(8)
—
(8)
(15) $
—
—
—
—
—
(15) $
(8)
(21)
(5)
(16)
3
(13)
(21)
21
9
13
5
18
(3)
(1)
Amounts are net of tax. See reclassifications out of accumulated other comprehensive income (loss) below for further details.
2701784_Text_1cPages.indd 81
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2016 Annual Report 97
Reclassifications out of accumulated other comprehensive income (loss) included the following components for the periods
Reclassifications out of accumulated other comprehensive income (loss) included the following components for the periods
indicated.
indicated.
(In millions)
(Losses) gains on derivatives:
Fuel swap contracts
Interest rate swap contracts
Net losses on derivatives
Impact of income taxes
Total reclassifications related to derivatives
(7) $
(7) $
Gains on available-for-sale securities
Impact of income taxes
Total reclassifications related to securities
Total reclassifications for the period
(5) $
(3) $
Note 15. Supplemental Cash Flow Information
Amounts Reclassified from Accumulated
Other Comprehensive Income (Loss)
As of December 31,
2016
2015
2014
Consolidated Statements of Operations
and Comprehensive Income (Loss) Location
$
$
$
$
$
(4) $
(5) $
(1) Cost of services rendered and products sold
(7)
(11)
4
3
2
(1)
$
$
(6)
(11)
4
7
4
(3)
$
$
Interest expense
Provision for income taxes
Interest and net investment income
(2) Provision for income taxes
(1)
(2)
(1)
1
4
3
1
(In millions)
(Losses) gains on derivatives:
Fuel swap contracts
Interest rate swap contracts
Net losses on derivatives
Impact of income taxes
Total reclassifications related to derivatives
Gains on available-for-sale securities
Impact of income taxes
Total reclassifications related to securities
Total reclassifications for the period
$
$
$
$
$
Note 15. Supplemental Cash Flow Information
Amounts Reclassified from Accumulated
Other Comprehensive Income (Loss)
As of December 31,
2015
2014
2016
Consolidated Statements of Operations
and Comprehensive Income (Loss) Location
(4) $
(7)
(11)
4
(7) $
3
$
(1)
2
$
(5) $
(5) $
(6)
(11)
4
(7) $
7
$
(3)
4
$
(3) $
Interest expense
Provision for income taxes
(1) Cost of services rendered and products sold
(1)
(2)
1
(1)
4
(2) Provision for income taxes
3
1
Interest and net investment income
(In millions)
Cash paid for or (received from):
Interest expense(1)
Interest and dividend income
Income taxes, net of refunds
agreements.
Supplemental information relating to the consolidated statements of cash flows is presented in the following table:
Supplemental information relating to the consolidated statements of cash flows is presented in the following table:
Year Ended December 31,
2016
2015
2014
$
134
$
178
$
(2)
71
(3)
44
(In millions)
Cash paid for or (received from):
220
(3)
12
Interest expense(1)
Interest and dividend income
Income taxes, net of refunds
Year Ended December 31,
2015
2016
2014
$
$
134
(2)
71
$
178
(3)
44
220
(3)
12
(1)
For the year ended December 31, 2016, excludes $10 million paid in connection with the termination of interest rate swap
(1)
For the year ended December 31, 2016, excludes $10 million paid in connection with the termination of interest rate swap
agreements.
As of December 31, 2016, Cash and cash equivalents of $291 million and Restricted cash of $95 million as presented on the
consolidated statements of financial position represent the amounts comprising Cash and cash equivalents and restricted cash of $386
presented on the consolidated statements of cash flows. There were no restricted cash balances as of December 31, 2015 and 2014.
As of December 31, 2016, Cash and cash equivalents of $291 million and Restricted cash of $95 million as presented on the
consolidated statements of financial position represent the amounts comprising Cash and cash equivalents and restricted cash of $386
presented on the consolidated statements of cash flows. There were no restricted cash balances as of December 31, 2015 and 2014.
The Company acquired $61 million, $27 million and $17 million of property and equipment through capital leases and other
non-cash financing transactions in the years ended December 31, 2016, 2015 and 2014, respectively, which have been excluded from
the consolidated statements of cash flows as non-cash investing and financing activities.
The Company acquired $61 million, $27 million and $17 million of property and equipment through capital leases and other
non-cash financing transactions in the years ended December 31, 2016, 2015 and 2014, respectively, which have been excluded from
the consolidated statements of cash flows as non-cash investing and financing activities.
In the years ended December 31, 2016, 2015 and 2014, the Company converted certain company-owned Merry Maids
In the years ended December 31, 2016, 2015 and 2014, the Company converted certain company-owned Merry Maids
branches to franchises for a total purchase price of $9 million, $17 million and $2 million, respectively. In the years ended December
31, 2016, and 2015, the Company received cash of $6 million and $13 million, respectively, and provided financing of $2 million and
$4 million, respectively. In the year ended December 31, 2014, the Company provided financing of $2 million. These financed
amounts have been excluded from the consolidated statements of cash flows as non-cash investing activities.
branches to franchises for a total purchase price of $9 million, $17 million and $2 million, respectively. In the years ended December
31, 2016, and 2015, the Company received cash of $6 million and $13 million, respectively, and provided financing of $2 million and
$4 million, respectively. In the year ended December 31, 2014, the Company provided financing of $2 million. These financed
amounts have been excluded from the consolidated statements of cash flows as non-cash investing activities.
Note 16. Capital Stock
Note 16. Capital Stock
The Company is authorized to issue 2,000,000,000 shares of common stock. As of December 31, 2016, there were
144,339,338 shares of common stock issued and 135,030,283 shares of common stock outstanding. The Company has no other classes
The Company is authorized to issue 2,000,000,000 shares of common stock. As of December 31, 2016, there were
144,339,338 shares of common stock issued and 135,030,283 shares of common stock outstanding. The Company has no other classes
of equity securities issued or outstanding.
In connection with the Company’s initial public offering, the Company’s board of directors and stockholders have adopted
the Omnibus Incentive Plan. Prior to the Company’s initial public offering, the Company’s board of directors and stockholders had
adopted the MSIP. Upon adoption of the Omnibus Incentive Plan, the Company froze the MSIP and will make no further grants
thereunder. However, awards previously granted under the MSIP are unaffected by the termination of the MSIP. The Omnibus
Incentive Plan provides for awards in the form of stock options, stock purchase rights, restricted stock, RSUs, performance shares,
performance units, stock appreciation rights, dividend equivalents, DSUs and other stock-based awards. The MSIP provided for the
sale of shares and DSUs of the Company’s stock to the Company’s executives, officers and other employees and to the Company’s
directors as well as the grant of RSUs, performance-based RSUs and options to purchase the Company’s shares to those individuals.
DSUs represent a right to receive a share of common stock in the future. The Company’s Compensation Committee selects the
Company’s executive officers, employees and directors eligible to participate in the MSIP and the Omnibus Incentive Plan and
determines the specific number of shares to be offered or options to be granted to an individual.
In connection with the Company’s initial public offering, the Company’s board of directors and stockholders have adopted
the Omnibus Incentive Plan. Prior to the Company’s initial public offering, the Company’s board of directors and stockholders had
adopted the MSIP. Upon adoption of the Omnibus Incentive Plan, the Company froze the MSIP and will make no further grants
thereunder. However, awards previously granted under the MSIP are unaffected by the termination of the MSIP. The Omnibus
Incentive Plan provides for awards in the form of stock options, stock purchase rights, restricted stock, RSUs, performance shares,
performance units, stock appreciation rights, dividend equivalents, DSUs and other stock-based awards. The MSIP provided for the
sale of shares and DSUs of the Company’s stock to the Company’s executives, officers and other employees and to the Company’s
directors as well as the grant of RSUs, performance-based RSUs and options to purchase the Company’s shares to those individuals.
DSUs represent a right to receive a share of common stock in the future. The Company’s Compensation Committee selects the
Company’s executive officers, employees and directors eligible to participate in the MSIP and the Omnibus Incentive Plan and
determines the specific number of shares to be offered or options to be granted to an individual.
Note 17. Stock-Based Compensation
of equity securities issued or outstanding.
Note 17. Stock-Based Compensation
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On February 24, 2015, the Company’s board of directors approved and recommended for approval by the Company’s
stockholders the Employee Stock Purchase Plan, which became effective for offering periods commencing July 1, 2015. The
Employee Stock Purchase Plan is intended to qualify for the favorable tax treatment under the Code. Under the plan, eligible
employees of the Company may purchase common stock, subject to Internal Revenue Service limits, during pre-specified offering
periods at a discount established by the Company not to exceed ten percent of the then-current fair market value. On April 27, 2015,
the Company’s stockholders approved the Employee Stock Purchase Plan with a maximum of one million shares of common stock
authorized for sale under the plan. Under the Employee Stock Purchase Plan, the Company sold 70,063 shares in 2016 and 34,302
shares in 2015.
A maximum of 16,396,667 shares of the Company’s stock is authorized for issuance under the MSIP, the Omnibus Incentive
Plan and the Employee Stock Purchase Plan, of which, as of December 31, 2016, 7,706,972 shares remain available for future grants.
The Company currently intends to satisfy any need for the Company’s shares of common stock associated with the settlement of
DSUs, vesting of RSUs, exercise of options or purchase of shares issued under the Omnibus Incentive Plan, MSIP or Employee Stock
Purchase Plan through new shares available for issuance or any shares repurchased, forfeited or surrendered from participants in the
MSIP and the Omnibus Incentive Plan.
All option grants under the Omnibus Incentive Plan and the MSIP have been, and the Company expects that all future option
grants will be, non-qualified options with a per-share exercise price no less than the fair market value of one share of the Company’s
stock on the grant date. Any stock options granted will generally have a term of ten years and vesting will be subject to an employee’s
continued employment. The Company’s Compensation Committee may accelerate the vesting of an option at any time. In addition,
vesting of options will be accelerated if the Company experiences a change in control (as defined in the Omnibus Incentive Plan and
the MSIP) unless options with substantially equivalent terms and economic value are substituted for existing options in place of
accelerated vesting. Vesting of options granted under the Omnibus Incentive Plan and the MSIP will also be accelerated in the event
of an employee’s death or disability (as defined in the Omnibus Incentive Plan and the MSIP). Upon termination for cause (as defined
in the Omnibus Incentive Plan and the MSIP), all options held by an employee are immediately cancelled. Following a termination
without cause, vested options will generally remain exercisable through the earlier of the expiration of their term or three months
following termination of employment (one year in the case of death, disability or retirement at normal retirement age). Unless sooner
terminated by the Company’s board of directors, the Omnibus Incentive Plan will remain in effect until June 26, 2024.
