One ServiceMaster Center150 Peabody PlaceMemphis, TN 38103servicemaster.comGrowth ThroughService2018 Annual Report ServiceMaster 2018 Annual Report Board of Directors
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SEC Reports
Executive Leadership
Common Stock
Ticker Symbol — SERV
Listed New York Stock Exchange
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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
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time that they are filed with
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Copies can also be obtained
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can also access our reports
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Mark Tomkins
Nikhil Varty
John Corness
Laurie Ann Goldman
Naren Gursahaney
Steven Hochhauser
Stephen Sedita
Nikhil Varty
Chief Executive Officer
Anthony DiLucente
Chief Financial Officer
Michael Bisignano
Senior Vice President,
General Counsel and Secretary
David Dart
Chief Human Resources Officer
Pratip Dastidar
Senior Vice President and
Chief Transformation Officer
Robert Doty
Chief Information Officer
Deni Naumann
Interim President, Terminix
Commercial;
President, Copesan Services, Inc.
Dion Persson
Senior Vice President, Strategy and
Business Development
Matthew Stevenson
President, Terminix Residential
Mary Kay Wegner
President, ServiceMaster Brands
Corporate Offices
150 Peabody Place
Memphis, TN 38103
901 597 1400
Corporate Website
servicemaster.com
Investor Relations
Jesse Jenkins
Treasurer & Vice President,
Investor Relations
150 Peabody Place
Memphis, TN 38103
901 597 3282
Annual Meeting Details
April 30, 2019, 2 p.m. Central
Marriott Milwaukee West Hotel
W 231 N 1600 Corporate Court
Waukesha, WI 53186
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Annual report design by Morgan Design (NYC)
Terminix Field Technician Brenda Bell rang the NYSE closing bell for ServiceMaster on Dec. 10, 2018.
About This Report
Every day, our ServiceMaster employees, service partners and franchise associates serve more than
50,000 customers, providing cleaner, healthier and safer environments wherever they are — at home,
at work or at play. Our customers have come to trust us during some of the most important moments of
their lives, whether protecting them from the effects of pests, helping them recover from the trauma of
unexpected disasters or keeping their homes clean and businesses orderly, so they can live hassle-free
lives. Our frontline serves our customers with passion because they care deeply about the work they do
and the relationships they have built.
We are continually redefining what service means for our company – and the work is starting on
our frontlines by harnessing their passion to make our services exceptional. How are individual field
technicians reimagining service? What do bed bugs, hurricanes and wedding dresses have to do with
creating growth? The stories highlighted in the following pages are just the beginning in a chronicle
about getting service right ... a chronicle that is the foundation for accelerating our growth.
We serve our customers by
providing exceptional customer
experiences that exceed their
expectations.
We care deeply about the
health, safety and wellbeing of
our customers, associates and
communities and constantly seek
new and better ways of
protecting them and improving
their environments in a
sustainable way.
We consistently deliver on our
commitments to our customers, our
employees and our shareholders.
2018 Financial Summary
(In millions, except per share data)
2018
2017
Change
As of and for the years ended December 31,
Operating Results
Revenue
Net (Loss) Income
Adjusted Net Income1
Adjusted EBITDA2
Net (Loss) Earnings Per Share
Adjusted Earnings Per Share3
Financial Position
Total Assets
Total Debt
Stockholders’ Equity
Cash Flows
Net Cash Provided from Operating Activities
from Continuing Operations
Free Cash Flow4
Free Cash Flow Conversion
$1,900
(41)
130
398
(0.30)
0.95
$5,023
1,776
2,204
$229
187
47%
$1,755
510
101
374
3.76
0.74
$5,646
2,778
1,167
$204
138
37%
8%
—
29%
6%
—
29%
12%
35%
Revenue
(in $ millions)
1,629
1,678
1,726
1,755
1,900
Adjusted EBITDA / Margin5
(in $ millions / %)
406
388
398
374
353
22%
23%
24%
21%
21%
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
Adjusted EBITDA
Margin
1 Adjusted net income is defined as net (loss) income before: amortization expense; 401(k) Plan corrective contribution; fumigation related matters; insurance
reserve adjustment; restructuring charges; acquisition-related costs; mark-to-market loss on investment in frontdoor, inc.; impairment of software and
other related costs; (gain) loss from discontinued operations, net of income taxes; loss on extinguishment of debt; and the tax impact of the aforementioned
adjustments and the impact of tax law change on deferred taxes. The company’s definition of adjusted net income may not be comparable to similarly titled
measures of other companies.
2 Adjusted EBITDA is defined as net (loss) income before: depreciation and amortization expense; acquisition-related costs; 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 and consulting agreement termination fees; mark-
to-market loss on investment in frontdoor, inc.; (gain) loss from discontinued operations, net of income taxes; provision (benefit) for income taxes; loss on
extinguishment of debt and interest expense. The company’s definition of adjusted EBITDA may not be comparable to similarly titled measures of other
companies.
3 Adjusted earnings per share is calculated as adjusted net income divided by the weighted-average diluted common shares outstanding.
4 Free cash flow is defined as net cash provided from operating activities from continuing operations less property additions, net of government grant fundings
for property additions.
5 Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of revenue.
1
Non-GAAP Reconciliation
The following table reconciles net income to adjusted net income for the
periods presented.
(In millions, except per share data)
2018
2017
As of and for the years ended December 31,
Net (Loss) Income
Amortization expense
Acquisition-related costs
401(k) Plan corrective contribution
Fumigation related matters
Restructuring charges
Impairment of software and other related costs
Mark-to-market loss on investment in frontdoor, inc.
Gain from discontinued operations, net of income taxes
Loss on extinguishment of debt
Tax impact of adjustments
Impact of tax law change on deferred taxes
Adjusted Net Income
Weighted average diluted common shares outstanding
Adjusted earnings per share
(41)
18
5
—
3
17
—
249
(122)
10
(14)
3
130
136.1
0.95
510
18
—
(3)
4
21
2
—
(169)
6
(17)
(271)
101
135.4
0.74
2
Dear Fellow Shareholders
As I look back at 2018, the words that come to mind are, “Getting
Started.” What an incredible start it has been. At the conclusion
of my first 18 months at ServiceMaster, we see the beginning of a
great transformation and the increase of positive energy across our
businesses. We are proud of the progress we have made, but believe
that there is much more to do to create meaningful impacts and
deliver incredible value.
We are blessed with fairly recession-resistant, growing markets in an increasingly
challenging political and economic environment. We continue to build a stable
operating system positioned to capture sustainable opportunities for profitable growth,
while steadily building strong capabilities in our people, processes and systems.
It is a privilege to be part of this special organization with over 40,000 people who
serve over 50,000 customers every day, providing them with cleaner, healthier, safer
environments wherever they are — at home, at work or at play.
This mission, our purpose and who we ultimately aspire to become are defined by our
three core commitments:
We Serve: We aspire to deliver an unparalleled customer experience, whether
protecting our customers’ health from the effects of harmful pests, returning them to
a safe place to live or work by carefully restoring their lives or ensuring they breathe
freely in an environment which we have kept meticulously clean. At ServiceMaster, we
believe through service and care, we have the power to impact and improve lives and
3
drive growth in our businesses. This core belief is at the heart of how we are shaping
our future, working with employees and franchise associates, and re-imagining our
customer journeys to deliver memorable experiences to our customers at every
touch point.
We Care: Listening to our employees in the field and instilling their learnings in our
processes and systems allows us to remove obstacles from their paths, enabling them
to deliver an unmatched customer experience. Enhancing benefits, optimizing work
hours, improving pay-for-performance structures and creating career paths tailored to
deserving employees’ aspirations demonstrates our deep care for them in their quest
to deliver outstanding service.
We are creating a workplace that respects creativity, initiative, diversity of thought
and cultural inclusion by recognizing talent and perseverance at every level. We have
increased our community outreach because service and care are at the heart of who
we are.
We Deliver: Credibility is extremely important. We have significantly improved
our ability to deliver on our commitments to our customers, employees, partners,
shareholders and to each other.
Our shareholders have benefited from our great start and have seen their total
shareholder return rise by $4.0 billion (75 percent) between July 2017 and March 1,
2019, as described and shown in the graph on page 14.
We have made significant improvements in our business by enhancing our brands
and renewing our focus, providing exceptional customer experiences that have
historically been the hallmark of what had made ServiceMaster a successful company.
The enhancements started with a stronger commitment to our customers and an
improvement of our core service capabilities to delight them. Some of our proudest
accomplishments include:
• Delivering considerable value to our shareholders through the spinoff of American Home
Shield (now Frontdoor), giving our shareholders ownership of two strong publicly traded
companies with increased flexibility and capital positions.
• Continuing to deliver on the Terminix transformation by focusing on fundamentals and
accountability, resulting in rapidly improving organic pest growth rates and a strengthened
termite business.
• Building a dedicated team to better serve the needs of our commercial and national account
customers through our Copesan acquisition, strong commercial processes and capabilities,
and adding incredible talent.
• Strengthening our capabilities and competitive advantages with acquisitions, like Cooper Pest
and Assured Environments — models for urban market penetration, improved bed bug
programs and organic growth best practices.
• Launching ServiceMaster Brands (formerly Franchise Services Group), reflecting a bold
vision for our restoration and cleaning segments, outlining a broadened growth strategy in
these important markets, and focusing on the end customer and service differentiation.
• Developing an enterprise strategy, mission and corporate value system setting a course
toward a business and cultural transformation. This is the core of our vision to be the best in
the eyes of our customers, the employer of choice and ultimately, a company considered a
stable investment for shareholders.
4
• Taking a major step in using lean, clean-sheet principles to dramatically improve our service
delivery models led by our customer-facing associates, and developing a leading-edge data
platform supported by our partnership with Salesforce.
As a result of the efforts of people across our company, ServiceMaster reported strong
results for 2018.
• Grew revenue 8 percent to $1.9 billion, including organic growth of 2 percent at
Terminix and 9 percent at ServiceMaster Brands
• Increased adjusted EBITDA to $398 million, while investing in growth
• Delivered free cash flow of $187 million, up 35 percent from 2017
• Significantly reduced debt and solidified our balance sheet
The actions we have taken and the foundation we have started to build excite me
about our future. We are better positioned to serve our customers, capitalize on new
opportunities, and continue creating value for our shareholders and employees in the
years to come.
We will focus on five clear strategic priorities in 2019:
• Terminix improvement: We are absolutely focused on driving operational improvement
across our Terminix business, with a special focus on exceptional customer experiences that
will improve our customer retention. As a result of the work to date, our net promoter score
— a leading indicator of retention improvement — continue to improve in both pest and
termite. They were up 5 percent and 7 percent respectively for the year.
• Commercial pest management: We will continue to leverage the significant capability
investments we made in 2018 to build a world-class commercial pest management business
that delights our customers.
• Growth through innovation and international expansion: Our innovation center is driving
dozens of new offerings across our businesses. In addition, we are developing market-
entry strategies to expand our businesses in attractive global markets, leveraging our strong
brands, size and scale.
• ServiceMaster Brands: We are beginning to identify and deliver more value from our
restoration and cleaning businesses, which generated $2.6 billion in 2018 customer-level
revenue. Value creation opportunities in this business include greater focus on the end
customer and the complete value chain, growing beyond our franchise services through a
broader network of franchisees, contractors and company-owned operations.
• Empower our true competitive advantage — Talent: Growth through service starts with
empowering our front-line employees to deliver a better customer experience with
streamlined processes, technology and a 360-degree customer view.
Looking forward to 2019, we will be satisfied with nothing less than delivering an
unparalleled service experience to our customers, a deep-rooted culture of care for
our employees and franchise associates, and delivering strong financial performance.
Thank you for your continued support and for choosing to invest in your company.
Nikhil Varty
Chief Executive Officer
March 21, 2019
5
ServiceMaster at a Glance
P E S T C O N T R O L
1927
1958
1958
Terminix is a leading provider of residential and
commercial termite and pest control services in
the United States.