In 2016, 2015 and 2014, the Company completed various equity offerings to certain of the Company’s executives, officers
and employees pursuant to the MSIP and Omnibus Incentive Plan. The shares sold and options granted in connection with these equity
offerings are subject to and governed by the terms of the MSIP and Omnibus Incentive Plan. In connection with these offerings, the
Company sold a total of 245,996 shares of common stock in 2014 at a weighted-average purchase price of $12.00 per share in 2014.
No shares of common stock were sold in 2016 and 2015.
Stock Options
The Company granted the Company’s executives, officers and employees options to purchase 684,329; 411,506; and
1,222,831 shares of the Company’s common stock in 2016, 2015 and 2014, respectively, at a weighted-average exercise price of
$39.54 per share for options issued in 2016, $32.70 per share for options issued in 2015 and $12.91 per share for options issued in
2014. These options are subject to and governed by the terms of the MSIP and Omnibus Incentive Plan. The per share purchase price
and exercise price was based on the determination by the Company’s Compensation Committee of the fair market value of the
Company’s common stock as of the purchase/grant dates. All options granted to date generally will vest in four equal annual
installments, subject to an employee’s continued employment. The four-year vesting period is the requisite service period over which
compensation cost will be recognized on a straight-line basis for all grants. All options issued are accounted for as equity-classified
awards.
The value of each option award was estimated on the grant date using the Black-Scholes option valuation model that
incorporates the assumptions noted in the following table. For options granted in 2016 and 2015, the expected volatility was based on
historical and implied volatilities of the Company’s publicly traded stock. For options granted in 2014, the expected volatility was
based on the historical and implied volatilities of the publicly traded stock of a group of companies comparable to the Company. The
expected life represents the period of time that options granted are expected to be outstanding and was calculated using the simplified
method as outlined by the SEC in Staff Accounting Bulletins No. 107 and 110 as the Company does not have sufficient historical
exercise to provide a reasonable basis upon which to estimate expected life due to the limited period of time the Company’s equity
shares have been publicly traded. The risk-free interest rates were based on the U.S. Treasury securities with terms similar to the
expected lives of the options as of the grant dates.
Assumption
Expected volatility
Expected dividend yield
Expected life (in years)
Risk-free interest rate
2016
Year Ended December 31,
2015
2014
32.3 %
0.0 %
6.3
34.1 %
0.0 %
6.3
1.25% - 1.46 % 1.50% - 1.83 %
49.6 %
0.0 %
6.3
1.86 %
The weighted-average grant-date fair value of the options granted during 2016, 2015 and 2014 was $13.58, $11.91 and $6.18
per option, respectively. During the year ended December 31, 2016, the Company applied a forfeiture assumption of 17.42 percent per
2016 Annual Report 99
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annum in the recognition of the expense related to these options, with the exception of the options held by the Company’s CEO for
which the Company has applied a forfeiture rate of zero. The total intrinsic value of stock options exercised during the years ended
December 31, 2016, 2015 and 2014, was $20 million, $25 million and $10 million, respectively. The total fair value of stock options
vested during the years ended December 31, 2016, 2015 and 2014, was $6 million, $5 million and $4 million, respectively.
annum in the recognition of the expense related to these options, with the exception of the options held by the Company’s CEO for
which the Company has applied a forfeiture rate of zero. The total intrinsic value of stock options exercised during the years ended
December 31, 2016, 2015 and 2014, was $20 million, $25 million and $10 million, respectively. The total fair value of stock options
vested during the years ended December 31, 2016, 2015 and 2014, was $6 million, $5 million and $4 million, respectively.
A summary of option activity under the MSIP and Omnibus Incentive Plan as of December 31, 2016 and changes during the
A summary of option activity under the MSIP and Omnibus Incentive Plan as of December 31, 2016 and changes during the
year then ended is presented below:
year then ended is presented below:
Stock
Options
3,668,055
684,329
(818,511) $
(376,354) $
(2,175) $
3,155,344
1,550,740
$
$
$
$
Weighted Avg.
Exercise
Price
14.16
39.54
12.77
22.90
32.14
18.96
12.59
$
$
$
Aggregate
Intrinsic
Value
(in millions)
Weighted Avg.
Remaining
Contractual
Term
(in years)
92
7.22
60
39
6.97
5.90
Total outstanding, December 31, 2015
Granted to employees
Exercised
Forfeited
Expired
Total outstanding, December 31, 2016
Total exercisable, December 31, 2016
RSUs
Stock
Options
$
3,668,055
$
684,329
(818,511) $
(376,354) $
(2,175) $
$
$
3,155,344
1,550,740
Weighted Avg.
Exercise
Price
14.16
39.54
12.77
22.90
32.14
18.96
12.59
$
$
$
Aggregate
Intrinsic
Value
(in millions)
92
Weighted Avg.
Remaining
Contractual
Term
(in years)
7.22
60
39
6.97
5.90
The Company granted the Company’s executives, officers and employees 267,739; 304,680; and 99,622 RSUs in 2016, 2015
and 2014, respectively, with weighted-average grant date fair values of $39.15 per unit for 2016, $32.55 per unit for 2015 and $17.52
per unit for 2014, which was equivalent to the then current fair value of the Company’s common stock at the grant date. All RSUs
outstanding as of December 31, 2016 will vest in three equal annual installments, subject to an employee’s continued employment.
Upon vesting, each RSU will be converted into one share of the Company’s common stock. The total fair value of RSUs vested during
The Company granted the Company’s executives, officers and employees 267,739; 304,680; and 99,622 RSUs in 2016, 2015
and 2014, respectively, with weighted-average grant date fair values of $39.15 per unit for 2016, $32.55 per unit for 2015 and $17.52
per unit for 2014, which was equivalent to the then current fair value of the Company’s common stock at the grant date. All RSUs
outstanding as of December 31, 2016 will vest in three equal annual installments, subject to an employee’s continued employment.
Upon vesting, each RSU will be converted into one share of the Company’s common stock. The total fair value of RSUs vested during
the years ended December 31, 2016, 2015 and 2014, was $10 million, $7 million and $5 million, respectively.
the years ended December 31, 2016, 2015 and 2014, was $10 million, $7 million and $5 million, respectively.
A summary of RSU activity under the MSIP and the Omnibus Incentive Plan as of December 31, 2016 and changes during
A summary of RSU activity under the MSIP and the Omnibus Incentive Plan as of December 31, 2016 and changes during
the year then ended is presented below:
the year then ended is presented below:
RSUs
499,966
267,739
$
$
(257,602) $
(70,969) $
439,134
$
Weighted Avg.
Grant Date
Fair Value
23.99
39.15
18.78
28.10
35.63
Total outstanding, December 31, 2015
Granted to employees
Vested
Forfeited
Total outstanding, December 31, 2016
Performance Shares
Weighted Avg.
Grant Date
Fair Value
23.99
39.15
18.78
28.10
35.63
RSUs
$
499,966
267,739
$
(257,602) $
(70,969) $
$
439,134
The Company granted the Company’s executives 131,352 performance shares in 2016 with a weighted–average grant date
fair value of $39.59 per share, which was equivalent to the then current fair value of the Company’s common stock at the grant date.
The performance shares vest at the end of a three-year period based on the achievement of a cumulative adjusted EPS target
established at the grant date and subject to an executive’s continued employment. As the performance shares contain a performance
condition, stock-based compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the
number of awards expected to vest. No performance shares were granted in 2015 and 2014.
The Company granted the Company’s executives 131,352 performance shares in 2016 with a weighted–average grant date
fair value of $39.59 per share, which was equivalent to the then current fair value of the Company’s common stock at the grant date.
The performance shares vest at the end of a three-year period based on the achievement of a cumulative adjusted EPS target
established at the grant date and subject to an executive’s continued employment. As the performance shares contain a performance
condition, stock-based compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the
number of awards expected to vest. No performance shares were granted in 2015 and 2014.
A summary of performance share activity under the Omnibus Incentive Plan as of December 31, 2016 and changes during the
A summary of performance share activity under the Omnibus Incentive Plan as of December 31, 2016 and changes during the
year then ended is presented below:
year then ended is presented below:
Performance
Shares
Weighted Avg.
Grant Date
Fair Value
— $
131,352
(21,471) $
109,881
$
$
—
39.59
39.59
39.59
Total outstanding, December 31, 2015
Granted to executives
Forfeited
Total outstanding, December 31, 2016
Stock-based compensation expense
Performance
Shares
Weighted Avg.
Grant Date
Fair Value
— $
131,352
$
(21,471) $
$
109,881
—
39.59
39.59
39.59
During the years ended December 31, 2016, 2015 and 2014, the Company recognized stock-based compensation expense of
During the years ended December 31, 2016, 2015 and 2014, the Company recognized stock-based compensation expense of
$13 million ($8 million, net of tax), $10 million ($6 million, net of tax) and $8 million ($5 million, net of tax), respectively. These
charges are recorded within Selling and administrative expenses in the consolidated statements of operations and comprehensive
$13 million ($8 million, net of tax), $10 million ($6 million, net of tax) and $8 million ($5 million, net of tax), respectively. These
charges are recorded within Selling and administrative expenses in the consolidated statements of operations and comprehensive
2016 Annual Report 100
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Total outstanding, December 31, 2015
Granted to employees
Exercised
Forfeited
Expired
RSUs
Total outstanding, December 31, 2016
Total exercisable, December 31, 2016
Total outstanding, December 31, 2015
Granted to employees
Vested
Forfeited
Total outstanding, December 31, 2016
Performance Shares
Total outstanding, December 31, 2015
Granted to executives
Forfeited
Total outstanding, December 31, 2016
Stock-based compensation expense
income. Additionally, during the year ended December 31, 2016, the Company recognized $3 million of stock-based compensation
expense due to the modification of non-vested stock options and RSUs as part of the severance agreement with the former president of
Terminix, which has been included in Restructuring charges in the consolidated statements of operations and comprehensive income.
There were no award modifications in 2015 and 2014.
As of December 31, 2016, there was $24 million of total unrecognized compensation costs related to non-vested stock
options, RSUs and performance shares granted under the MSIP and Omnibus Incentive Plan. These remaining costs are expected to be
recognized over a weighted-average period of 2.16 years.
TruGreen Spin-Off
In connection with the TruGreen Spin-off, on January 14, 2014, the Company distributed all of New TruGreen’s common
stock to the Company’s stockholders. Following the distribution, the Company’s employees held equity incentive awards covering
shares of New TruGreen common stock as well as equity incentive awards covering shares of the Company’s common stock, and
employees who transferred to New TruGreen held equity incentive awards covering shares of the Company’s common stock as well
as equity incentive awards covering shares of New TruGreen common stock.
To align the interests of the Company’s continuing employees and the interests of New TruGreen’s employees with their
respective employers, on February 14, 2014, the Company and New TruGreen extended offers to each other’s employees to allow
them to tender their equity awards covering shares of their non-employing entity to the respective issuer and subsequently to apply the
proceeds of any such tendered equity awards to subscribe for equity awards in their respective employers at the then-current fair
market value ($12.00, in the case of the Company’s common stock, and $3.75, in the case of New TruGreen common stock). As a
result of this program, on March 18, 2014, the Company accepted tenders of 199,075 shares of the Company’s common stock and
DSUs from New TruGreen employees and issued 237,762 shares of the Company’s common stock and DSUs to the Company’s
continuing employees. Additionally, 63,663 RSUs were converted under this program.
In connection with the TruGreen Spin-off, the Company adjusted the exercise price of options held by the Company’s
employees to reflect the fair market value of its common stock after giving effect to the TruGreen Spin-off by multiplying the exercise
price of such options immediately prior to the TruGreen Spin-off by a fraction, the numerator of which was the fair market value of a
share of its common stock immediately following the TruGreen Spin-off ($12.00 per share) and the denominator of which was the fair
market value of a share of its common stock immediately prior to the TruGreen Spin-off ($15.75 per share), or the “Option
Conversion Ratio.”
To allow the Company’s employees to retain the intrinsic value of their stock options prior to the TruGreen Spin-off, the
Company also adjusted the number of shares underlying the options of such employees. The number of shares underlying the options
was adjusted by dividing the number of shares underlying the options held by each employee by the Option Conversion Ratio. The
Company refers to these adjustments collectively as the “Option Conversion.” The change in the number of shares underlying options
and the adjustment of the exercise price pursuant to the Option Conversion represent modifications to the Company’s share based
compensation awards. As a result of the Option Conversion the Company compared the fair value of the awards following the
TruGreen Spin-off with the fair value of the original awards. The comparison did not yield incremental value. Accordingly, the
Company did not record any incremental compensation expense as a result of the Option Conversion.
Note 18. 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 net of tax as a component of accumulated other comprehensive income (loss) on the consolidated statements of
financial position, or, for certain unrealized losses, reported in interest and net investment income in the consolidated statements of
operations and comprehensive income (loss) if the decline in value is other than temporary. The carrying amount of total debt was
$2,831 million and $2,752 million and the estimated fair value was $2,930 million and $2,813 million as of December 31, 2016 and
December 31, 2015, respectively. The fair value of the Company’s 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 the Company as of December 31, 2016 and 2015.
The Company has estimated the fair value of its financial instruments measured at fair value on a recurring basis using the
market and income approaches. For investments in marketable securities, deferred compensation trust assets and derivative contracts,
which are carried at their fair values, the Company’s 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.
2701784_Text_1cPages.indd 85
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2016 Annual Report 101
Interest rate swap contracts are valued using forward interest rate curves obtained from third-party market data providers. The
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.
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
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.
The Company regularly reviews the forward price curves obtained from third-party market data providers and related changes in 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.
The Company regularly reviews the forward price curves obtained from third-party market data providers and related changes in fair
value for reasonableness utilizing information available to the Company from other published sources.
value for reasonableness utilizing information available to the Company from other published sources.
The Company has not changed its valuation techniques for measuring the fair value of any financial assets and liabilities
The Company has not changed its 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 years ended December 31, 2016 and 2015.
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 years ended December 31, 2016 and 2015.
The carrying amount and estimated fair value of the Company’s financial instruments that are recorded at fair value on a
The carrying amount and estimated fair value of the Company’s financial instruments that are recorded at fair value on a
recurring basis for the periods presented are as follows:
recurring basis for the periods presented are as follows:
Statement of Financial
Position Location
Carrying
Value
Estimated Fair Value Measurements
Quoted
Prices In
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Long-term marketable securities
$
8
$
8
$
— $
Marketable securities and Long-
term marketable securities
Prepaid expenses and other assets
and Other assets
Other assets
Other accrued liabilities and Other
long-term obligations
Long-term marketable securities
Marketable securities and Long-
term marketable securities
Other accrued liabilities
Other long-term obligations
$
$
$
$
$
$
36
5
27
75
4
4
73
81
4
8
12
$
$
$
$
$
33
—
—
40
$
—
— $
38
46
$
— $
—
— $
3
—
27
30
4
4
35
35
8
8
$
$
$
$
— $
8
$
8
$
— $
—
—
5
—
5
—
—
—
—
—
4
—
4
(In millions)
As of December 31, 2016:
Financial Assets:
Deferred compensation trust
Investments in marketable
securities
Fuel swap contracts
Interest rate swap contracts
Total financial assets
Financial Liabilities:
Interest rate swap contracts
Total financial liabilities
As of December 31, 2015:
Financial Assets:
Deferred compensation trust
Investments in marketable
securities
Total financial assets
Financial Liabilities:
Fuel swap contracts
Interest rate swap contracts
Total financial liabilities
(In millions)
As of December 31, 2016:
Financial Assets:
Deferred compensation trust
Investments in marketable
securities
Fuel swap contracts
Interest rate swap contracts
Total financial assets
Financial Liabilities:
Interest rate swap contracts
Total financial liabilities
As of December 31, 2015:
Financial Assets:
Deferred compensation trust
Investments in marketable
securities
Total financial assets
Financial Liabilities:
Fuel swap contracts
Interest rate swap contracts
Total financial liabilities
Statement of Financial
Position Location
Carrying
Value
Estimated Fair Value Measurements
Significant
Other
Observable
Inputs
(Level 2)
Quoted
Prices In
Active
Markets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
Long-term marketable securities
Marketable securities and Long-
term marketable securities
Prepaid expenses and other assets
and Other assets
Other assets
Other accrued liabilities and Other
long-term obligations
Long-term marketable securities
Marketable securities and Long-
term marketable securities
Other accrued liabilities
Other long-term obligations
$
$
$
$
$
$
$
8
$
8
$
— $
36
5
27
75
4
4
$
$
33
—
—
40
$
—
— $
3
—
27
30
4
4
$
$
8
$
8
$
— $
73
81
4
8
12
$
$
$
38
46
$
— $
—
— $
35
35
$
— $
8
8
$
—
—
5
—
5
—
—
—
—
—
4
—
4
2016 Annual Report 102
2016 Annual Report 102
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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:
(In millions)
Balance as of December 31, 2014
Total (losses) gains (realized and unrealized)
Included in earnings
Included in other comprehensive income
Settlements
Balance as of December 31, 2015
Total (losses) gains (realized and unrealized)
Included in earnings
Included in other comprehensive income
Settlements
Balance as of December 31, 2016
$
$
Fuel Swap
Contract
Assets
(Liabilities)
(6)
Location of Loss included in Earnings
(5) Cost of services rendered and products sold
2
5
(4)
(4) Cost of services rendered and products sold
8
4
5
The following tables present information relating to the significant unobservable inputs of the Company’s Level 3 financial
instruments:
As of December 31, 2016:
Fuel swap contracts
As of December 31, 2015:
Fuel swap contracts
Fair Value
(in millions)
Valuation
Technique
Unobservable Input
Range
Weighted
Average
$
$
5
Discounted
Cash Flows
(4) Discounted
Cash Flows
Forward Unleaded Price per Gallon(1)
$2.31 - $2.85
$
2.55
Forward Unleaded Price per Gallon(1)
$1.91 - $2.55
$
2.22
___________________________________
(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.
The Company uses derivative financial instruments to manage risks associated with changes in fuel prices and interest rates.
The Company does not hold or issue derivative financial instruments for trading or speculative purposes. In designating its derivative
financial instruments as hedging instruments under accounting standards for derivative instruments, the Company formally documents
the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the
use of the hedging instrument. This documentation includes linking the derivatives to forecasted transactions. The Company assesses
at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting
the projected changes in cash flows of the associated forecasted transactions. All of the Company’s designated hedging instruments
are classified as cash flow hedges.
The Company has historically hedged a significant portion of its annual fuel consumption. The Company has also historically
hedged the interest payments on a portion of its variable rate debt through the use of interest rate swap agreements. All of the
Company’s fuel swap contracts and interest rate swap contracts are classified as cash flow hedges, and, as such, the hedging
instruments are recorded on the consolidated statements of financial position as either an asset or liability at fair value, with the
effective portion of changes in the fair value attributable to the hedged risks recorded in accumulated other comprehensive income
(loss). Any change in the fair value of the hedging instrument resulting from ineffectiveness, as defined by accounting standards, is
recognized in current period earnings. Cash flows related to fuel and interest rate derivatives are classified as operating activities in the
consolidated statements of cash flows.
Ineffective portions of derivative instruments designated in accordance with accounting standards as cash flow hedge
relationships were insignificant during the 12 months ended December 31, 2016. As of December 31, 2016, the Company had fuel
swap contracts to pay fixed prices for fuel with an aggregate notional amount of $33 million, maturing through 2018. Under the terms
of its fuel swap contracts, the Company is 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 December 31, 2016, the Company had
posted $3 million in letters of credit as collateral under its 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 (loss). These amounts are reclassified into earnings in the same
2016 Annual Report 103
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period or periods during which the hedged forecasted debt interest settlement or the fuel settlement affects earnings. See Note 14 to
the consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in accumulated
other comprehensive income (loss) and for the amounts reclassified out of accumulated other comprehensive income (loss) 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 (loss) expected to be recognized in earnings is a loss of
$3 million, net of tax, as of December 31, 2016. 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.
period or periods during which the hedged forecasted debt interest settlement or the fuel settlement affects earnings. See Note 14 to
the consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in accumulated
other comprehensive income (loss) and for the amounts reclassified out of accumulated other comprehensive income (loss) 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 (loss) expected to be recognized in earnings is a loss of
$3 million, net of tax, as of December 31, 2016. The amounts that are ultimately reclassified into earnings will be based on actual fuel
prices and interest rates at the time the positions are settled and may differ materially from the amount noted above.