Acquired in March 2018, Copesan extends our
commercial market reach and national account
management capabilities.
$5+ billion
U.S. market
$3+ billion
U.S. market
R E S T O R A T I O N
Highly fragmented markets
1981
1992
1987
ServiceMaster Restore is a leader in commercial
and residential property restoration services.
One of the world’s largest furniture and cabinet
repair and restoration companies.
A leading home and commercial property
inspection brand in North America.
$43+ billion
addressable
U.S. market
$2+ billion
addressable
U.S. market
$4+ billion
addressable
U.S. market
C L E A N I N G
Large addressable markets
1947
1979
A leader in commercial cleaning and floor and
upholstery services around the world.
One of the largest networks of home cleaning
franchises in the United States.
$61+ billion
U.S. market
$17+ billion
U.S. market
All market sizes derived from Specialty Consultants, LLC, and management estimates. Market position as measured by customer-level revenue, including franchise customers,
based on company filings and management estimates.
6
P E S T C O N T R O L
R E S T O R A T I O N
Highly fragmented markets
C L E A N I N G
Large addressable markets
#1 U.S.
residential
market position
Top 4 U.S.
commercial
market position
400+
company-owned and
franchise locations
9,400+
employees
47 U.S. states
19 countries
Average tenure:
9 years: branch mgrs.
8 years: techs
155 service locations
80+ local service
providers
265
employees
2.8 million
customers
50,000+
customer visits
2,900+
franchised locations
$2.6 billion
in customer-level
revenue
(ServiceMaster
Brands total)
290+
franchises
U.S., Canada, U.K.
34,000+
franchise associates
(ServiceMaster
Brands total)
~60,000 U.S.
home inspections
each year
~270
licenses in U.S.
and Canada
900+
franchised and
licensed locations
around the world
1,140+
franchised and
licensed locations on
four continents
Employ more than
7,100
home-cleaning
professionals
175,000+
home visits in North
America every month
7
Pest Control at home
Transformation of our service model was a primary focus for Terminix in 2018.
Our frontline helped us take a hard look at our people, processes and systems to
identify ways to serve our customers better, while strengthening the fundamentals
and accelerating our organic growth. This included recruiting new service-minded
talent among our branch managers, regional field directors and senior leadership to
better support our frontline technicians — and acquiring new service capabilities and
talent through acquisitions like Cooper Pest Solutions, which strengthens our bed
bug expertise.
Our process and system improvements already have driven higher net promoter
scores (a measure of customer satisfaction and loyalty). Improvements in start rates
and completion rates — especially in our residential pest business — drove organic
growth above seven percent in the second half of 2018. We also rebuilt and invested
heavily in our sales and marketing process. As a result, we have seen a record number
of both customer renewals and enrollments in our convenient auto-pay system, two
critical signals of retention improvement.
We will continue to improve our services in 2019 as we intensify our focus on the
fundamentals: communication with customers, schedule optimization and ensuring
we follow consistent service routines. Our frontline associates are actively involved
in designing improved service experiences with our Transformation Office, using a
lean digital approach and clean sheet design. They also are helping roll out a new
customer experience platform, powered by Salesforce, giving our frontline associates
a 360-degree view of the customer, streamlined processes and a single platform
across sales, service and marketing, enabling them to spend more time delivering
exceptional customer service experiences. Additionally, our employees helped design
a new compensation program that encourages a stronger focus on rewarding high-
quality customer service. In 2019, to better address customer needs, we plan to
Terminix Saves the Bride
The week of her wedding, Jennifer Carlson placed her
wedding dress in a garment bag draped over a spare
bed. She came home from work to find black ants all
over the room, including the wedding dress garment
bag. “All I could think was that my dress would be ru-
ined and 11 guests were coming to stay at my infested
townhouse!” Carlson said. Terminix came right away
to ensure no ants remained on the wedding dress —
or anywhere in her home. “We’ve been loyal Terminix
customers ever since. It’s given us such peace of mind
since that day to know that our technician, Patrick, is
right here if we ever have another ant invasion.”
Starting Termite Service with a Clean Sheet
In the fall 2018, two teams of 20 frontline technicians,
sales staff, contact center staff and other team mem-
bers gathered to ask themselves: How does Terminix
currently deliver termite control? And — if we rede-
signed our jobs on a clean sheet of paper — how could
we do things better, from finding prospective customers
through account renewal? These teams identified and
are testing dozens of enablers that span operational
improvements and digital enhancements to improve
sales and drive exceptional customer experiences —
all while improving employee safety and standardizing
operations. Their ideas are enhancing employee and
customer satisfaction and will drive productivity and
efficiencies over time.
Q4 Start Rates Up:
Pest
Termite
5%
4%
Pest
FY18 NPS Scores Up:
5%
7%
Termite
19 Pest control acquisitions in 2018
9
Improving Pest Control Service and Quality
A priority focus area is to leverage the expertise of
Copesan throughout the entire commercial business.
We have added a quality assurance team that is travel-
ing the country and working on initiatives designed to
improve the service levels of existing Terminix Commer-
cial branches. “I have seen first-hand the success of
this program through our work in this area with Copesan
partners over the years,” said Dominique Sauvage,
senior director of Quality, Training and Field Operations.
“I am confident that as we expand on the service capa-
bilities of the Terminix Commercial branches, we will
enjoy improved customer satisfaction and retention.”
No Prep, No Bed Bugs, No Bites
Rose Community Management, a portfolio of affordable
and mixed income properties, is a valued customer
of Terminix through our recent acquisition of Cooper
Pest Solutions. The company, like many of Cooper’s
customers, finds particular value in an industry-leading
“no prep” bed bug treatment developed by Dr. Richard
Cooper, a leading entomologist and the company’s
technical director. “In most cases, we can administer
bed bug treatments without asking residents to strip
beds and empty closets and drawers,” Cooper said.
“This is an enormous convenience for residents and
property managers alike.” This service capability, being
rolled out nationwide, gives us a competitive edge in
serving vulnerable and aging populations.
Copesan’s 2018
Revenue Growth Rate
5%
Q4 NPS Scores Up:
Commercial Pest
16%
Bed Bug Control
Market (2017):
$645 million
10
Bed Bug Control
Market Growth (2017):
6%
Pest Control at work or play
introduce a simplified tiered (bundled) offering, launch our new Drywood Defend®
termite product, and expand termite product sales to big-box retailers and through
e-commerce and other channels.
In order to serve our commercial customers more effectively and efficiently and
improve our service capabilities, we made several important acquisitions last year,
giving us one of the largest geographic footprints in the industry with 200 commercial
branch and service partner locations. Our commercial pest control business now ranks
among the leading providers of commercial pest management services in the United
States. Acquired in March 2018, Copesan Services is an alliance of regional pest
management providers with exceptional expertise, focused national account services
and industry-leading commercial customer service, using strong processes, protocols,
training and tools. Best practices from Copesan helped strengthen our commercial
service capabilities and customer engagement practices, while providing synergies in
back-office costs. To enhance customer satisfaction and retention, we have instituted
regional quality assurance and training teams. In December, we also announced the
acquisition of a valued Copesan partner, Assured Environments, America’s largest
independent urban pest company, known for providing pest management services to
Madison Square Garden, the September 11 Memorial and Museum, Rockefeller Center
and other iconic New York buildings.
In 2019, we plan to further customize our service offerings to better meet the
highly sophisticated needs of various customer verticals, such as food safety (food
processing, packaging and distribution); foodservice (retail grocery and convenience
stores); transportation and logistics; multi-site local real estate; healthcare;
warehousing/distribution and manufacturing. We also look forward to expanding
Assured Environments’ urban pest management best practices into other urban
areas beyond New York City.
Restoration & Cleaning
We are a leading restoration and cleaning services provider in both the residential
and commercial markets, with more than 4,600 franchise licensees and more than
34,000 franchise associates in 10 countries. Our strong portfolio of quality brands
generated $2.6 billion in customer-level revenues in 2018. The initiatives we launched
in 2018 continue to drive us toward sustainable revenue growth in 2019. In restoration
services, we reinforced commercial recovery teams to help improve our services for
multi-location commercial customers, who often have recurring restoration needs,
growing that segment by 20 percent. We also enhanced our fire damage remediation
offering, leading to 21 percent growth in customer-level revenues for this service. In
cleaning, our improved service offerings enabled us to increase revenues by 24 percent
in national accounts and increase sales by 20 percent in healthcare services. We also
are realizing productivity gains by adopting lean digital principles and continuous
improvement across all of our brands.
We launched a bold vision for cleaning and restoration in 2018 and changed this
business segment’s name to ServiceMaster Brands to better reflect the growth
opportunities in these important markets. We envision this growth occurring through
a broader network of franchisees, contractors and company-owned operations.
We have multiple opportunities to expand our restoration and reconstruction
businesses and to leverage the strength of all of our brands in unified offerings. For
example, we are discussing programs with new national accounts that desire pest,
cleaning and restoration services from a single provider. In our Merry Maids brand, we
are refreshing the strategy to prioritize the fact that our cleaning professionals are in
homes 175,000 times a month. We have stepped back and are looking at ways to offer
more value in those visits and find new opportunities to provide exceptional service
for these customers.
Rebuilding Communities After a Hurricane
In October 2018, Hurricane Michael devastated parts of
Florida, Georgia, North Carolina and Virginia — including
Seminole County Elementary School in Donalsonville,
Ga. “The primary focus is getting kids back in school
so we can feed them and get them out of houses that
are essentially uninhabitable now,” said School Su-
perintendent Brinson Register. “I’ve been very pleased
with ServiceMaster. They had boots on the ground by
10 o’clock the next morning to clean up the extensive
damage.” Power came back to the town in two weeks
— and students were back in school just a week later,
thanks to ServiceMaster Restore’s help in rebuilding
the community.
Great Cleaning, Less Stress
Americans are finding themselves with less and less
time to manage all their necessary household chores
while balancing their free time – and many are turning to
Merry Maids for help. “Merry Maids helps me make my
own life possible by taking care of some of the things
I don’t want to find time for,” said customer Kimanda
Richards. Kimanda represents a growing population
of customers who would rather outsource household
tasks like cleaning, decluttering and organization. The
Colorado Springs Merry Maids office offers professional
organization, unpacking and decluttering services to its
customers after discovering a need in their community.
The Most Important Details of Patient Care
A meticulously clean hospital reassures patients,
family members and employees about the quality of
care. Franklin Medical Center, a 34-bed hospital in
Winnsboro, La., hired ServiceMaster Clean to manage
environmental services (ES), including staff training.
After two years, patient ratings of cleanliness rose
from the 70th percentile to above the 90th percentile,
improving patient satisfaction, insurance reimbursement
rates — and ultimately, hospital revenue and profitability.
One patient’s granddaughter was transformed from
skeptic to fan. “I attribute much of her change in attitude
to the performance of our ES staff,” said Blake Kramer,
hospital administrator.
1313
We Deliver
Spin-off Market Capitalization Graph
The graph below presents the value creation in total market capitalization, commencing on June 26, 2014, our initial day
of trading at our IPO through March 1, 2019. On October 1, 2018, we completed the previously announced separation
of our American Home Shield business, effectuated through a pro rata dividend to the company’s stockholders of
approximately 80.2 percent of the outstanding shares of common stock of frontdoor, inc. (“Frontdoor”), which was
formed as a wholly owned subsidiary of the company to hold our American Home Shield business.
The graph reflects the value of our market capitalization on (i) June 26, 2014, (ii) July 25, 2017, the day before we
announced the spin-off of the American Home Shield business, (iii) September 30, 2018, the day before we completed
the spin-off of Frontdoor and (iv) March 1, 2019, giving effect to 2018 year-end earnings announcements for both
ServiceMaster and Frontdoor. This graph assumes that the shares of Frontdoor distributed on October 1, 2018,
were retained by stockholders through March 1, 2019, which reflects the combined market capitalization of both
ServiceMaster and Frontdoor.