Note 19. Earnings Per Share
Note 19. 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 shares are reflected
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 shares are reflected
in diluted net income per share by applying the treasury stock method.
in diluted net income 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
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:
diluted earnings per share from continuing operations is as follows:
(In millions, except per share data)
Income from continuing operations
Weighted-average common shares outstanding
Effect of dilutive securities:
RSUs
Stock options(1)
Weighted-average common shares outstanding - assuming dilution
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
___________________________________
Year Ended December 31,
2016
2015
2014
$
$
$
155
$
162
$
135.3
0.2
1.8
137.3
1.15
1.13
$
$
135.0
0.2
1.4
136.6
1.20
1.19
$
$
43
112.8
0.1
0.8
113.8
0.38
0.38
(In millions, except per share data)
Income from continuing operations
Weighted-average common shares outstanding
Effect of dilutive securities:
RSUs
Stock options(1)
Weighted-average common shares outstanding - assuming dilution
Basic earnings per share from continuing operations
Diluted earnings per share from continuing operations
___________________________________
Year Ended December 31,
2015
2016
2014
$
$
$
155
135.3
0.2
1.8
137.3
1.15
1.13
$
$
$
162
135.0
0.2
1.4
136.6
1.20
1.19
$
$
$
43
112.8
0.1
0.8
113.8
0.38
0.38
(1)
Options to purchase 0.9 million, 0.3 million, and 0.1 million shares for the years ended December 31, 2016, 2015 and 2014,
respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-
(1)
dilutive.
Options to purchase 0.9 million, 0.3 million, and 0.1 million shares for the years ended December 31, 2016, 2015 and 2014,
respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-
dilutive.
2016 Annual Report 104
2016 Annual Report 104
2701784_Text_1cPages.indd 88
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ServiceMaster Global Holdings, Inc.
Memphis, Tennessee
We have audited the internal control over financial reporting of ServiceMaster Global Holdings, Inc. and subsidiaries (the
“Company”) as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of
directors, management, and other personnel 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. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2016 of the
Company and our report dated February 24, 2017 expressed an unqualified opinion on those financial statements and included an
explanatory paragraph regarding the Company’s adoption of two new accounting standards.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
February 24, 2017
2701784_Text_1cPages.indd 89
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2016 Annual Report 105
Quarterly Operating Results (Unaudited)
Quarterly Operating Results (Unaudited)
Quarterly operating results for the last two years are shown in the table below. As discussed in the “Advertising” section in
Quarterly operating results for the last two years are shown in the table below. As discussed in the “Advertising” section in
the Significant Accounting Policies, on an interim basis, certain advertising costs are deferred and recognized approximately in
proportion to revenue over the year and are not deferred beyond the calendar year-end. Full year results are not affected.
the Significant Accounting Policies, on an interim basis, certain advertising costs are deferred and recognized approximately in
proportion to revenue over the year and are not deferred beyond the calendar year-end. Full year results are not affected.
(in millions, except per share data)
Operating Revenue
Gross Profit
Income from Continuing Operations(1)
Loss from Discontinued Operations, net of income taxes
Net Income(1)
Basic earnings per share:
Net Income
Diluted earnings per share:
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Net Income
Loss from Discontinued Operations, net of income taxes
(in millions, except per share data)
Operating Revenue
Gross Profit
Income from Continuing Operations(1)
Net Income(1)
Basic earnings (loss) per share:
Income from Continuing Operations
Net Income
Diluted earnings (loss) per share:
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Loss from Discontinued Operations, net of income taxes
Net Income
$
608 $
284
747 $
368
758 $
358
633 $
288
39
—
39
0.29
—
0.28
0.28
—
0.28
28
—
28
0.21
—
0.21
0.21
—
0.20
16
—
16
0.11
—
0.12
0.11
—
0.11
67
—
67
0.50
—
0.49
0.49
—
0.49
70
—
70
0.52
—
0.52
0.51
—
0.51
50
(1)
49
0.37
(0.01)
0.37
0.37
(0.01)
0.36
31
—
31
0.23
—
0.23
0.23
—
0.23
17
—
17
0.13
—
0.12
0.12
—
0.12
$
571 $
268
716 $
351
706 $
338
601 $
261
First
Quarter
Second
Quarter
Fourth
Quarter
Year
2016
Third
Quarter
2,746
1,298
155
(1)
155
(in millions, except per share data)
Operating Revenue
Gross Profit
Income from Continuing Operations(1)
Loss from Discontinued Operations, net of income taxes
Net Income(1)
Basic earnings per share:
1.15
—
1.14
1.13
—
1.13
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Net Income
Diluted earnings per share:
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Net Income
First
Quarter
Second
Quarter
Fourth
Quarter
Year
2015
Third
Quarter
2,594
1,219
162
(2)
160
(in millions, except per share data)
Operating Revenue
Gross Profit
Income from Continuing Operations(1)
Loss from Discontinued Operations, net of income taxes
Net Income(1)
Basic earnings (loss) per share:
1.20
(0.01)
1.19
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Net Income
Diluted earnings (loss) per share:
1.19
(0.01)
1.17
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Net Income
$
$
First
Quarter
Second
Quarter
2016
Third
Quarter
Fourth
Quarter
608 $
284
39
—
39
747 $
368
16
—
16
758 $
358
70
—
70
633 $
288
31
—
31
0.29
—
0.28
0.28
—
0.28
0.11
—
0.12
0.11
—
0.11
0.52
—
0.52
0.51
—
0.51
0.23
—
0.23
0.23
—
0.23
Year
2,746
1,298
155
(1)
155
1.15
—
1.14
1.13
—
1.13
First
Quarter
Second
Quarter
2015
Third
Quarter
Fourth
Quarter
Year
571 $
268
28
—
28
716 $
351
67
—
67
706 $
338
50
(1)
49
601 $
261
17
—
17
0.21
—
0.21
0.21
—
0.20
0.50
—
0.49
0.49
—
0.49
0.37
(0.01)
0.37
0.37
(0.01)
0.36
0.13
—
0.12
0.12
—
0.12
2,594
1,219
162
(2)
160
1.20
(0.01)
1.19
1.19
(0.01)
1.17
2016 Annual Report 106
2016 Annual Report 106
2701784_Text_1cPages.indd 90
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(1)
The results include restructuring charges primarily related to a branch optimization project and executive severance at
Terminix, a project to consolidate the stand-alone operations of Home Security of America, Inc. with those of American
Home Shield, an initiative to enhance capabilities and reduce costs in the Company’s headquarters functions, and costs
related to the relocation of the Company’s headquarters. The table below summarizes the pre-tax and after-tax restructuring
charges, by quarter, for 2016 and 2015.
(in millions)
Pre-tax
After-tax
(in millions)
Pre-tax
After-tax
First
Quarter
Second
Quarter
2016
Third
Quarter
Fourth
Quarter
1 $
1 $
4 $
3 $
8 $
5 $
4 $
2 $
First
Quarter
Second
Quarter
2015
Third
Quarter
Fourth
Quarter
2 $
1 $
— $
— $
2 $
1 $
1 $
1 $
$
$
$
$
Year
17
11
Year
5
3
The results for the second and fourth quarters of 2016 include charges of $1 million ($1 million, net of tax) and $1 million
($0 million, net of tax), respectively, related to the 401(k) Plan. The results for the fourth quarter of 2015 include a charge of
$23 million ($14 million, net of tax) related to the 401(k) Plan.
The results for the first, second and third quarters of 2016 include charges of $3 million ($3 million, net of tax), $88 million
($54 million, net of tax) and $1 million ($1 million, net of tax), respectively, for fumigation related matters. The results for
the fourth quarter of 2015 include a charge of $9 million ($9 million, net of tax) for fumigation related matters.
The results for the second quarter of 2016 includes a charge of $23 million ($15 million, net of tax) related to an insurance
reserve adjustment.
The results for the first quarter of 2016 includes a gain of $1 million ($0 million, net of tax) associated with the branch
conversions. The results for the first, second, third and fourth quarters of 2015 include gains of $1 million ($1 million, net of
tax), $2 million ($1 million, net of tax), $3 million ($2 million, net of tax) and $2 million ($1 million, net of tax),
respectively, associated with the branch conversions.
The results for the fourth quarter of 2016 includes a loss on extinguishment of debt of $32 million ($20 million, net of tax)
related to the repayment of the Old Credit Facilities. The results for the first, second and third quarters of 2015 include a loss
on extinguishment of debt of $13 million ($9 million, net of tax), $14 million ($9 million, net of tax) and $31 million ($20
million, net of tax), respectively, related to the redemption of the 2020 Notes.
2701784_Text_1cPages.indd 91
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2016 Annual Report 107
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
procedures were effective as of December 31, 2016.
Changes in internal control over financial reporting
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company’s CEO, Robert J. Gillette, and Senior Vice President and CFO, Alan J. M. Haughie, have evaluated the
The Company’s CEO, Robert J. Gillette, and Senior Vice President and CFO, Alan J. M. Haughie, have evaluated the
Company’s 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 Annual Report on Form 10-K as required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange
Act. Messrs. Gillette and Haughie have concluded that both the design and operation of the Company’s disclosure controls and
Company’s 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 Annual Report on Form 10-K as required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange
Act. Messrs. Gillette and Haughie have concluded that both the design and operation of the Company’s disclosure controls and
procedures were effective as of December 31, 2016.
No changes in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) or Rule 15d-15(f) under
No changes in the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) or Rule 15d-15(f) under
the Exchange Act, occurred during the fourth quarter of fiscal 2016 that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
the Exchange Act, occurred during the fourth quarter of fiscal 2016 that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal controls over financial
reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
The Company’s management is responsible for establishing and maintaining adequate internal controls over financial
reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation and fair presentation of published financial statements.
reliability of financial reporting and the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management assessed, under the supervision and with the participation of the Company’s CEO, Robert J.
The Company’s management assessed, under the supervision and with the participation of the Company’s CEO, Robert J.
Changes in internal control over financial reporting
Gillette, and Senior Vice President and CFO, Alan J.M. Haughie, the effectiveness of its internal control over financial reporting as of
December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded
that, as of December 31, 2016, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has audited the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2016 and has expressed an unqualified opinion in their report
which is included herein.
ITEM 9B. OTHER INFORMATION
Gillette, and Senior Vice President and CFO, Alan J.M. Haughie, the effectiveness of its internal control over financial reporting as of
December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded
that, as of December 31, 2016, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has audited the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2016 and has expressed an unqualified opinion in their report
which is included herein.
ITEM 9B. OTHER INFORMATION
As previously announced, Alan Haughie, who has been serving as our Chief Financial Officer through February 24, 2017,
will retire March 15, 2017. Effective as of February 25, 2017, Anthony (Tony) DiLucente will assume the role of Chief Financial
Officer.
As previously announced, Alan Haughie, who has been serving as our Chief Financial Officer through February 24, 2017,
will retire March 15, 2017. Effective as of February 25, 2017, Anthony (Tony) DiLucente will assume the role of Chief Financial
Officer.
2016 Annual Report 108
2016 Annual Report 108
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item for the Company will be set forth in Company’s Proxy Statement for the 2017 Annual
Meeting of Stockholders, which information is hereby incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item for the Company will be set forth in Company’s Proxy Statement for the 2017 Annual
Meeting of Stockholders, which information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item for the Company will be set forth in Company’s Proxy Statement for the 2017 Annual
Meeting of Stockholders, which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item for the Company will be set forth in Company’s Proxy Statement for the 2017 Annual
Meeting of Stockholders, which information is hereby incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item for the Company will be set forth in Company’s Proxy Statement for the 2017 Annual
Meeting of Stockholders, which information is hereby incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a). Financial Statements, Schedules and Exhibits.
1. Financial Statements
PART IV
Report of Independent Registered Public Accounting Firm contained in Item 8 of this Annual Report on Form 10-K.
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and
2014 contained in Item 8 of this Annual Report on Form 10-K.
72
73
Consolidated Statements of Financial Position as of December 31, 2016 and 2015 contained in Item 8 of this Annual Report on
74
Form 10-K.
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014 contained in Item 8 of
75
this Annual Report on Form 10-K.
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014 contained in Item 8 of this
Annual Report on Form 10-K.
Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
76
77
2. Financial Statements Schedules
The following information is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the
financial statements contained in Item 8 of this Annual Report on Form 10-K:
Schedule I—ServiceMaster Global Holdings, Inc. (Parent) Condensed Financial Information
Schedule II—Valuation and Qualifying Accounts
3. Exhibits
111
115
116
The exhibits filed with this report are listed on the Exhibit Index. Entries marked by the symbol # next to the exhibit’s
number identify management compensatory plans, contracts or arrangements.
2701784_Text_1cPages.indd 93
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2016 Annual Report 109
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, ServiceMaster Global
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, ServiceMaster Global
Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SERVICEMASTER GLOBAL HOLDINGS, INC.
SERVICEMASTER GLOBAL HOLDINGS, INC.
Date: February 24, 2017
Date: February 24, 2017
By:
/s/ ROBERT J. GILLETTE
Name: Robert J. Gillette
Title:
Chief Executive Officer
By:
/s/ ROBERT J. GILLETTE
Name: Robert J. Gillette
Title:
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrants and in the capacities and on the dates indicated.
persons on behalf of the registrants and in the capacities and on the dates indicated.
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
By:
/s/ MARK E. TOMKINS
Name: Mark E. Tomkins
Title: Director, Chairman of the Board
By:
/s/ ROBERT J. GILLETTE
Name: Robert J. Gillette
Title:
Chief Executive Officer and Director
(Principal Executive Officer)
By:
/s/ ALAN J. M. HAUGHIE
Name: Alan J. M. Haughie
Title:
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
By:
/s/ JOHN P. MULLEN
Name:
John P. Mullen
Title:
Vice President, Controller and Chief Accounting
Officer (Principal Accounting Officer)
Date: February 24, 2017
By:
/s/ PETER L. CELLA
Name: Peter L. Cella
Title: Director
By:
/s/ JOHN B. CORNESS
Name:
John B. Corness
Title: Director
By:
/s/ JERRI DEVARD
Name:
Jerri L. DeVard
Title: Director
By:
/s/ RICHARD P. FOX
Name: Richard P. Fox
Title: Director
By:
/s/ LAURIE ANN GOLDMAN
Name: Laurie Ann Goldman
Title: Director
By:
/s/ STEPHAN J. SEDITA
Name: Stephan J. Sedita
Title: Director
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
Date: February 24, 2017
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ MARK E. TOMKINS
Name: Mark E. Tomkins
Title: Director, Chairman of the Board
/s/ ROBERT J. GILLETTE
Name: Robert J. Gillette
Title:
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ ALAN J. M. HAUGHIE
Name: Alan J. M. Haughie
Title:
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
/s/ JOHN P. MULLEN
Name:
Title:
John P. Mullen
Vice President, Controller and Chief Accounting
Officer (Principal Accounting Officer)
/s/ PETER L. CELLA
Name: Peter L. Cella
Title: Director
/s/ JOHN B. CORNESS
Name:
Title: Director
John B. Corness
/s/ JERRI DEVARD
Name:
Title: Director
Jerri L. DeVard
/s/ RICHARD P. FOX
Name: Richard P. Fox
Title: Director
/s/ LAURIE ANN GOLDMAN
Name: Laurie Ann Goldman
Title: Director
/s/ STEPHAN J. SEDITA
Name: Stephan J. Sedita
Title: Director
2016 Annual Report 110
2016 Annual Report 110
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SERVICEMASTER GLOBAL HOLDINGS, INC. (PARENT COMPANY ONLY)
SCHEDULE I
Condensed Statements of Income
(In millions)
Revenue
Selling and administrative expenses
Loss from Continuing Operations before Income Taxes
Benefit for income taxes
Income (Loss) from Continuing Operations
Equity in earnings of subsidiaries (net of tax)
Net Income (Loss)
Total Comprehensive Income (Loss)
2016
Year ended December 31,
2015
2014
— $
— $
—
—
—
—
155
155
173
$
$
—
—
(1)
1
160
160
147
$
$
—
1
(2)
(1)
(1)
(56)
(57)
(70)
$
$
$
2701784_Text_1cPages.indd 95
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2016 Annual Report 111
SERVICEMASTER GLOBAL HOLDINGS, INC. (PARENT COMPANY ONLY)
SERVICEMASTER GLOBAL HOLDINGS, INC. (PARENT COMPANY ONLY)
Condensed Balance Sheets
(In millions)
Condensed Balance Sheets
(In millions)
As of December 31,
2016
2015
As of December 31,
2016
2015
Assets:
Current Assets:
Cash and cash equivalents
Receivables
Total Current Assets
Other Assets:
Investments in and advances to subsidiaries
Liabilities and Shareholders' Equity:
Total Assets
Current Liabilities:
Accrued liabilities:
Payroll and related expenses
Other
Total Current Liabilities
Other Long-Term Liabilities:
Intercompany payable
Shareholders' Equity
Total Liabilities and Shareholders' Equity
$
$
$
$
—
5
5
741
747
—
—
60
686
747
$
$
$
— $
14
1
15
552
568
Assets:
Current Assets:
Cash and cash equivalents
Receivables
Total Current Assets
Other Assets:
Investments in and advances to subsidiaries
Total Assets
Liabilities and Shareholders' Equity:
Current Liabilities:
Accrued liabilities:
1
22
23
Payroll and related expenses
Other
Total Current Liabilities
Other Long-Term Liabilities:
—
545
568
Intercompany payable
Shareholders' Equity
Total Liabilities and Shareholders' Equity
$
$
$
$
5
—
5
741
747
$
$
— $
—
—
60
686
747
$
14
1
15
552
568
1
22
23
—
545
568
2016 Annual Report 112
2016 Annual Report 112
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SERVICEMASTER GLOBAL HOLDINGS, INC. (PARENT COMPANY ONLY)
Condensed Statements of Cash Flows
(In millions)
2016
Year ended December 31,
2015
2014
Cash and Cash Equivalents at Beginning of Period
Net Cash Used for Operating Activities from Continuing Operations
Cash Flows from Financing Activities from Continuing Operations:
Borrowings of debt
Payments of debt
Contribution to ServiceMaster Company, LLC
Net intercompany advances
Repurchase of common stock and RSU vesting
Issuance of common stock
Net Cash Provided from (Used for) Financing Activities from Continuing
Operations
Cash (Decrease) Increase During the Period
Cash and Cash Equivalents at End of Period
$
$
14
(22)
—
—
—
60
(60)
13
13
(9)
5
$
$
$
21
(3)
—
—
(20)
—
—
16
(5)
(7)
14
$
8
—
2
(16)
(646)
—
(6)
679
13
13
21
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2016 Annual Report 113
1. Basis of Presentation
1. Basis of Presentation
Notes to Condensed Parent Company Only Financial Statements
Notes to Condensed Parent Company Only Financial Statements
The condensed financial statements of ServiceMaster Global Holdings, Inc. (“Parent Company”) are required as a result of
the restricted net assets of the Parent Company’s consolidated subsidiaries exceeding 25% of the Parent Company’s consolidated net
assets as of December 31, 2016. All consolidated subsidiaries of the Parent Company are wholly owned. The primary source of
income for the Parent Company is equity in its subsidiaries’ earnings.
The condensed financial statements of ServiceMaster Global Holdings, Inc. (“Parent Company”) are required as a result of
the restricted net assets of the Parent Company’s consolidated subsidiaries exceeding 25% of the Parent Company’s consolidated net
assets as of December 31, 2016. All consolidated subsidiaries of the Parent Company are wholly owned. The primary source of
income for the Parent Company is equity in its subsidiaries’ earnings.
Pursuant to rules and regulations of the SEC, the unconsolidated condensed financial statements of the Parent Company do
Pursuant to rules and regulations of the SEC, the unconsolidated condensed financial statements of the Parent Company do
not reflect all of the information and notes normally included with financial statements prepared in accordance with GAAP. Therefore,
these condensed financial statements should be read in conjunction with the consolidated financial statements and related notes
not reflect all of the information and notes normally included with financial statements prepared in accordance with GAAP. Therefore,
these condensed financial statements should be read in conjunction with the consolidated financial statements and related notes
included in this Annual Report on Form 10-K.