$10
)
s
n
o
i
l
l
i
b
(
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
June 26
2014
July 25
2017
Sept 30
2018
Mar 01
2019
ServiceMaster Stock Performance Graph
The graph below presents our cumulative total stockholder 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. On October 1, 2018, we completed the previously announced separation of our American
Home Shield business. Our stockholders received one share of Frontdoor common stock for every two shares of
ServiceMaster common stock held as of the close of business on the Record Date. The graph below assumes, similar
to a cash dividend, that the shares of Frontdoor that were distributed on October 1, 2018, were sold and the proceeds
from such sale were reinvested into additional shares of ServiceMaster common stock.
$330
$280
$230
$180
$130
$80
June 26
2014
Dec 31
2014
Dec 31
2015
Dec 31
2016
Dec 29
2017
Dec 31
2018
14
SERV
S&P 500 Index
S&P 400 Consumer Services Index
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-K
________________________________________________
(cid:95)(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
(cid:134)(cid:134) 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.)
150 Peabody Place, Memphis, Tennessee 38103
(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 (cid:95) No (cid:134)
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 (cid:134) No (cid:95)
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 (cid:95) No (cid:134)
Indicate by check mark whether the registrant has submitted electronically 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 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. (cid:134)
Yes (cid:95) No (cid:134)
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer (cid:1409)
Accelerated filer (cid:1407)
Non-accelerated filer (cid:1407)
Smaller reporting company (cid:1407)
Emerging growth company (cid:1407)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes (cid:134) No (cid:95)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134) No (cid:95)
As of June 30, 2018, there were 135,557,005 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 $8 billion based on the closing price of common stock on the NYSE on June 29, 2018 of $59.47 per share (reflecting historical stock prices in
advance of the spin-off of the American Home Shield business, which occurred on October 1, 2018; stock prices have since been re-indexed to give effect to the
spin-off).
The number of shares of the registrant’s common stock outstanding as of February 25, 2019: 135,880,104 shares of common stock, par value $0.01 per share.
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 2019 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, 2018.
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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
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
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
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
PART IV
Item 15.
Item 16.
Exhibit Index
Signatures
Exhibits and Financial Statement Schedules
Form 10-K Summary
(cid:20)(cid:27)
(cid:21)(cid:24)
(cid:22)(cid:25)
(cid:22)(cid:25)
(cid:22)(cid:26)
(cid:22)(cid:26)
(cid:22)(cid:27)
(cid:23)(cid:19)
(cid:23)(cid:24)
(cid:25)(cid:25)
(cid:25)(cid:27)
(cid:20)(cid:20)(cid:19)
(cid:20)(cid:20)(cid:19)
(cid:20)(cid:20)(cid:19)
(cid:20)(cid:20)(cid:20)
(cid:20)(cid:20)(cid:20)
(cid:20)(cid:20)(cid:20)
(cid:20)(cid:20)(cid:20)
(cid:20)(cid:20)(cid:20)
(cid:20)(cid:20)(cid:20)
(cid:20)(cid:20)(cid:20)
(cid:20)(cid:20)(cid:21)
(cid:20)(cid:20)(cid:28)
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ITEM 1. BUSINESS
PART I
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
Form 10-K.
Overview
ServiceMaster Global Holdings, Inc. and its majority-owned subsidiary partnerships, limited liability companies and
corporations (collectively, “ServiceMaster,” the “Company,” “we,” “us” and “our”) is a leading provider of essential services to
residential and commercial customers in the termite, pest control, cleaning and restoration markets, operating through an extensive
service network of more than 8,000 company-owned locations and franchise and license agreements. Our mission is to simplify and
improve the quality of our customers’ lives by delivering services that help them protect and maintain their homes or businesses,
typically their most highly valued assets. We have leading positions across the majority of the segments we serve, as measured by
customer-level revenue. Our portfolio of well-recognized brands includes Terminix (residential termite and pest control), Terminix
Commercial (commercial termite and pest control), Copesan (commercial national accounts pest management), ServiceMaster Restore
(restoration), ServiceMaster Clean (commercial cleaning), Merry Maids (residential cleaning), Furniture Medic (cabinet and furniture
repair) and AmeriSpec (home inspections). 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 10,700 company associates and an estimated 34,000 employees of licensed franchisors.
For the year ended December 31, 2018, we had revenue, net loss and Adjusted EBITDA of $1,900 million, $41 million and
$398 million, respectively. In 2018, Terminix, our largest segment, represented approximately 87 percent of our revenue, while
ServiceMaster Brands, formerly referred to as our Franchise Services Group, represented approximately 13 percent of our revenue.
For a reconciliation of net (loss) income to Adjusted EBITDA, see “Selected Financial Data.”
Approximately 97 percent of our 2018 revenue was generated by sales and services in the United States. A significant portion
of our assets are 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 2018, 2017 and 2016 is contained in Note 4 to the consolidated financial statements.
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.
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 businesses 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 310 company-owned locations and
approximately 100 franchise locations. ServiceMaster Brands 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.
These trends include growth in population, household formation and new and existing home sales as well as increasing regulation of
commercial pest control services. 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.
Our Reportable Segments
Our operations are organized into two reportable segments: Terminix (which includes Terminix, Terminix Commercial and
Copesan) and ServiceMaster Brands (which includes ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and
AmeriSpec).
Terminix
Terminix is a leading provider of residential and commercial termite and pest control services in the United States. Terminix
specializes in protection against termite damage, rodents, insects and other pests, including cockroaches, spiders, wood-destroying
ants, ticks, fleas, mosquitos and bed bugs. Our services include termite remediation, annual termite inspection and prevention
18
treatments with termite damage repair guarantees, periodic pest control services, insulation services, crawlspace encapsulation and
wildlife exclusion.
For the year ended December 31, 2018, Terminix recorded revenue of $1,655 million and Adjusted EBITDA of $333 million.
In 2018, 59 percent of Terminix revenue was generated from pest control services and 36 percent was generated from termite and
home services, which includes crawlspace encapsulation, wildlife exclusion and insulation services, with the remaining five percent
primarily from the distribution of pest control products. In 2018, 67 percent and 33 percent of pest control revenue was related to
residential services and commercial services, respectively, and 93 percent and seven percent of revenue from termite and home
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 9-year and 8-year
average tenure of our branch managers and technicians, respectively. Our field organization is supported by dedicated customer
service and customer care 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 310 company-owned locations and approximately 100
franchise locations, which serve approximately 2.8 million customers in 47 states and the District of Columbia. Terminix’s
approximately 9,600 employees made a daily average of 50,000 visits to residential and commercial customer locations during 2018.
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 and the Middle East. In 2018, 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 2018. We estimate that customer-level revenue for this segment was $2,003 million for the year ended
December 31, 2018. Customer-level revenue represents the total of our estimate of revenue generated by our franchisees, a portion of
which is included in our reported revenue from royalty fees, and revenue generated by our company-owned operations. More
specifically, customer level revenue means: Terminix revenue of $1,655 million, less royalty fees of $11 million, plus estimated sales
generated by our franchisees of $359 million.
Terminix Competitive Strengths
#1 recognized brand in U.S. termite and pest control services
(cid:120)(cid:3)
(cid:120)(cid:3) Passionate and committed associates focused on delivering superior customer service
(cid:120)(cid:3) Expansive scale and deep presence across a national footprint
(cid:120)(cid:3) Effective multi-channel customer acquisition strategy
(cid:120)(cid:3) History of innovation leadership and introducing new products and services
ServiceMaster Brands
ServiceMaster Brands consists of ServiceMaster Restore (restoration), ServiceMaster Clean (commercial cleaning), Merry
Maids (residential cleaning), Furniture Medic (cabinet and furniture repair) and AmeriSpec (home inspection) businesses. Our
businesses in this segment operate principally through franchisees.
For the year ended December 31, 2018, ServiceMaster Brands recorded revenue of $244 million and Adjusted EBITDA of
$89 million. In 2018, approximately 54 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 $2,636 million for the year ended December 31, 2018. Customer level
revenue means: ServiceMaster Brands revenue of $244 million, less royalty fees of $132 million, plus estimated sales generated by
our franchisees of $2,519 million.
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We believe that each business holds a leading position in its respective category and that our scale and national presence
create competitive advantages for us in attracting and retaining franchisees, commercial customers and insurance partners. 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 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. ServiceMaster Brands 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 10 other countries.
ServiceMaster Brands Competitive Strengths
Infrastructure and scale supporting our ability to sell and service national accounts, including major insurance carriers
(cid:120)(cid:3) Strong and trusted brands with leading positions in their respective categories
(cid:120)(cid:3)
(cid:120)(cid:3) Attractive value proposition to franchisees
(cid:120)(cid:3) Exceptional focus on customer service
(cid:120)(cid:3) National network and 24/7/365 service availability supports mission-critical nature of the ServiceMaster Restore
business
(cid:120)(cid:3) Long-standing and strong relationships with many of the top 20 insurance carriers
American Home Shield Spin-off
On October 1, 2018, we completed the previously announced separation of our American Home Shield business (the
“Separation”). The Separation was effectuated through a pro rata dividend (the “Distribution”) to the Company’s stockholders of
approximately 80.2 percent of the outstanding shares of common stock of frontdoor, inc. (“Frontdoor”), which was formed as a wholly
owned subsidiary of the Company to hold our American Home Shield business. As a result of the Distribution, Frontdoor is an
independent public company that trades on the Nasdaq Global Select Market under the symbol “FTDR.”
The Distribution was made to our stockholders of record as of the close of business on September 14, 2018 (the “Record
Date”), and such stockholders received one share of Frontdoor common stock for every two shares of ServiceMaster common stock
held as of the close of business on the Record Date. We distributed 67,781,527 shares of common stock of Frontdoor in the
Distribution and retained 16,734,092 shares, or approximately 19.8 percent of the common stock of Frontdoor immediately following
the Distribution. This investment is accounted for as an available for sale security. We currently intend to responsibly dispose of all
the Frontdoor common stock we retained after the Distribution through one or more subsequent exchanges for debt by June 14, 2019,
in accordance with terms set forth in a private letter ruling with the Internal Revenue Service (“IRS”) governing the tax-free status of
the Distribution.
The American Home Shield segment is reported in this Annual Report on Form 10-K in discontinued operations. See Note 8
to the consolidated financial statements for further information.
Our Opportunity
Termite and Pest Control Industry
The outsourced segment for residential and commercial termite and pest control services in the United States was
approximately $8.6 billion in 2017, 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.
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
20
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.
ServiceMaster Brands Industries
Restoration (ServiceMaster Restore). We estimate that the North American restoration segment was approximately $43
billion in 2018, just over one-half of which is related to residential customers and the remainder related to commercial customers. This
market primarily includes mitigation and reconstruction of fire and flood related damages for both commercial and residential
customers. Most emergency response mitigation and reconstruction needs result from regularly occurring emergency situations, such
as burst pipes and kitchen fires, for residential and commercial customers. Extreme weather events and natural disasters also provide
demand for mitigation and reconstruction services. Critical factors in the selection of an emergency response service provider are the
firm’s reputation, relationships with insurers, available resources, proper insurance and credentials, quality of service, timeliness and
responsiveness. This segment is highly fragmented, with the main competition coming from Servpro Industries, Inc., Belfor, a
subsidiary of Belfor Europe GmbH, Interstate Restoration and FirstOnSite (operating brands of Global Restorations Holdings, LLC
and Bellwether FOS Holdco, Inc.), BMS CAT, Inc., Paul Davis and Stanley Steemer International, Inc. We believe there are
opportunities for growth for scaled service providers.
Cleaning (ServiceMaster Clean, Merry Maids). We estimate that the U.S. cleaning market was approximately $78 billion in
2018. This market includes commercial cleaning national accounts in the commercial market serviced through ServiceMaster Clean as
well as residential cleaning provided through the Merry Maids brand. The segment is highly fragmented with most competition
coming from local, independently-owned firms the majority of which has five or fewer employees. Other national competitors in the
various markets include ABM Industries Incorporated and Molly Maid, Inc., among others. We believe our strong brand name and
nationwide footprint give us a differentiated offering and competitive advantage in the market.
Our Competitive Strengths
#1 Positions in Large, Fragmented and Growing Segments. We are a leading provider of essential residential and
commercial services in the majority of segments in which we operate. Our segments 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 industry leading brand awareness
and a reputation for high-quality customer service, both of 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 such as large real estate agencies and insurance carriers. We believe our size and
scale provide us 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
geographies. We operate in all 50 states and the District of Columbia. Our Terminix business, which accounted for 87 percent of our
revenue in 2018, served approximately 2.8 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
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.
Capital-Light Business Model. Our business model is characterized by strong Adjusted EBITDA margins, negative working
capital and limited capital expenditure requirements. For the years ended December 31, 2018, 2017 and 2016, our net cash provided
from operating activities from continuing operations was $229 million, $204 million and $148 million, respectively, and our property
additions were $41 million (net of government grants received of $7 million), $66 million (net of government grants received of $2
million) and $46 million, respectively. Free Cash Flow was $187 million, $139 million and $103 million for the years ended
December 31, 2018, 2017 and 2016, 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 Financial Data.”
Resilient Financial Model with Track Record of Consistent Performance.
Solid revenue and Adjusted EBITDA growth through business cycles. Our consolidated revenue and Adjusted EBITDA
compound annual growth rates from 2013 through 2018 were four percent and five percent, respectively. We believe that our strong
performance is attributable to the essential nature of our services, our strong value proposition and management’s focus on driving
results through strategic investment and operational execution.
21
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.
This allows us to generate productivity to expand margins through a variety of initiatives, including metric-driven continuous
improvement in our customer care centers, application of consistent process guidelines at the branch level, leveraging size and scale to
improve the sourcing of labor and materials and deploying shared services models. 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
consumers make at each stage in the purchase of residential and commercial services. We also have been deploying increasingly
sophisticated consumer analytics models that allow us to more effectively segment our prospective customers and tailor campaigns
towards them and, as a result, we have kept cost per sale relatively flat. In addition, we are seeing success with innovative ways of
reaching and marketing to consumers, including content marketing, online reputation management and social media channels.
Operational and Customer Service Excellence Driven by Superior Employee 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.
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 segments where we believe substantial opportunity exists. We are now focusing our efforts on increasing our share in
these product lines.
National accounts platform. Our acquisition of Copesan Services, Inc. (“Copesan”) in 2018 broadens our national account
service offerings in commercial pest control and provides us with the opportunity to expand into combined offerings in the future.
These national accounts customers operate multi-location businesses that pair well with our national footprint.
Grow Our Commercial Business. Our revenue from commercial customers comprised approximately 15 percent of our 2018
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
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.
Expand Our Geographic Segments. Through detailed assessments of local economic conditions and demographics, we have
identified target segments for expansion, both in existing segments, where we have capacity to increase our local position, and in new
geographies, 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, additional licensing agreements and/or Company operated
subsidiaries.
22
Enhance Our Profitability. Historically, we have a track record of being able to source and purchase targets at attractive
prices and successfully integrate them into our business. 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 implemented
tools and processes to centralize and systematize pricing decisions. These tools and processes enable us to optimize pricing at the local
and product levels while creating a flexible and scalable pricing architecture that is fully scalable across our business. We intend to
leverage these investments as well as identify further opportunities to enhance profitability. We also evaluate our brands periodically
to determine which vehicle to market or ownership strategy optimizes total value creation and our profitability.
Pursue Selective Acquisitions. From 2014 through 2018, we have completed approximately 75 acquisitions. In 2018, we
completed a total of 20 acquisitions, including Copesan and the acquisitions of a Terminix franchisee and a ServiceMaster Restore
master distributor, for a total purchase price of $254 million. In 2017, we completed four pest control acquisitions and purchased a
ServiceMaster Clean master distributor, within the ServiceMaster Brands, for a total purchase price of $16 million. We anticipate that
the highly fragmented nature of our segments will continue to create opportunities for further consolidation. In the future, we intend to
continue to take advantage of tuck-in as well as strategic acquisition opportunities, particularly in underserved geographies where we
can enhance and expand our service capabilities. We seek to use acquisitions to expand our capabilities, geographic footprint and
talent levels. We may also pursue acquisitions as vehicles for strategic international expansion.
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.
Franchises
Franchises are important to the Terminix, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and
AmeriSpec businesses. In 2018, 2017 and 2016, total franchise fees (monthly royalty fees as well as initial fees from sales of
franchises and licenses) were $149 million, $143 million and $135 million, respectively, related franchise operating expenses were
$62 million, $56 million and $52 million, respectively, and total profits from our franchised operations were $87 million, $87 million
and $83 million, respectively. Nearly all of the franchise fees received by our ServiceMaster Brands segment are derived from the
ServiceMaster Restore, ServiceMaster Clean and Merry Maids businesses. Franchise fees from our Terminix franchisees represented
less than one percent of Terminix revenue for 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.
Customers and Geographies
We have no single customer that accounts for more than two percent of our consolidated revenue. Neither of our reportable
segments are 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 U.S. In our Terminix
segment, California, Texas and Florida collectively accounted for approximately one-third of our revenue in 2018.
Competition
We compete in residential and commercial services industries, focusing on residential and commercial termite and pest
control, commercial national accounts pest management, restoration, commercial cleaning, residential cleaning, cabinet and furniture
repair and home inspections. We compete with many other companies in the sale of our services, franchises and products. The
principal methods of competition in our businesses include quality and speed of service, brand awareness and reputation, customer
satisfaction, pricing and promotions, professional sales forces, contractor network 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 segments we serve. All of the primary segments in which we operate are highly fragmented.
Residential and Commercial Termite and Pest Control
Competition in the industry 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.,
Rentokil Initial, plc. and Anticimex, all of which compete nationally.
Commercial National Accounts Pest Management
Competition in industry for national account pest management services in the United States comes primarily from Orkin, Inc.
and Rentokil Initial, plc., both of which compete nationally.
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Restoration, Emergency Response and Related Services
Competition in the industry for 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, Interstate Restoration and FirstOnSite (operating brands of Global Restoration Holdings, LLC and
Bellwether FOS Holdco, Inc.), BMS CAT, Inc., Paul Davis and Stanley Steemer International, Inc.
Commercial Cleaning
Competition in the industry for commercial cleaning 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 industry 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.
Information Technology
We have invested in information systems and software packages designed to allow us to grow efficiently and scale across our
organization, while retaining local and regional flexibility. We believe this capability 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 2018, we
announced our partnership with Salesforce to replace legacy operating systems as part of a fundamental reimagining of our operating
model which will provide a full 360-degree vision of the customer and enable more data driven decision making.
Employees
The average number of persons employed by us during 2018 was approximately 10,700.
Intellectual Property
We hold various service marks, trademarks and trade names, such as ServiceMaster, Terminix, Copesan, 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, 2018, we had marks that were protected by registration (either by direct registration or by treaty) in the United
States and approximately 80 other countries.
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.
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. Terminix,
Copesan, 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,
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
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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.
Terminix is regulated under many federal and state environmental laws, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, 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,
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 2018, there were no
material capital expenditures for environmental control facilities, and there are no material expenditures anticipated for 2019 or 2020
related to such facilities.
Consumer Protection and Solicitation Matters
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
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.
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.
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.
Available Information
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
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 Securities and Exchange Commission (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
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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 risk factors generally have been separated into four groups: risks related to our businesses and our
industries, risks related to our substantial indebtedness, risks related to our common stock and risks related to the spin-off of the
American Home Shield business.
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 Businesses and Our Industries
Our industries are highly competitive. Competition could reduce our share and adversely affect our reputation, businesses,
financial position, results of operations and cash flows.
We operate in highly competitive industries. Changes in the source and intensity of competition in the industries served by us
impact the demand for our services and may also result in additional pricing pressure. Regional and local competitors operating in a
limited geographic area may have lower labor, employee benefits and overhead costs than us. The principal methods of competition in
our businesses include customer service, brand reputation, fairness of contract terms, including price, and timely response to service
claims. We may be unable to compete successfully against current or future competitors, and the competitive pressures that we face
may result in reduced share, reduced pricing or an adverse impact to our reputation, businesses, financial position, results of
operations and cash flows.
Weakening general economic conditions, especially as they may affect home sales, unemployment or consumer confidence or
spending levels, may adversely impact our businesses, financial position, results of operations and cash flows.
Our results of operations are dependent upon consumer spending. Deterioration in general economic conditions and
consumer confidence, particularly in California, Texas and Florida, which collectively represented approximately one-third of our
revenue in 2018, 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 demand for our
services and adversely impact our businesses, 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 various growth or other initiatives. Our business strategies and initiatives, including growth of our customer
base, introduction of new service and product offerings, geographic or segment expansion and enhancement of profitability, are
subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.
We will incur certain costs to achieve efficiency improvements and growth in our businesses, and we may not meet
anticipated implementation timetables or stay within budgeted costs. As these efficiency improvement and growth initiatives are
implemented, we may not fully achieve expected cost savings and efficiency improvements or growth rates, or these initiatives could
adversely impact customer retention or our operations. Also, our business strategies may change in light of our ability to implement
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, which could have a material adverse impact on our businesses, financial position, results of operations and cash flows.
Disruptions in credit or financial markets could make it more difficult for us to obtain, or increase our cost of obtaining,
financing for our operations or investments or to refinance our proposed indebtedness, or cause the proposed lenders to depart from
prior credit industry practice and not give technical or other waivers under credit facility or other agreements to the extent we may
seek them in the future, thereby causing us to be in default. Market changes in the real estate segment could also affect the demand for
our services as home buyers elect not to purchase our services, which could have a material adverse impact on our businesses,
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.
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 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 or unpredictable weather conditions could materially adversely impact our businesses, financial
position, results of operations and cash flows.
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Increases in raw material prices, fuel prices and other operating costs could adversely impact our businesses, 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,
chemicals, 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. Our fleet has been negatively impacted by significant increases in fuel prices in
the past and could be negatively impacted in the future. Previous increases in fuel prices increased our costs of operating vehicles and
equipment. Although fuel prices remained relatively stable during 2018, there can be no assurances that rates will not fluctuate
materially in future years. We cannot predict what effect global events could have on fuel prices, but it is possible that such events
could lead to higher fuel prices. 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 2019. As of December 31, 2018, a 10 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 businesses. 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 businesses, 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.
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
executives, retain our leadership team and recruit other important personnel could have a material adverse impact on our businesses,
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, businesses, 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 businesses, 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, businesses,
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 January 20, 2017, 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 revised Plea Agreement (the
“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.
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Virgin Islands. The 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. At a hearing on November 20, 2017, TMX USVI
and TMX LP were sentenced for pleading guilty to four misdemeanor charges of violations of the Federal Insecticide, Fungicide, and
Rodenticide Act related to improper applications of methyl bromide. Under the terms of sentencing handed down (i) TMX USVI and
TMX LP each paid a fine of $4.6 million (total of $9.2 million); (ii) TMX USVI and TMX LP paid a total of $1.2 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; and (iii) both TMX USVI
and TMX LP will serve a five-year probation period. In lieu of the $1 million community service payment that was proposed in the
Plea Agreement, the court required TMX USVI and TMX LP to provide for training certification courses with respect to pesticide
application and safety in the U.S. Virgin Islands over the next five years.
On December 16, 2016, the U.S. Virgin Islands Department of Justice filed a civil complaint in the Superior Court of the
Virgin Islands related to the aforementioned fumigation incident in a matter styled Government of the United States Virgin Islands v.
The ServiceMaster Company, LLC, The Terminix International Company Limited Partnership, and Terminix International USVI,
LLC. The amount and extent of any further potential penalties, fines, sanctions, costs and damages that the federal or other
governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of any additional
civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S. Virgin Islands
matter, which could be material, is not currently known, and any such further penalties, fines, sanctions, costs or damages would not
be covered under the Company’s general liability insurance policies.