The Parent Company has accounted for its subsidiaries under the equity method in the unconsolidated condensed financial
The Parent Company has accounted for its subsidiaries under the equity method in the unconsolidated condensed financial
statements.
2. Commitments and Contingencies
The Parent Company and its subsidiaries are parties to environmental and other legal matters. For further discussion of
The Parent Company and its subsidiaries are parties to environmental and other legal matters. For further discussion of
commitments, guarantees and contingencies, see Note 9 to the consolidated financial statements of ServiceMaster Global Holdings,
commitments, guarantees and contingencies, see Note 9 to the consolidated financial statements of ServiceMaster Global Holdings,
Inc. included in this Annual Report on Form 10-K.
On April 19, 2013, the Parent Company entered into a revolving promissory note with The ServiceMaster Company, LLC
On April 19, 2013, the Parent Company entered into a revolving promissory note with The ServiceMaster Company, LLC
with a maximum borrowing capacity of $25 million that was scheduled to mature on April 18, 2018. Amounts outstanding under this
agreement bore interest at the rate of five percent per annum. On July 1, 2014, the Parent Company used a portion of the proceeds
from the initial public offering to repay this inter-company loan. As a result of this repayment, the Parent Company did not have a
balance outstanding under this note as of December 31, 2015 and 2016.
with a maximum borrowing capacity of $25 million that was scheduled to mature on April 18, 2018. Amounts outstanding under this
agreement bore interest at the rate of five percent per annum. On July 1, 2014, the Parent Company used a portion of the proceeds
from the initial public offering to repay this inter-company loan. As a result of this repayment, the Parent Company did not have a
balance outstanding under this note as of December 31, 2015 and 2016.
3. Long-Term Debt
included in this Annual Report on Form 10-K.
statements.
2. Commitments and Contingencies
Inc. included in this Annual Report on Form 10-K.
3. Long-Term Debt
2016 Annual Report 114
2016 Annual Report 114
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SCHEDULE II
SERVICEMASTER GLOBAL HOLDINGS, INC.
Valuation and Qualifying Accounts
(In millions)
As of and for the year ending December 31, 2016:
Continuing Operations—
Allowance for doubtful accounts
Accounts receivable
Notes receivable
Income tax valuation allowance
As of and for the year ending December 31, 2015:
Continuing Operations—
Allowance for doubtful accounts
Accounts receivable
Notes receivable
Income tax valuation allowance
As of and for the year ending December 31, 2014:
Continuing Operations—
Allowance for doubtful accounts
Accounts receivable
Notes receivable
Income tax valuation allowance
___________________________________
Balance at
Beginning of
Period
Additions
Charged to
Costs and
Expenses
Deductions(1)
Balance at
End of
Period
$
$
$
21 $
2
7
22 $
3
7
22 $
4
7
39 $
—
2
35 $
—
1
34 $
—
1
39 $
1
2
36 $
1
2
34 $
1
1
21
2
7
21
2
7
22
3
7
(1)
Deductions in the allowance for doubtful accounts for accounts and notes receivable reflect write-offs of uncollectible
accounts. Deductions for the income tax valuation allowance in 2016, 2015 and 2014 are primarily attributable to the
reduction of net operating loss carryforwards and other deferred tax assets related to the uncertainty of future taxable income
in certain jurisdictions.
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2016 Annual Report 115
Exhibit
Number
EXHIBIT INDEX
Description
Exhibit
Number
EXHIBIT INDEX
Description
2.1 Separation and Distribution Agreement, dated as of January 14, 2014, by and among ServiceMaster Global
2.1 Separation and Distribution Agreement, dated as of January 14, 2014, by and among ServiceMaster Global
Holdings, Inc., The ServiceMaster Company, TruGreen Holding Corporation and TruGreen Limited Partnership, is
incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K of The ServiceMaster Company, LLC,
filed January 17, 2014.
Holdings, Inc., The ServiceMaster Company, TruGreen Holding Corporation and TruGreen Limited Partnership, is
incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K of The ServiceMaster Company, LLC,
filed January 17, 2014.
2.2 Employee Matters Agreement, dated as of January 14, 2014, by and among ServiceMaster Global Holdings, Inc., The
ServiceMaster Company, LLC, TruGreen Limited Partnership and TruGreen Holding Corporation, is incorporated by
reference to Exhibit 2.3 to the Current Report on Form 8-K of The ServiceMaster Company, LLC, filed January 17,
2.2 Employee Matters Agreement, dated as of January 14, 2014, by and among ServiceMaster Global Holdings, Inc., The
ServiceMaster Company, LLC, TruGreen Limited Partnership and TruGreen Holding Corporation, is incorporated by
reference to Exhibit 2.3 to the Current Report on Form 8-K of The ServiceMaster Company, LLC, filed January 17,
2014.
2.3 Tax Matters Agreement, dated as of January 14, 2014, by and among ServiceMaster Global Holdings, Inc., The
2.3 Tax Matters Agreement, dated as of January 14, 2014, by and among ServiceMaster Global Holdings, Inc., The
ServiceMaster Company, LLC, TruGreen Holding Corporation and TruGreen Limited Partnership, is incorporated by
reference to Exhibit 2.4 to the Current Report on Form 8-K of The ServiceMaster Company, LLC, filed January 17,
ServiceMaster Company, LLC, TruGreen Holding Corporation and TruGreen Limited Partnership, is incorporated by
reference to Exhibit 2.4 to the Current Report on Form 8-K of The ServiceMaster Company, LLC, filed January 17,
2014.
2014.
2014.
2.4 Transition Services Agreement, dated as of January 14, 2014, by and between The ServiceMaster Company, LLC and
2.4 Transition Services Agreement, dated as of January 14, 2014, by and between The ServiceMaster Company, LLC and
TruGreen Limited Partnership, is incorporated by reference to Exhibit 2.5 to the Current Report on Form 8-K of The
ServiceMaster Company, LLC, filed January 17, 2014.
TruGreen Limited Partnership, is incorporated by reference to Exhibit 2.5 to the Current Report on Form 8-K of The
ServiceMaster Company, LLC, filed January 17, 2014.
3.1 Second Amended and Restated Certificate of Incorporation of ServiceMaster Global Holdings, Inc., is incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S-8 of ServiceMaster Global Holdings, Inc., filed
July 1, 2014.
3.1 Second Amended and Restated Certificate of Incorporation of ServiceMaster Global Holdings, Inc., is incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S-8 of ServiceMaster Global Holdings, Inc., filed
July 1, 2014.
3.2 Third Amended and Restated By-Laws of ServiceMaster Global Holdings, Inc., is incorporated by reference to
3.2 Third Amended and Restated By-Laws of ServiceMaster Global Holdings, Inc., is incorporated by reference to
Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 of ServiceMaster Global
Holdings, Inc., filed October 28, 2016.
Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 of ServiceMaster Global
Holdings, Inc., filed October 28, 2016.
4.1 Indenture, dated as of August 15, 1997, between The ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and the Harris Trust and Savings Bank, as trustee,
is incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-3 of The ServiceMaster Company,
filed August 6, 1997.
4.1 Indenture, dated as of August 15, 1997, between The ServiceMaster Company (as successor to ServiceMaster Limited
Partnership and The ServiceMaster Company Limited Partnership) and the Harris Trust and Savings Bank, as trustee,
is incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-3 of The ServiceMaster Company,
filed August 6, 1997.
4.2 First Supplemental Indenture dated as of August 15, 1997 between The ServiceMaster Company (as successor to
4.2 First Supplemental Indenture dated as of August 15, 1997 between The ServiceMaster Company (as successor to
ServiceMaster Limited Partnership and The ServiceMaster Company Limited Partnership) and the Harris Trust and
Savings Bank, as trustee, is incorporated by reference to Exhibit 4.4 to the Annual Report on Form 10-K for the year
ended December 31, 1997 of The ServiceMaster Company, filed March 27, 1998.
ServiceMaster Limited Partnership and The ServiceMaster Company Limited Partnership) and the Harris Trust and
Savings Bank, as trustee, is incorporated by reference to Exhibit 4.4 to the Annual Report on Form 10-K for the year
ended December 31, 1997 of The ServiceMaster Company, filed March 27, 1998.
4.3 Second Supplemental Indenture dated as of January 1, 1998 between The ServiceMaster Company and the Harris
Trust and Savings Bank, as trustee, is incorporated by reference to Exhibit 2 to the Current Report on Form 8-K of
The ServiceMaster Company, filed February 26, 1998.
4.3 Second Supplemental Indenture dated as of January 1, 1998 between The ServiceMaster Company and the Harris
Trust and Savings Bank, as trustee, is incorporated by reference to Exhibit 2 to the Current Report on Form 8-K of
The ServiceMaster Company, filed February 26, 1998.
4.4 Third Supplemental Indenture dated as of March 2, 1998 between The ServiceMaster Company and the Harris Trust
4.4 Third Supplemental Indenture dated as of March 2, 1998 between The ServiceMaster Company and the Harris Trust
and Savings Bank, as trustee, is incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K of the
ServiceMaster Company, filed February 27, 1998.
and Savings Bank, as trustee, is incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K of the
ServiceMaster Company, filed February 27, 1998.
4.5 Fourth Supplemental Indenture dated as of August 10, 1999 between The ServiceMaster Company and the Harris
4.5 Fourth Supplemental Indenture dated as of August 10, 1999 between The ServiceMaster Company and the Harris
Trust and Savings Bank, as trustee, is incorporated by reference to Exhibit 3 to the Current Report on Form 8-K filed
of The ServiceMaster Company, filed August 16, 1999.
Trust and Savings Bank, as trustee, is incorporated by reference to Exhibit 3 to the Current Report on Form 8-K filed
of The ServiceMaster Company, filed August 16, 1999.
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2016 Annual Report 116
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4.6 Fifth Supplemental Indenture, dated as of January 14, 2014, among The ServiceMaster Company, LLC and The Bank
of New York Mellon Trust Company, N.A. (as successor to Harris Trust and Savings Bank), as Trustee is
incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K of The ServiceMaster Company, LLC,
filed January 17, 2014.