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 businesses, 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 businesses, 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
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
coverages, sales tax collection and remittance, 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
businesses or may substantially increase our operating costs, including increases in the minimum wage; environmental regulations
related to chemical use, climate change and other environmental matters; health care coverage; or “do-not-call” or other marketing
regulations. While we do not consider ourselves to be an insurance company, the IRS or state agencies could deem us to be taxed as
such, which could impact the timing of our tax payments.
In addition, new federal tax legislation was enacted in December 2017. This legislation made significant changes to the U.S.
Internal Revenue Code, many of which are highly complex and may require interpretations and implementing regulations. As a result,
we may incur meaningful expenses (including professional fees) as the new legislation is implemented. The expected impact of certain
aspects of the legislation is unclear and subject to change.
We are also subject to various consumer protection laws and subject to receiving inquiries or investigative demands by
regulatory bodies, including the Bureau of Consumer Financial Protection and state attorneys general and other state agencies. 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 businesses, 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 harm to our reputation, suffer the
loss of licenses or incur penalties that may affect how our businesses are operated, which, in turn, could have a material adverse
impact on our businesses, financial position, results of operations and cash flows.
We are dependent on labor availability at our customer care centers and branches.
Our ability to conduct our operations is in part affected by our ability to increase our labor force, including on a seasonal
basis at our customer care centers, which may be adversely affected by a number of factors. In the event of a labor shortage, we could
experience difficulty in responding to customer calls in a timely fashion or delivering our services in a high-quality or timely manner,
and could be forced to increase wages to attract and retain associates, which would result in higher operating costs and reduced
profitability. Long wait times by customers during peak operating times could have a material adverse impact on our reputation,
businesses, financial position, results of operations and cash flows.
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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 segment share in certain geographic areas.
Our franchisees, subcontractors, third-party distributors and vendors could take actions that could harm our businesses.
For the years ended December 31, 2018, 2017 and 2016, $149 million, $143 million and $135 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, businesses, 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
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, businesses, financial position, results of operations and cash flows could be
materially adversely impacted and the price of our common stock could decline.
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 affected, and any of these circumstances could adversely affect our reputation, businesses, financial position, results of
operations and cash flows.
We may experience difficulties implementing our new Salesforce platform.
We are engaged in a multi-year implementation of a new system in partnership with Salesforce that will integrate all legacy
operating systems onto a single platform accessible by all. The new system will continue to require significant investment of human
and financial resources. In implementing the system, we may experience significant delays, increased costs and other difficulties. Any
significant disruption or deficiency in the design and implementation of the system could adversely affect our ability to process work
orders, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. In addition, our efforts to
centralize various business processes within our organization in connection with this implementation may disrupt our operations and
negatively impact our business, results of operations and financial condition.
Changes in the services we deliver or the products we use could affect our reputation, businesses, 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 to customers. There can be no
assurance that our strategies or product offerings will succeed in increasing revenue and growing profitability. An unsuccessful
execution of strategies, including the rollout or adjustment of our new services or products or sales and marketing plans, could cause
29
us to reevaluate or change our business strategies and could have a material adverse impact on our reputation, businesses, financial
position, results of operations and cash flows.
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 cards 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 these 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 these systems. Any compromises, breaches or errors in applications related to these systems or failures to comply with standards set
by the PCI could cause damage to our reputation and interruptions in our operations, including customers’ ability to pay for 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. We are subject to risks
caused by data breaches and operational disruptions, particularly through cyber-attack or cyber-intrusion, including by computer
hackers, foreign governments and cyber terrorists. The frequency of data breaches of companies and governments have increased in
recent years as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The
occurrence of any of these events could have a material adverse impact on our reputation, businesses, 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 businesses.
Our ability to compete effectively depends in part on our rights to proprietary information, service marks, trademarks, trade
names and other intellectual property rights we own or license, particularly our registered brand names, ServiceMaster, Terminix,
Copesan, 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
intellectual property rights, including brand names, it could cause a material adverse impact on our reputation, businesses, 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 affect our reputation, businesses, 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, businesses, 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
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
businesses 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 impairment charges.
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:
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
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
30
(cid:120)(cid:3)
a current expectation that it is more likely than not that a reporting unit or intangible asset will be sold or otherwise
disposed of.
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
operations.
We are subject to various restrictive covenants that could materially adversely impact our businesses, 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
non-solicitation obligations), 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 businesses. 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 businesses, 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 businesses, 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 businesses 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
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 businesses, which could adversely impact our reputation, businesses, 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.
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 businesses and satisfy our obligations.
As of December 31, 2018, we had approximately $1.8 billion of total consolidated long-term indebtedness, including the
current portion of long-term debt, outstanding.
As of December 31, 2018, there were $33 million of letters of credit outstanding and $267 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:
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
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;
(cid:120)(cid:3) we are exposed to the risk of increased interest rates because a portion of our borrowings are or will be at variable rates
(cid:120)(cid:3)
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;
(cid:120)(cid:3) we may be more vulnerable to general adverse economic and industry conditions;
(cid:120)(cid:3) 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
(cid:120)(cid:3)
(cid:120)(cid:3)
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(cid:120)(cid:3) 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.
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 has primarily non-investment grade ratings, 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 businesses, 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 businesses.
The agreements governing the $1,650 million Term Loan Facility maturing November 8, 2023 and the $300 million
revolving credit facility maturing November 8, 2021 (collectively, the “Credit Facilities”) contain covenants that, among other things,
restrict our ability to:
(cid:120)(cid:3)
(cid:120)(cid:3)
incur additional indebtedness (including guarantees of other indebtedness);
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;
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3) merge, consolidate or sell all or substantially all of our assets; and
(cid:120)(cid:3)
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 businesses 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
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.
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. 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.
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.
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.
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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 flows
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
businesses, 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:
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
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;
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3) war, terrorist acts and epidemic disease;
(cid:120)(cid:3)
(cid:120)(cid:3)
any future sales of our common stock or other securities; and
additions or departures of key personnel.
The stock markets have experienced 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 businesses, 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
Incentive Plan (“Omnibus Incentive Plan”), including approximately 4.7 million shares of our common stock that have been sold in
the public market through the exercise of stock options as of December 31, 2018, are freely tradable under the Securities Act, unless
purchased by our affiliates. As of December 31, 2018, there were stock options outstanding to purchase a total of 1,342,843 shares of
our common stock and there were 526,744 shares of our common stock subject to restricted stock units. In addition, 5,817,681 shares
of our common stock are reserved for future issuances under our Omnibus Incentive Plan.
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On February 24, 2015, our board of directors approved and recommended for approval by our stockholders the
ServiceMaster Global Holdings, Inc. Employee Stock Purchase Plan (“Employee Stock Purchase Plan”), which became effective for
offering periods commencing July 1, 2015. The Employee Stock Purchase Plan was intended to qualify for the favorable tax treatment
under Section 423 of the Code. Under the plan, eligible employees of the Company may purchase common stock, subject to IRS
limits, during pre-specified offering periods at a discount established by the Company not to exceed 10 percent of the then current fair
market value. On April 27, 2015, our stockholders approved the Employee Stock Purchase Plan with a maximum of one million
shares of common stock authorized for sale under the plan. On November 3, 2015, we filed a registration statement on Form S-8 under
the Securities Act to register the one million shares of common stock that may be issued under the Employee Stock Purchase Plan and,
as a result, all shares of common stock acquired under the Employee Stock Purchase Plan will be freely tradable under the Securities
Act, unless purchased by our affiliates. As of December 31, 2018, there were 843,584 shares of our common stock reserved for future
issuances under the Employee Stock Purchase Plan. As a result of the Separation, the Employee Stock Purchase Plan was suspended
effective January 1, 2018.
Our Compensation Committee amended the Employee Stock Purchase Plan in February 2019 to allow for more frequent
purchase periods and to change the allowed 10 percent discount to a company match of 10 percent of employee contributions. The
authorized number of shares remaining in the Employee Stock Purchase Plan (843,584) was not changed. The expiration date of the
plan was not changed from April 27, 2025. We expect the first purchase under the amended Employee Stock Purchase Plan to begin in
July 2019.
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.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our businesses, 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 businesses. If one or more of the analysts that covers our common stock downgrades our stock or publishes
misleading or unfavorable research about our businesses, 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.
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.
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:
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
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
34
(cid:120)(cid:3)
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.
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 cash 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 cash 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 businesses
and for working capital needs and general corporate purposes. Therefore, you are not likely to receive any cash 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 cash 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.
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.
Risks Related to the Spin-off of the American Home Shield Business
If the distribution, together with certain related transactions, fails to qualify as a transaction that is generally tax-free for U.S.
federal income tax purposes, we and our stockholders could be subject to significant tax liabilities.
In connection with the spin-off of Frontdoor, we obtained a private letter ruling from the IRS regarding certain U.S. federal
income tax matters relating to the separation and distribution and one or more opinions from our tax advisors, regarding certain U.S.
federal income tax matters relating to the separation and the distribution. The IRS private letter ruling and the opinions of tax advisors
are based upon and rely on, among other things, various facts and assumptions, as well as certain representations, statements and
undertakings of Frontdoor and us, including those relating to the past and future conduct of Frontdoor and us. If any of these
representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if we or Frontdoor breach any of the
representations or covenants contained in any of the separation-related agreements and documents or in any documents relating to the
IRS private letter ruling and/or the opinions of tax advisors, the IRS private letter ruling and/or the opinions of tax advisors may be
invalid and the conclusions reached therein could be jeopardized.
Notwithstanding receipt of the IRS private letter ruling and the opinions of tax advisors, the IRS could determine that the
distribution and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it
determines that any of the representations, assumptions, or undertakings upon which the IRS private letter ruling or the opinions of tax
advisors were based are false or have been violated. In addition, neither the IRS private letter ruling nor the opinions of tax advisors
will address all of the issues that are relevant to determining whether the distribution, together with certain related transactions,
qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes. Further, the opinions of tax advisors represent
the judgment of such tax advisors and are not binding on the IRS or any court, and the IRS or a court may disagree with the
conclusions in the opinions of tax advisors. Accordingly, notwithstanding our receipt of the IRS private letter ruling and the opinions
of tax advisors, there can be no assurance that the IRS will not assert that the distribution and/or certain related transactions do not
qualify for tax-free treatment for U.S. federal income tax purposes or that a court would not sustain such a challenge. In the event the
IRS were to prevail in such a challenge, we and our stockholders could be subject to significant U.S. federal income tax liability.
35
Under current U.S. federal income tax law, even if the distribution, together with certain related transactions, otherwise
qualifies for tax-free treatment, the distribution may nevertheless be rendered taxable to us and our stockholders as a result of certain
post-distribution transactions, including certain acquisitions of Frontdoor’s shares or assets. Under the Tax Matters Agreement that we
entered into with Frontdoor, Frontdoor may be required to indemnify us against any additional taxes and related amounts resulting
from (i) an acquisition of all or a portion of the equity securities or assets of Frontdoor, whether by merger or otherwise, (ii) issuing
equity securities beyond certain thresholds, (iii) repurchasing shares of Frontdoor stock other than in certain open-market transactions,
(iv) ceasing to actively conduct certain of its businesses, or (v) other actions or failures to act by Frontdoor. However, any such
indemnity from Frontdoor may be insufficient to protect us against the full amount of such additional taxes or related liabilities, and
Frontdoor may be unable to satisfy any such indemnification obligations fully. Moreover, even if we ultimately succeed in recovering
from Frontdoor any amounts for which we are held liable, we may be temporarily required to bear such losses, which could negatively
affect our business, results of operations and financial condition.
The value of our retained interest in Frontdoor is subject to certain risks and uncertainties which could make it difficult to dispose
of some or all of our retained interest at favorable market prices and could jeopardize the tax treatment of the disposal of such
retained interest.