4.7 Form of 7.45% Note due August 14, 2027 is incorporated by reference to Exhibit 4.2 to the Registration Statement on
Form S-3 of The ServiceMaster Company, filed August 6, 1997.
4.8 Form of 7.10% Note due March 1, 2018 is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-
K of the ServiceMaster Company, filed February 27, 1998.
4.9 Form of 7.25% Note due March 1, 2038 is incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-
K of the ServiceMaster Company, filed February 27, 1998.
4.10 Indenture, dated as of November 8, 2016, among The ServiceMaster Company, LLC, the Subsidiary Guarantors
named therein and Wilmington Trust, National Association, as Trustee, is incorporated by reference to Exhibit 4.1 to
the Current Report on Form 8-K of ServiceMaster Global Holdings, Inc., filed November 10, 2016.
4.11 First Supplemental Indenture, dated as of November 8, 2016, among The ServiceMaster Company, LLC, the
Subsidiary Guarantors named therein and Wilmington Trust, National Association, as Trustee, is incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K of ServiceMaster Global Holdings, Inc., filed November
10, 2016.
4.12 Form of 5.125% Senior Note maturing in 2024 is, included in and, incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K of ServiceMaster Global Holdings, Inc., filed November 10, 2016.
4.13 Form of Common Stock Certificate is incorporated by reference to Exhibit 4.18 to the Registration Statement on
Form S-1 of ServiceMaster Global Holdings, Inc., filed June 19, 2014.
10.1 Credit Agreement, dated as of July 1, 2014, among The ServiceMaster Company, LLC, the several banks and other
financial institutions from time to time party thereto, JPMorgan Chase Bank, as administrative agent and collateral
agent for the lenders party thereto, and the other parties thereto, is incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of ServiceMaster Global Holdings, Inc. and the ServiceMaster Company, LLC filed
July 2, 2014.
10.2 First Term Loan Amendment, dated as of April 1, 2015, to the Credit Agreement, dated as of July 1, 2014, among The
ServiceMaster Company, LLC and the incremental term lenders party thereto, JPMorgan Chase Bank, N.A., as
administrative agent and collateral agent for the lenders and the other parties party thereto is incorporated by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 of ServiceMaster Global
Holdings, Inc. and the ServiceMaster Company, LLC, filed May 4, 2015.
10.3 Second Amendment, dated as of August 17, 2015, to the Credit Agreement, dated as of July 1, 2014, among The
ServiceMaster Company, LLC and the incremental term lenders party thereto, JPMorgan Chase Bank, N.A., as
administrative agent and collateral agent for the lenders and the other parties party thereto is incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K of ServiceMaster Global Holdings, Inc., and The ServiceMaster
Company, LLC, filed August 17, 2015.
10.4 Third Amendment, dated as of November 8, 2016, to the Credit Agreement, dated as of July 1, 2014, among The
ServiceMaster Company, LLC, JPMorgan Chase Bank N.A., as administrative agent, the lenders and other financial
institutions party thereto and certain Subsidiaries named therein is incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of ServiceMaster Global Holdings, Inc., filed November 10, 2016.
10.5 Guarantee and Collateral Agreement, dated as of July 1, 2014 among The ServiceMaster Company, LLC, the
Guarantors named therein, in favor of JPMorgan Chase Bank, as administrative agent and collateral agent for the
2016 Annual Report 117
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banks and other financial institutions from time to time parties to the Credit Agreement, is incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K of ServiceMaster Global Holdings, Inc. and the ServiceMaster
Company, LLC filed July 2, 2014.
banks and other financial institutions from time to time parties to the Credit Agreement, is incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K of ServiceMaster Global Holdings, Inc. and the ServiceMaster
Company, LLC filed July 2, 2014.
10.6# Employment Agreement, dated as of June 14, 2013, by and between Robert J. Gillette and ServiceMaster Global
10.6# Employment Agreement, dated as of June 14, 2013, by and between Robert J. Gillette and ServiceMaster Global
Holdings, Inc. is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of The ServiceMaster
Company, filed June 18, 2013.
Holdings, Inc. is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of The ServiceMaster
Company, filed June 18, 2013.
10.7# Amendment No. 1 to Employment Agreement, dated as of August 13, 2013, by and between Robert J. Gillette and
10.7# Amendment No. 1 to Employment Agreement, dated as of August 13, 2013, by and between Robert J. Gillette and
ServiceMaster Global Holdings, Inc. is incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-
Q for the quarter ended June 30, 2013 of The ServiceMaster Company, filed August 14, 2013.
ServiceMaster Global Holdings, Inc. is incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-
Q for the quarter ended June 30, 2013 of The ServiceMaster Company, filed August 14, 2013.
10.8# Amendment No. 2 to Employment Agreement, dated as of February 28, 2014, by and between Robert J. Gillette and
ServiceMaster Global Holdings, Inc. is incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-
K for the year ended December 31, 2013 of The ServiceMaster Company, LLC, filed March 5, 2014.
10.8# Amendment No. 2 to Employment Agreement, dated as of February 28, 2014, by and between Robert J. Gillette and
ServiceMaster Global Holdings, Inc. is incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-
K for the year ended December 31, 2013 of The ServiceMaster Company, LLC, filed March 5, 2014.
10.9# Severance Agreement, dated as of August 26, 2013, by and between Alan J. M. Haughie and The ServiceMaster
Company is incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of The ServiceMaster
Company, filed August 29, 2013.
10.9# Severance Agreement, dated as of August 26, 2013, by and between Alan J. M. Haughie and The ServiceMaster
Company is incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of The ServiceMaster
Company, filed August 29, 2013.
10.10# Amended and Restated ServiceMaster Global Holdings, Inc. Stock Incentive Plan, as amended as of October 25, 2012
10.10# Amended and Restated ServiceMaster Global Holdings, Inc. Stock Incentive Plan, as amended as of October 25, 2012
(the “MSIP”), is incorporated by reference to Exhibit 10 to the Current Report on Form 8-K of The ServiceMaster
Company, filed October 26, 2012.
(the “MSIP”), is incorporated by reference to Exhibit 10 to the Current Report on Form 8-K of The ServiceMaster
Company, filed October 26, 2012.
10.11# Form of Employee Stock Option Agreement under the MSIP is incorporated by reference to Exhibit 10.32 to the
10.11# Form of Employee Stock Option Agreement under the MSIP is incorporated by reference to Exhibit 10.32 to the
Annual Report on Form 10-K for the year ended December 31, 2007 of The ServiceMaster Company, filed March 28,
Annual Report on Form 10-K for the year ended December 31, 2007 of The ServiceMaster Company, filed March 28,
2008.
10.12# Form of Employee Deferred Share Unit Agreement under the MSIP is incorporated by reference to Exhibit 10.33 to
10.12# Form of Employee Deferred Share Unit Agreement under the MSIP is incorporated by reference to Exhibit 10.33 to
the Annual Report on Form 10-K for the year ended December 31, 2007 of The ServiceMaster Company, filed
the Annual Report on Form 10-K for the year ended December 31, 2007 of The ServiceMaster Company, filed
March 28, 2008.
10.13# Form of Employee Restricted Stock Unit Agreement under the MSIP is incorporated by reference to Exhibit 10.3 to
the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 of The ServiceMaster Company, filed
10.13# Form of Employee Restricted Stock Unit Agreement under the MSIP is incorporated by reference to Exhibit 10.3 to
the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 of The ServiceMaster Company, filed
November 15, 2010.
2008.
March 28, 2008.
November 15, 2010.
10.14# Form of Employee Restricted Stock Unit Agreement for Robert J. Gillette is incorporated by reference to Exhibit 10.3
10.14# Form of Employee Restricted Stock Unit Agreement for Robert J. Gillette is incorporated by reference to Exhibit 10.3
to the Current Report on Form 8-K of The ServiceMaster Company, filed June 18, 2013.
to the Current Report on Form 8-K of The ServiceMaster Company, filed June 18, 2013.
10.15# Form of Employee Stock Option Agreement for Robert J. Gillette is incorporated by reference to Exhibit 10.4 to the
10.15# Form of Employee Stock Option Agreement for Robert J. Gillette is incorporated by reference to Exhibit 10.4 to the
Current Report on Form 8-K of The ServiceMaster Company, filed June 18, 2013.
Current Report on Form 8-K of The ServiceMaster Company, filed June 18, 2013.
10.16 Form of Director Indemnification Agreement is incorporated by reference to Exhibit 10.71 to the Registration
10.16 Form of Director Indemnification Agreement is incorporated by reference to Exhibit 10.71 to the Registration
Statement on Form S-1 of ServiceMaster Global Holdings, Inc., filed June 19, 2014.
Statement on Form S-1 of ServiceMaster Global Holdings, Inc., filed June 19, 2014.
10.17* Schedule of Signatories to a Director Indemnification Agreement.
10.17* Schedule of Signatories to a Director Indemnification Agreement.
10.18# ServiceMaster Deferred Compensation Plan, amended and restated as of October 28, 2016, is incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 of
ServiceMaster Global Holdings, Inc., filed October 28, 2016.
10.18# ServiceMaster Deferred Compensation Plan, amended and restated as of October 28, 2016, is incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 of
ServiceMaster Global Holdings, Inc., filed October 28, 2016.
10.19 ServiceMaster Global Holdings, Inc. Directors’ Deferred Compensation Plan is incorporated by reference to
10.19 ServiceMaster Global Holdings, Inc. Directors’ Deferred Compensation Plan is incorporated by reference to
Exhibit 10.79 to the Registration Statement on Form S-1 of ServiceMaster Global Holdings, Inc., filed June 16, 2014.
Exhibit 10.79 to the Registration Statement on Form S-1 of ServiceMaster Global Holdings, Inc., filed June 16, 2014.
2016 Annual Report 118
2016 Annual Report 118
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10.20# ServiceMaster Global Holdings, Inc. Executive Annual Bonus Plan is incorporated by reference to Annex A to the
definitive Proxy Statement on Schedule 14A of ServiceMaster Global Holdings, Inc., filed March 20, 2015 (the
“2015 Proxy Statement”).
10.21# Amended and Restated ServiceMaster Global Holdings, Inc. 2014 Omnibus Incentive Plan (the “Omnibus Plan”) is
incorporated by reference to Annex B to the 2015 Proxy Statement.