In the Distribution, we retained approximately 19.8 percent of the common stock of Frontdoor. As previously disclosed, we
currently intend to responsibly dispose of all of the Frontdoor common stock that we retained through one or more exchanges for debt
by June 14, 2019 in accordance with the terms of the IRS private letter ruling.
As with any investment in a publicly traded company, our investment in Frondoor is subject to risks and uncertainties relating
to Frontdoor’s business and ownership of Frontdoor common stock, some of which are disclosed in Frontdoor’s filings with the SEC,
as well as risks and uncertainties relating to fluctuations in the global economy and public equity markets generally. Any such risk or
uncertainty may cause the share price of Frontdoor common stock, and the value of our retained interest in Frontdoor, to decline,
which could impair our ability to dispose of our shares of Frontdoor common stock at favorable market prices.
In addition, if the public markets are unavailable for a disposition of our retained interest in Frontdoor by June 14, 2019 due,
for example, to regulatory delays resulting from a government shutdown, the favorable tax treatment under the IRS private letter
ruling for the disposal may be jeopardized. This time limitation under the IRS private letter ruling could also impact our negotiations
with potential counterparties in a disposition transaction and the pricing and other terms that we are able to obtain.
Any of the foregoing could cause the trading price of our common stock to decline.
U.S. federal income tax consequences may restrict our ability to engage in certain desirable strategic or capital-raising
transactions after the separation.
Under current law, a separation can be rendered taxable to us and our stockholders as a result of certain post-separation
acquisitions of our shares or assets. As a result , we may determine to forgo certain strategic transactions or other transactions that we
may believe to be in the best interests of our stockholders or that might increase the value of our business. Moreover, in light of the
requirements of Section 355(e) of the Code, we may determine to forgo certain transactions, including share repurchases, stock
issuances, certain asset dispositions and other strategic transactions, for some period of time following the separation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate Global Service Center and the headquarters for Terminix are located in leased premises at 150 Peabody Place,
Memphis, Tennessee.
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, customer care centers and data processing space. Our Terminix business leases four customer
care centers throughout the U.S. that field inbound claims calls and initiate sales calls in Dallas, Texas; Memphis, Tennessee; Phoenix,
Arizona; and Tampa, Florida. In addition, we lease space for a training facility and a product warehouse in Memphis, Tennessee. 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 headquarter properties listed above, used by each of our reportable segments
as of December 31, 2018. We believe that these facilities, when considered with the Global Service Center, customer care center
facilities, offices and training facilities described above, are suitable and adequate to support the current needs of our business.
Reportable Segment
Terminix
ServiceMaster Brands
Owned
Facilities
Leased
Facilities
20
—
251
5
36
ITEM 3. LEGAL PROCEEDINGS
On December 16, 2016, the U.S. Virgin Islands Department of Justice filed a civil complaint in the Superior Court of the
Virgin Islands related to a fumigation incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster
Company, LLC, The Terminix International Company Limited Partnership, and Terminix International USVI, LLC. The amount and
extent of any potential penalties, fines sanctions, costs and damages that the federal or other governmental authorities may impose,
investigation or other costs and reputational harm, as well as the impact of any civil, criminal or other claims or judicial,
administrative or regulatory proceedings resulting from or related to the U.S. Virgin Islands fumigation matter, which could be
material, is not currently known, and any such penalties, fines, sanctions, costs or damages would not be covered under the
Company’s general liability policies.
In addition to the matter discussed above, in the ordinary course of conducting business activities, we and our subsidiaries
become involved in judicial, administrative and regulatory proceedings involving both private parties and governmental authorities.
These proceedings include insured and uninsured matters that are brought on an individual, collective, representative and class action
basis, or other proceedings involving regulatory, employment, general and commercial liability, automobile liability, wage and hour,
environmental and other matters. We have entered into settlement agreements in certain cases, including with respect to putative
collective and class actions, which are subject to court or other approvals. 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 10 to the consolidated financial statements for more details.
ITEM 4. MINE SAFETY DISCLOSURES
None.
37
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
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 23, 2019, there were two registered holders of our common stock and approximately 32,000 beneficial
stockholders.
The graph below presents our cumulative total stockholder 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. On
October 1, 2018, we completed the previously announced separation of our American Home Shield business. Our stockholders
received one share of Frontdoor common stock for every two shares of ServiceMaster common stock held as of the close of business
on the Record Date. The graph below assumes, similar to a cash dividend, that the shares of Frontdoor that were distributed on
October 1, 2018, were sold and the proceeds from such sale were reinvested into additional shares of ServiceMaster common stock.
Dividends
We did not pay any cash dividends in 2016, 2017 or 2018. As a result of the spin-off of American Home Shield, each
ServiceMaster stockholder as of the Record Date, received a dividend of one share of Frontdoor common stock for every two shares of
ServiceMaster common stock held. The Company distributed 67,781,527 shares of common stock of Frontdoor in the Distribution.
Stockholders received cash in lieu of fractional shares they would have otherwise received in the Distribution.
We currently intend to use our future earnings, if any, to fund our growth, to develop our business, repay debt, make
acquisitions, repurchase shares of our common stock and for working capital needs and general corporate purposes. Our ability to pay
cash 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 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 could
repurchase up to $300 million of outstanding shares of our common stock. As of December 31, 2018, we had repurchased $145
38
million of outstanding shares under this program, which is included in treasury stock on the consolidated statements of financial
position. On February 19, 2019, our board of directors approved a three-year extension of the share repurchase plan allowing for $150
million of repurchases though February 19, 2022. Under the share repurchase program, we may repurchase shares in accordance with
all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent
to which we repurchase our shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including
market conditions, regulatory requirements and other corporate considerations, as determined by us. The repurchase program may be
suspended or discontinued at any time. 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 stockholder
value.
39
ITEM 6. SELECTED FINANCIAL DATA
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
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
Acquisition-related costs
401(k) Plan corrective contribution(1)
Fumigation related matters(2)
Insurance reserve adjustment(3)
Impairment of software and other related costs(4)
Mark-to-market loss on investment in frontdoor, inc.(5)
Consulting agreement termination fees(6)
Interest expense
Loss on extinguishment of debt(7)
(Loss) Income from continuing operations
Net (Loss) Income
Cash dividends per share
Weighted-average shares outstanding:
Basic
Diluted
Basic Earnings Per Share -- Continuing Operations
Diluted Earnings Per Share -- Continuing Operations
Financial Position (as of period end):
Total assets(8)
Total long-term debt
Total stockholders' 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(9)
Adjusted EBITDA Margin(10)
Free Cash Flow(11)
__________________________________
2018
$ 1,900
1,041
555
5
—
3
—
—
249
—
133
10
(163)
(41)
—
$
Year Ended December 31,
2016
2017
2015
$ 1,755
962
500
—
(3)
4
—
$ 1,726
924
462
1
2
93
23
$ 1,678
908
436
1
22
9
—
2
—
—
150
6
341
510
—
$
1
—
—
153
32
2
155
—
$
—
—
—
167
58
21
160
—
$
2014
$ 1,629
895
435
—
—
—
—
—
—
21
219
65
(58)
(57)
—
$
135.5
135.5
$ (1.20)
$ (1.20)
134.4
135.4
2.54
2.52
$
$
135.3
137.3
0.01
0.01
135.0
136.6
0.15
0.15
$
$
$
$
112.8
113.8
$ (0.51)
$ (0.51)
$ 5,023
1,776
2,204
$ 5,646
2,778
1,167
$ 5,386
2,817
686
$ 5,098
2,751
545
$ 5,028
3,025
359
$
229
(250)
(350)
$
204
(79)
(147)
$
148
(79)
(102)
$
249
(117)
(380)
$
126
(54)
(311)
$
$
398
20.9 %
374
$
21.3 %
406
$
23.5 %
388
$
23.1 %
353
21.7 %
$
187
$
138
$
102
$
216
$
122
(1)(cid:3)
(2)(cid:3)
(3)(cid:3)
(4)(cid:3)
(5)(cid:3)
(6)(cid:3)
Represents a corrective contribution related to our 401(k) Plan.
Represents charges for fumigation related matters described in Note 10 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 10 to the consolidated financial statements.
For 2017 and 2016, represents the impairment of software and other related costs relating to our decision to replace certain
software.
Represents a mark-to-market loss on the retained shares in Frontdoor described in Note 18 to the consolidated financial
statements.
Represents consulting agreement termination fees incurred in 2014 to terminate agreements with the private equity firms that
owned the Company prior to our initial public offering in 2014.
40
(7)(cid:3)
(8)(cid:3)
(9)(cid:3)
For 2018, 2017 and 2016, represents a loss on extinguishment of debt as described in Note 12 to the consolidated financial
statements. For 2015 and 2014, represents a loss on extinguishment of debt related to the redemption of the then-existing
credit facility in connection with our initial public offering.
Includes American Home Shield data for periods prior to the October 1, 2018 Distribution. See Note 8 to the consolidated
financial statements for information on the divested net assets.
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 (loss)
income 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 (loss) income before:
depreciation and amortization expense; acquisition-related costs; 401(k) Plan corrective contribution; fumigation related
matters; insured reserve adjustment; non-cash stock-based compensation expense; restructuring charges; gain on sale of
Merry Maids branches; non-cash impairment of software and other costs; management and consulting fees and consulting
agreement termination fees; mark-to-market loss on investment in frontdoor, inc.; (gain) loss from discontinued operations,
net of income taxes; provision (benefit) for income taxes; loss on extinguishment of debt; interest expense; 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, acquisition activities (affecting amortization and acquisition-related costs) 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:
(cid:120)(cid:3) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
(cid:120)(cid:3) Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or
principal payments on our debt;
(cid:120)(cid:3) Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;
(cid:120)(cid:3) Adjusted EBITDA does not reflect historical capital expenditures or future requirements for capital expenditures or
contractual commitments;
(cid:120)(cid:3) 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
(cid:120)(cid:3) Other companies in our industries may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative
measure.
41
The following table sets forth Adjusted EBITDA for each of our reportable segments and Corporate and reconciles Net
(Loss) Income to total Adjusted EBITDA for the periods presented, which we consider to be the most directly comparable
GAAP financial measure:
(In millions)
Net (Loss) Income
$
Depreciation and amortization expense
Acquisition-related costs(a)
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)
Management and consulting fees and consulting agreement termination fees(i)
Mark-to-market loss on investment in frontdoor, inc.(j)
(Gain) loss from discontinued operations, net of income taxes(k)
Provision (benefit) for income taxes
Loss on extinguishment of debt(l)
Interest expense
Other non-operating expenses(m)
Total Adjusted EBITDA
Adjusted EBITDA:
Terminix
ServiceMaster Brands
Reportable Segment Adjusted EBITDA
Corporate(n)
Costs historically allocated to American Home Shield(o)
Total Adjusted EBITDA
____________________________________________________________________
$
$
$
$
2018
(41) $
91
5
—
3
—
14
17
—
—
—
249
(122)
37
10
133
—
398 $
Year Ended December 31,
2016
155 $
80
1
2
93
23
12
15
(2)
1
—
—
(153)
(5)
32
153
—
406 $
2017
510 $
86
—
(3)
4
—
10
21
—
2
—
—
(169)
(242)
6
150
—
374 $
2015
160 $
75
1
22
9
—
9
5
(7)
—
—
—
(140)
27
58
167
3
388 $
2014
(57)
91
—
—
—
—
6
11
(1)
—
25
—
(1)
(5)
65
219
—
353
333 $
89
422 $
9
(33)
398 $
330 $
87
417 $
1
(44)
374 $
372 $
79
450 $
(3)
(42)
406 $
348 $
77
425 $
(9)
(29)
388 $
309
78
387
(9)
(25)
353
(a)(cid:3) Represents legal, accounting and other expenses associated with completed or contemplated acquisitions. 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. Prior period amounts have been
presented to conform to current period presentation.
(b)(cid:3) Represents a corrective contribution related to our 401(k) Plan. 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)(cid:3) Represents charges for fumigation related matters described in Note 10 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)(cid:3) Represents an adjustment to our accrued self-insured claims related to automobile, general liability and workers’
compensation risks. The adjustment was 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 were $10 million,
$4 million, $9 million and $13 million in the years ended December 31, 2018, 2016, 2015 and 2014, respectively, and
were not material for the year ended December 31, 2017. Adjustments in each year were recorded as charges in total
Adjusted EBITDA.
(e)(cid:3) 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.
42
(f)(cid:3) For 2018, 2017 and 2016, represents restructuring charges described in Note 9 to the consolidated financial statements.
For 2015 and 2014, represents restructuring charges related primarily to the impact of a branch optimization program at
Terminix, a reorganization of leadership at ServiceMaster Brands and an initiative to enhance capabilities and reduce
costs in our corporate 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.
(g)(cid:3) Represents the gain associated with the conversion of certain company-owned Merry Maids branches to franchises in
2016, 2015 and 2014 (the “branch conversions”).
(h)(cid:3) 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)(cid:3) Represents $4 million paid to certain of our Equity Sponsors under consulting agreements as well as $21 million of fees
to terminate consulting agreements in connection with our initial public offering. 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.
(j)(cid:3) Represents the loss resulting from the remeasurement of our retained 19.8% investment in Frontdoor subsequent to the
Distribution and driven by the change in Frontdoor’s stock price between October 1, 2018 and December 31, 2018. We
exclude this amount from Adjusted EBITDA because this charge is not part of our ongoing operations and we believe
doing so is useful to investors in aiding period-to-period comparability. We currently intend to responsibly dispose of all
of our retained Frontdoor common stock by June 14, 2019, in accordance with terms set forth in a private letter ruling
with the IRS governing the tax-free status of the Distribution.
(k)(cid:3) Represents the historical results of our American Home Shield and TruGreen businesses, which were spun off on
October 1, 2018 and January 14, 2014, respectively, and are presented as discontinued operations herein. See Note 8 to
the consolidated financial statements. 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.
(l)(cid:3) For 2018, 2017 and 2016, represents a loss on extinguishment of debt as described in Note 12 to the consolidated
financial statements. For 2015 and 2014, represents a loss on extinguishment of debt related to the partial redemptions of
our 8% 2020 Notes and 7% 2020 Notes and the repayment on the then-existing term loan facilities. We believe
excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability.
(m)(cid:3)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.
(n)(cid:3) Represents unallocated corporate expenses.
(o)(cid:3) Includes amounts historically allocated to the American Home Shield segment not permitted to be classified as
discontinued operations under GAAP as described in Note 8 to the consolidated financial statements.
(10)(cid:3)
Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of revenue.
43
(11)(cid:3)
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 net cash provided from operating activities from
continuing operations, less: (i) cash paid for consulting agreement termination fees; and (ii) property additions, net of
government grant fundings for 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 and property additions, net of government grant fundings for property additions, 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:
(In millions)
Net Cash Provided from Operating Activities from
Continuing Operations
Cash paid for consulting agreement termination fees
Property additions, net of government grant fundings for property
additions
Free Cash Flow
Year Ended December 31,
2018
2017
2016
2015
2014
$
229
—
$
204
—
$
148
—
$
249
—
$
126
21
(41)
187
$
(66)
138
$
(46)
102
$
(33)
216
$
(25)
122
$
44
\
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
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.”
On October 1, 2018, we completed the previously announced Separation of our American Home Shield business. The
Separation was effectuated through a pro rata dividend to the Company’s stockholders of approximately 80.2% of the outstanding
shares of common stock of Frontdoor, which was formed as a wholly owned subsidiary of the Company to hold our American Home
Shield business. As a result of the Distribution, Frontdoor is an independent public company. For more detail on the Separation, see
Item 1, Business-American Home Shield Spin-off, of Part I of this Annual Report on Form 10-K. The financial results of the American
Home Shield segment for periods prior to the Distribution have been reflected within the disclosures of this Management’s Discussion
and Analysis of Financial Condition and Results of Operations as discontinued operations. See Note 8 to the consolidated financial
statements for further information.
Overview
Our core services include residential and commercial termite and pest control, restoration, commercial and residential
cleaning, cabinet and furniture repair and home inspection under the following leading brands: Terminix, Terminix Commercial,
Copesan, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec. Our operations for the periods
presented in this report are organized into two reportable segments: Terminix and ServiceMaster Brands.
Key Business Metrics
We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and
performance of the continuing operations of our businesses. These metrics include:
revenue,
operating expenses,
net (loss) income,
(loss) earnings per share,
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3) Adjusted EBITDA, and
(cid:120)(cid:3)
organic revenue growth.
To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges that
management believes are not indicative of the earnings capabilities of our businesses. We also focus on measures designed to monitor
cash flow, including net cash provided from operating activities from continuing operations and free cash flow.
Revenue. Our revenue results are primarily a function of the volume and pricing of the services and products provided to our
customers by our businesses as well as the mix of services and products provided across our businesses. The volume of our revenue in
Terminix, Terminix Commercial and Copesan is impacted by new unit sales, the retention of our existing customers and acquisitions.
Revenue results in the ServiceMaster Brands are driven principally by royalty fees earned from our franchisees. We serve both
residential and commercial customers, principally in the United States. In 2018, approximately 97 percent of our revenue was
generated by sales in the United States. We expect to continue our tuck-in acquisition program at Terminix and to periodically
evaluate other strategic acquisitions in the United States and internationally.
Operating Expenses. In addition to the impact of changes in our revenue results, our profitability (Net (Loss) Income and
Adjusted EBITDA) are affected by, among other things, the level of our operating expenses. A number of our operating expenses are
subject to inflationary pressures, such as fuel, chemicals, wages and salaries, employee benefits and health care, vehicles, self-
insurance costs and other insurance premiums, as well as various regulatory compliance costs.
We have historically hedged a significant portion of our annual fuel consumption. Fuel costs for 2018, after the impact of the
hedges and after adjusting for the impact of year-over-year changes in the number of gallons used, increased $4 million compared to
2017, and fuel costs for 2017 decreased $4 million compared to 2016. Based on current Department of Energy fuel price forecasts, as
well as hedges we have executed to date for 2019, we project that fuel prices for 2019 will increase our fuel costs by approximately
$1 million compared to 2018.
After adjusting for the impact of year-over-year changes in the number of covered employees, health care and related costs
for 2018 increased approximately $1 million compared to 2017 while costs in 2017 increased approximately $4 million compared to
2016. We expect our health care costs in 2019 to increase approximately $2 million compared to 2018.
Net (Loss) Income and (Loss) Earnings Per Share. We recorded a mark-to-market loss on our retained investment in
Frontdoor of $249 million in the year ended December 31, 2018 as a result of the stock price of Frontdoor dropping from its price on
45
October 1, 2018 to the price on December 31, 2018. We currently intend to responsibly dispose of all of the Frontdoor common stock
by June 14, 2019, in accordance with terms set forth in a private letter ruling with the IRS governing the tax-free status of the
Distribution. Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted-average number of shares of
common stock outstanding. Diluted (loss) earnings per share is computed by dividing net (loss) income by the weighted-average
number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that
would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and
RSUs are reflected in diluted earnings per share by applying the treasury stock method.
Adjusted EBITDA. We evaluate performance and allocate resources based primarily on Adjusted EBITDA. We define
Adjusted EBITDA as net (loss) income before: depreciation and amortization expense; acquisition-related costs; 401(k) Plan
corrective contribution; fumigation related matters; insured reserve adjustment; non-cash stock-based compensation expense;
restructuring charges; gain on sale of Merry Maids branches; non-cash impairment of software and other costs; management and
consulting fees and consulting agreement termination fees; mark-to-market loss on investment in frontdoor, inc.; (gain) loss from
discontinued operations, net of income taxes; provision (benefit) for income taxes; loss on extinguishment of debt; interest expense;
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,
acquisition activities and equity-based, long-term incentive plans.
Organic Revenue Growth. We evaluate organic revenue growth to track performance of the business, including the impacts
of sales, pricing, new service offerings and other growth initiatives. Organic revenue growth excludes revenue from acquired
customers for 12 months following the acquisition date.
Seasonality
We have seasonality in our business, which drives fluctuations in revenue and Adjusted EBITDA for interim periods. In
2018, approximately 23 percent, 27 percent, 26 percent and 24 percent of our revenue and approximately 25 percent, 31 percent,
24 percent and 20 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.
Effect of Weather Conditions
The demand for our services and our results of operations are also affected by weather conditions, including the seasonal
nature of our termite and pest control services and restoration services. Weather conditions which have a potentially unfavorable
impact to our business include cooler temperatures or droughts which can impede the development of termite swarms and lead to
lower demand for our termite control services. For example, in the third quarter of 2017, our Terminix business was negatively
impacted by hurricanes Harvey and Irma, which resulted in 53 branches, primarily in Texas and Florida, being temporarily closed for
a period of time during August and September. Weather conditions which have a potentially favorable impact to our business include
mild winters which can lead to higher demand for termite and pest control services; and severe storms which can lead to an increase in
demand for restoration services. For example, in the third and fourth quarters of 2018 and 2017, our ServiceMaster Restore business
saw a significant increase in royalty fees related to hurricanes Florence and Michael in 2018 and hurricanes Harvey and Irma in 2017
as well as wildfires.
Refinancing of Indebtedness
In connection with the Separation and in accordance with the terms set forth in a private letter ruling with the IRS governing
the tax-free status of the Distribution related to a debt-for-debt exchange, we borrowed an aggregate principal amount of $1 billion
under a short-term credit facility on August 1, 2018, the proceeds of which were used to prepay $982 million aggregate principal
amount of term loans outstanding under our senior secured term loan facility. Such prepayment resulted in a loss on extinguishment of
debt of $10 million for the year ended December 31, 2018. On August 16, 2018, Frontdoor incurred in favor of the Company $350
million aggregate principal of 6.75% Senior Notes due 2026 and a $650 million senior secured term loan facility and obtained a $250
million senior secured revolving credit facility. We then transferred and assigned our rights and obligations in respect of Frontdoor’s
senior notes and senior secured term loan facility to the lender under such short-term credit facility through the debt-for-debt exchange
to satisfy our obligations thereunder. On October 1, 2018, Frontdoor’s senior secured term loan facility and senior notes were included
in the transfer of assets and liabilities to Frontdoor, reducing our total long-term debt by approximately $1 billion.
On March 1, 2018, we repaid $79 million of our 2018 Notes upon their maturity.
On September 18, 2017, we purchased $13 million in aggregate principal amount of our 7.25% notes maturing in 2038 at a
price of 104.625% of the principal amount using available cash. On May 11, 2017, we purchased $17 million in aggregate principal
amount of our 7.25% notes maturing in 2038 at a price of 97% of the principal amount using available cash. The repurchased notes
were delivered to the trustee for cancellation. In connection with these partial repurchases, we recorded a loss on extinguishment of
debt of $6 million in the year ended December 31, 2017.
46
Results of Operations
The following table shows the results of operations for continuing operations for the years ended December 31, 2018, 2017
and 2016, which reflects the results of acquired businesses from the relevant acquisition dates.
Year Ended December 31,
2016
2018
2017
$ 1,900 $ 1,755 $ 1,726
924
462
27
1
2
93
23
1
—
15
(2)
153
(1)
32
(2)
(5)
(1)
2
1,041
555
18
5
—
3
—
—
249
17
—
133
(5)
10
(126)
37
—
(163) $
962
500
18
—
(3)
4
—
2
—
21
—
150
(2)
6
99
(242)
—
341 $
$
Increase
)
2017 vs.
2016
2 %
4
8
(33)
(
2018 vs.