10.22# ServiceMaster Global Holdings, Inc. Employee Stock Purchase Plan is incorporated by reference to Annex C to the
2015 Proxy Statement.
10.23# Form of Employee Stock Option Agreement under the Omnibus Plan for awards granted between July 1, 2014 and
February 23, 2015 is incorporated by reference to Exhibit 10.77 to the Registration Statement on Form S-1 of
ServiceMaster Global Holdings, Inc., filed June 16, 2014.
10.24# Form of Employee Stock Option Agreement under the Omnibus Plan for awards granted between February 24, 2015
and February 21, 2016 is incorporated by reference to Exhibit 10.70 to the Annual Report on Form 10-K for the year
ended December 31, 2014 of ServiceMaster Global Holdings, Inc. and the ServiceMaster Company, LLC, filed
March 2, 2015.
10.25# Form of Employee Stock Option Agreement under the Omnibus Plan for awards granted on or after February 22,
2016 is incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended March
31, 2016 of ServiceMaster Global Holdings, Inc., filed May 5, 2016.
10.26# Form of Employee Restricted Stock Unit Agreement under the Omnibus Plan for awards granted between July 1,
2014 and February 23, 2015 is incorporated by reference to Exhibit 10.78 to the Registration Statement on Form S-1
of ServiceMaster Global Holdings, Inc., filed June 16, 2014.
10.27# Form of Employee Restricted Stock Unit Agreement under the Omnibus Plan for awards granted between
February 24, 2015 and February 21, 2016 is incorporated by reference to Exhibit 10.71 to the Annual Report on
Form 10-K for the year ended December 31, 2014 of ServiceMaster Global Holdings, Inc. and the ServiceMaster
Company, LLC, filed March 2, 2015.
10.28# Form of Employee Restricted Stock Unit Agreement under the Omnibus Plan for awards granted on or after
February 22, 2016 is incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2016 of ServiceMaster Global Holdings, Inc., filed May 5, 2016.
10.29# Form of Performance Share Agreement under the Omnibus Plan for awards granted on February 22, 2016 is
incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016
of ServiceMaster Global Holdings, Inc., filed May 5, 2016.
10.30#*Form of Performance Share Agreement under the Omnibus Plan for awards granted on or after February 20, 2017.
10.31 Form of Director Restricted Stock Agreement under the Omnibus Plan is incorporated by reference to Exhibit 10.7 to
the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 of ServiceMaster Global Holdings, Inc.,
filed May 5, 2016.
10.32# Separation and Consulting Agreement with Mark J. Barry, dated March 24, 2016, is incorporated by reference to
Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 of ServiceMaster Global
Holdings, Inc., filed May 5, 2016.
10.33#*Employment Offer Letter dated December 14, 2016, between the Company and Anthony DiLucente related to his
appointment as incoming Chief Financial Officer of the Company.
10.34 Plea Agreement entered into on January 20, 2017 by The Terminix International Company Limited Partnership and
Terminix International USVI, LLC is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of
ServiceMaster Global Holdings, Inc., filed January 23, 2017.
2016 Annual Report 119
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12* Statement regarding Computation of Ratio of Earnings to Fixed Charges as of December 31, 2016.
12* Statement regarding Computation of Ratio of Earnings to Fixed Charges as of December 31, 2016.
21* List of Subsidiaries as of December 31, 2016.
21* List of Subsidiaries as of December 31, 2016.
23* Consent of Deloitte & Touche LLP.
23* Consent of Deloitte & Touche LLP.
31.1* Certification of Chief Executive Officer of ServiceMaster Global Holdings, Inc. Pursuant to Rule 13a — 14, as
31.1* Certification of Chief Executive Officer of ServiceMaster Global Holdings, Inc. Pursuant to Rule 13a — 14, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer of ServiceMaster Global Holdings, Inc. Pursuant to Rule 13a — 14, as
31.2* Certification of Chief Financial Officer of ServiceMaster Global Holdings, Inc. Pursuant to Rule 13a — 14, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer of ServiceMaster Global Holdings, Inc. Pursuant to Section 1350 of Chapter
63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer of ServiceMaster Global Holdings, Inc. Pursuant to Section 1350 of Chapter
63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer of ServiceMaster Global Holdings, Inc. Pursuant to Section 1350 of Chapter
63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer of ServiceMaster Global Holdings, Inc. Pursuant to Section 1350 of Chapter
63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Extension Presentation Linkbase
101.PRE* XBRL Extension Presentation Linkbase
__________________________________
__________________________________
# Denotes management compensatory plans, contracts or arrangements.
# Denotes management compensatory plans, contracts or arrangements.
* Filed herewith.
* Filed herewith.
2016 Annual Report 120
2016 Annual Report 120
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RATIO OF EARNINGS TO FIXED CHARGES
Our consolidated ratio of earnings to fixed charges is as follows:
Ratio of Earnings to Fixed Charges
2016
2.58
Years Ended December 31,
2014
1.38
2013
1.35
2015
2.62
2012
(a)
(a)
For purposes of the ratio calculation, the deficiency in our earnings to achieve a one-to-one ratio of earnings to fixed charges
for the year ended December 31, 2012 was $26 million. For purposes of calculating our ratio of earnings to fixed charges for
the year ended December 31, 2012, fixed charges were $245 million.
Exhibit 12
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2016 Annual Report 121
Exhibit 31.1
Exhibit 31.1
I, Robert J. Gillette, certify that:
I, Robert J. Gillette, certify that:
1. I have reviewed this Annual Report on Form 10-K of ServiceMaster Global Holdings, Inc.;
1. I have reviewed this Annual Report on Form 10-K of ServiceMaster Global Holdings, Inc.;
CERTIFICATIONS
CERTIFICATIONS
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;
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;
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
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:
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;
(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;
(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;
(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
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
(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):
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
(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
(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.
Date: February 24, 2017
/s/ Robert J. Gillette
Robert J. Gillette
Chief Executive Officer
/s/ Robert J. Gillette
Robert J. Gillette
Chief Executive Officer
internal control over financial reporting.
Date: February 24, 2017
2016 Annual Report 122
2016 Annual Report 122
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3/11/17 11:19 AM
Exhibit 31.2
I, Alan J. M. Haughie, certify that:
1. I have reviewed this Annual Report on Form 10-K of ServiceMaster Global Holdings, Inc.;
CERTIFICATIONS
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.
Date: February 24, 2017
/s/ Alan J. M. Haughie
Alan J. M. Haughie
Senior Vice President and Chief Financial Officer
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3/11/17 11:19 AM
2016 Annual Report 123
Certification of Chief Executive Officer
Certification of Chief Executive Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of The United States Code
Pursuant to Section 1350 of Chapter 63 of Title 18 of The United States Code
Exhibit 32.1
Exhibit 32.1
I, Robert J. Gillette, the Chief Executive Officer of ServiceMaster Global Holdings, Inc., certify that (i) the Annual Report on
Form 10-K for the year ended December 31, 2016, 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 Annual Report on Form 10-K fairly presents, in all material respects,
the financial condition and results of operations of ServiceMaster Global Holdings, Inc.
I, Robert J. Gillette, the Chief Executive Officer of ServiceMaster Global Holdings, Inc., certify that (i) the Annual Report on
Form 10-K for the year ended December 31, 2016, 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 Annual Report on Form 10-K fairly presents, in all material respects,
the financial condition and results of operations of ServiceMaster Global Holdings, Inc.
/s/ Robert J. Gillette
Robert J. Gillette
February 24, 2017
/s/ Robert J. Gillette
Robert J. Gillette
February 24, 2017
Certification of Chief Financial Officer
Certification of Chief Financial Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of The United States Code
Pursuant to Section 1350 of Chapter 63 of Title 18 of The United States Code
Exhibit 32.2
Exhibit 32.2
I, Alan J. M. Haughie, the Senior Vice President and Chief Financial Officer of ServiceMaster Global Holdings, Inc., certify that
(i) the Annual Report on Form 10-K for the year ended December 31, 2016, 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 Annual Report on Form 10-K fairly presents,
in all material respects, the financial condition and results of operations of ServiceMaster Global Holdings, Inc.
I, Alan J. M. Haughie, the Senior Vice President and Chief Financial Officer of ServiceMaster Global Holdings, Inc., certify that
(i) the Annual Report on Form 10-K for the year ended December 31, 2016, 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 Annual Report on Form 10-K fairly presents,
in all material respects, the financial condition and results of operations of ServiceMaster Global Holdings, Inc.
/s/ Alan J. M. Haughie
Alan J. M. Haughie
February 24, 2017
/s/ Alan J. M. Haughie
Alan J. M. Haughie
February 24, 2017
2016 Annual Report 124
2016 Annual Report 124
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3/11/17 11:19 AM
Stockholder & SEC Information
Stockholder Information
Corporate Offices
860 Ridge Lake Blvd.
Memphis, TN 38120
901 597 1400
Corporate Website
servicemaster.com
Annual Meeting Details
April 25, 2017, 1 p.m. (US-MST)
Hyatt Regency Scottsdale Resort &
Spa at Gainey Ranch
7500 East Doubletree Ranch Road
Scottsdale, AZ 85258
Investor Relations
James E. Shields
Vice President, Investor Relations
860 Ridge Lake Blvd.
Memphis, TN 38120
901 597 6839
Transfer Agent
Computershare
Trust Company N. A.
211 Quality Circle, Suite 210
College Station, TX 77845
877 373 6374
computershare.com
Common Stock
Ticker Symbol - SERV
Listed New York Stock Exchange
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
Memphis, TN
SEC Reports
ServiceMaster maintains a website at www.servicemaster.com, which includes a hyperlink to a website maintained
by a third party where ServiceMaster’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and all amendments to those reports are available without change as soon as reasonably
practicable following the time that they are filed with or furnished to the Securities and Exchange Commission.
Copies can also be obtained at the Securities and Exchange Commission’s Public Reference Room at 100 F Street,
N.E., Room 1580, Washington D.C. 20549. In addition, the Securities and Exchange Commission maintains a website
at www.sec.gov, from which interested persons can also access our reports electronically.
Corporate Headquarters
860 Ridge Lake Boulevard
Memphis, TN 38120
servicemaster.com
@ServiceMaster
facebook.com/ServiceMaster
linkedin.com/company/ServiceMaster