2017
8 %
8
11
—
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
(11)
150
(2)
100
*
*
*
*
*
*
*
*
*
*
% of Revenue
2016
2017
2018
100 % 100 % 100 %
55
55
28
29
1
1
—
—
—
—
—
—
—
—
—
—
—
13
1
1
—
—
9
7
—
—
—
1
6
(7)
(14)
2
—
—
19 %
(9) %
54
27
2
—
—
5
1
—
—
1
—
9
—
2
—
—
—
— %
(In millions)
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
Amortization expense
Acquisition-related costs
401(k) Plan corrective contribution
Fumigation related matters
Insurance reserve adjustment
Impairment of software and other related costs
Mark-to-market loss on investment in frontdoor,
Restructuring charges
Gain on sale of Merry Maids branches
Interest expense
Interest and net investment income
Loss on extinguishment of debt
(Loss) Income from Continuing Operations before
Provision (benefit) for income taxes
Equity in losses of joint venture
(Loss) Income from Continuing Operations
___________________________________
*
not meaningful
Revenue
We reported revenue of $1,900 million, $1,755 million and $1,726 million for the years ended December 31, 2018, 2017 and
2016, 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.
(In millions)
Year Ended December 31, 2016
Residential Pest Control(1)
Commercial Pest Control(2)
Termite and Home Services(3)
Royalty Fees
Commercial Cleaning National Accounts
Sale of Merry Maids Branches(4)
Sale of Products and Other
Year Ended December 31, 2017
Residential Pest Control(1)
Commercial Pest Control(2)
Termite and Home Services(3)
Royalty Fees
Commercial Cleaning National Accounts
Sale of Products and Other
Year Ended December 31, 2018
___________________________________
Terminix(5)
ServiceMaster
Brands
Corporate
Total
$
$
$
1,524 $
(8)
—
22
—
—
—
4
1,541 $
42
62
6
—
—
3
1,655 $
200 $
—
—
—
8
9
(6)
—
212 $
—
—
—
5
12
15
244 $
2 $
—
—
—
—
—
—
—
2 $
—
—
—
—
—
—
1 $
1,726
(8)
—
22
8
9
(6)
4
1,755
42
62
6
5
12
18
1,900
(1)(cid:3)
Includes growth from acquisitions of approximately $15 million and $7 million for the years ended December 31, 2018 and
2017, respectively.
47
(2)(cid:3)
(3)(cid:3)
(4)(cid:3)
(5)(cid:3)
Includes growth from acquisitions of approximately $66 million and $1 million for the years ended December 31, 2018 and
2017, respectively.
Includes wildlife exclusion, crawl space encapsulation and attic insulation products that are managed as a component of our
termite line of business. Includes growth from acquisitions of approximately $2 million and $3 million for the years ended
December 31, 2018 and 2017, respectively.
Includes a $6 million reduction in revenue from company-owned branches for the year ended December 31, 2017, offset, in
part, by a $2 million increase in royalty fees as result of the branch conversions for the year ended December 31, 2016.
Royalty fee increases as a result of the branch conversions were insignificant in 2017.
Hurricanes Harvey and Irma negatively impacted 2017 by approximately $4 million as the result of 53 branches, primarily in
Texas and Florida, being temporarily closed for a period of time during August and September 2017. No similar closures
occurred in 2018.
Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of $1,041 million, $962 million and $924 million for the years ended
December 31, 2018, 2017 and 2016, 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, 2016
Impact of change in revenue
Impact of Hurricanes
Production labor
Vehicles and insurance program
Damage claims
Technology costs
Fuel prices
Legal expense
Sale of Merry Maids branches
Depreciation
Other
Year Ended December 31, 2017
Impact of change in revenue(1)
Production labor
Vehicles and insurance program
Damage claims
Fuel prices
Bad debt
Chemicals and materials
Other
Year Ended December 31, 2018
___________________________________
Terminix
ServiceMaster
Brands
Corporate
Total
$
$
$
839 $
11
(1)
11
6
10
2
(4)
—
—
2
2
878 $
77
3
3
3
4
(8)
(6)
1
955 $
81 $
10
—
—
—
—
—
—
—
(6)
—
(1)
84 $
13
—
—
—
—
—
—
—
96 $
4 $
—
—
—
(4)
—
—
—
—
—
—
—
— $
—
—
(9)
—
—
—
—
(1)
(10) $
924
21
(1)
11
2
10
2
(4)
—
(6)
2
1
962
90
3
(7)
3
4
(8)
(6)
—
1,041
(1)(cid:3)
For Terminix, includes approximately $64 million for the year ended December 31, 2018, as a result of the acquisitions of
Copesan and other pest control companies during 2018.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
At Terminix, the impact of the change in revenue reflects the increase in relatively low margin revenue from our acquisition
of Copesan. The increase in production labor resulted from higher technician incentive and overtime pay due to more work orders than
anticipated, driven, in part, by an initiative to increase route completion, higher sales and improved start rates. The increase in our
insurance programs was principally driven by an increase in the number of company-owned sales and production vehicles. The
increase in damage claims was driven by increased termite warranty claims, primarily in the Gulf Coast region. The decrease in bad
debt expense was driven by enhanced credit policies and collection rates. The decrease in chemicals and materials was driven by
sourcing savings.
The decrease in the Corporate insurance program expense was primarily attributable to favorable claims results in 2018 in
our automobile, general liability and workers’ compensation program.
48
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
At Terminix, the aforementioned hurricane-related impact in 2017 was a decrease of $1 million. The increase in production
labor was driven by investments in field operations focused on improving safety, customer service and retention. The increase in our
insurance programs was principally driven by an increase in the number of company-owned sales vehicles. The increase in damage
claims was driven by increased termite warranty claims. Additionally, the increase in technology costs was driven by investments to
improve our customers’ experiences through technology.
We realized a reduction in cost of sales of $6 million in the ServiceMaster Brands as a result of the branch conversions
completed in 2016.
Insurance costs decreased $4 million at Corporate for the year ended December 31, 2017. The year ended December 31, 2016
included increased reserves in our automobile, general liability and workers’ compensation insurance program of $4 million driven by
unfavorable claims trends, which 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 (an amount equal to our insurance deductibles under our general liability insurance
program). There were no material changes to reserves in our automobile, general liability and workers’ compensation insurance
programs for the year ended December 31, 2017.
Selling and Administrative Expenses
For the years ended December 31, 2018, 2017 and 2016, we reported selling and administrative expenses of $555 million,
$500 million and $462 million, respectively, which comprised general and administrative expenses of $290 million, $263 million and
$253 million, respectively, and selling and marketing expenses of $265 million, $237 million and $209 million, respectively. The
following table provides a summary of changes in selling and administrative expenses for each of our reportable segments and
Corporate:
$
$
(In millions)
Year Ended December 31, 2016
Sales and marketing costs
Sale of Merry Maids branches
Stock-based compensation expense
Depreciation
Costs historically allocated to American Home Shield
Other
Year Ended December 31, 2017
Sales and marketing costs
Acquisition selling and administrative expenses
Incentive compensation
Stock-based compensation expense
Depreciation
Spin-off dis-synergies
Investments in growth
Costs historically allocated to American Home Shield
Other
Year Ended December 31, 2018
$
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Terminix
ServiceMaster
Brands
Corporate
Total
348 $
20
—
—
6
—
3
377 $
11
14
5
—
—
5
6
—
(5)
413 $
43 $
1
(1)
—
—
—
1
44 $
14
—
—
—
1
1
—
—
3
62 $
70 $
—
—
(1)
5
4
(1)
78 $
—
—
—
4
4
—
—
(11)
5
80 $
462
21
(1)
(1)
11
4
3
500
24
14
5
4
5
5
6
(11)
3
555
The increase in sales and marketing costs at Terminix was driven by targeted investments to drive sales growth. Terminix
also incurred incremental selling and administrative expenses as a result of the Copesan acquisition and other acquisitions. The
increase in investments in growth includes our partnership with Salesforce to replace legacy operating systems.
At ServiceMaster Brands, the increase in sales and marketing costs was driven by the recognition of national advertising fund
contributions from franchisees as revenue upon our adoption of ASC 606 on January 1, 2018. Prior to 2018, contributions to the
national advertising fund made by our franchisees were treated as an offset to advertising expense.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The increase in sales and marketing costs at Terminix was driven by investments to grow and train our sales force, higher
commissions attributable to the growth in core termite, wildlife exclusion, attic insulation and pest sales and incremental marketing
investments.
49
We realized a reduction in administrative expenses of $1 million in the ServiceMaster Brands as a result of the branch
conversions completed in 2016.
Amortization Expense
Amortization expense was $18 million, $18 million and $27 million in the years ended December 31, 2018, 2017 and 2016,
respectively. The decrease in 2017 was a result of certain finite-lived intangible assets recorded in connection with the merger
transaction by which the Company was taken private in 2007 being fully amortized.
Acquisition-Related Costs
We recognized $5 million and $1 million of acquisition-related costs in the years ended December 31, 2018 and 2016. No
acquisition-related costs were recognized in the year ended December 31, 2017. Amounts have been reclassified from Selling and
administrative expenses in prior years to Acquisition-related costs on the consolidated statements of operations and comprehensive
(loss) income to conform to current period presentation.
401(k) Plan Corrective Contribution
We recorded charges of $2 million in the year ended December 31, 2016, related to the 401(k) Plan. In connection with the
final agreement, we reversed charges of $3 million for the 401(k) plan corrective contribution in the year ended December 31, 2017.
No additional charges were recognized in the year ended December 31, 2018.
Fumigation Related Matters
We recorded charges of $3 million, $4 million and $93 million in the years ended December 31, 2018, 2017 and 2016,
respectively, for fumigation related matters. See Note 10 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 was 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 related to coverage periods of 2015 and prior. No similar charge was recorded in the years ended December 31, 2018
or 2017.
Impairment of Software and Other Related Costs
We recorded impairment charges of $2 million and $1 million in the years ended December 31, 2017 and 2016, respectively,
relating to our decision to replace certain software. No similar charge was recorded in the year ended December 31, 2018.
Mark-to-Market Loss on Investment in frontdoor, inc.
We recorded a mark-to-market loss on our retained investment in Frontdoor of $249 million in the year ended December 31,
2018 as a result of the stock price of Frontdoor dropping from its price on October 1, 2018 to the price on December 31, 2018. We
currently intend to responsibly dispose of all of the remaining Frontdoor common stock we hold by June 14, 2019, in accordance with
terms set forth in a private letter ruling with the IRS governing the tax-free status of the Distribution.
Restructuring Charges
We incurred restructuring charges of $17 million, $21 million and $15 million for the years ended December 31, 2018, 2017
and 2016, respectively. Restructuring charges are comprised of the following:
(In millions)
Terminix(1)
ServiceMaster Brands(2)
Corporate(3)
Leadership transition(4)
Global Service Center relocation(5)
Total restructuring charges
___________________________________
Year Ended December 31,
2017
2016
2018
$
$
2 $
1
7
—
8
17 $
2 $
1
2
11
5
21 $
7
—
5
—
3
15
(1)(cid:3)
For the years ended December 31, 2018, 2017, and 2016, these charges include $2 million, $2 million and $4 million,
respectively, of lease termination and severance costs driven by Terminix’s branch optimization program. 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.
(2)(cid:3)
Represents severance and other costs related to the reorganization of the ServiceMaster Brands.
50
(3)(cid:3)
(4)(cid:3)
(5)(cid:3)
We have historically made changes on an ongoing basis to enhance capabilities and reduce costs in our corporate functions
that provide company-wide administrative services for our operations. In 2017, we began taking actions to enhance
capabilities and align our corporate functions with those required to support our strategic needs as two stand-alone companies
in anticipation of the American Home Shield spin-off. For the years ended December 31, 2018, 2017 and 2016, these charges
include severance and other costs of $3 million, $2 million, and $2 million, respectively. For the year ended December 31,
2018, these charges also included $4 million of costs incurred due to the Separation that were not directly attributable to
American Home Shield and therefore were not included in discontinued operations. 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.
For the year ended December 31, 2017, these charges include $5 million of severance costs and $5 million of stock-based
compensation expense as part of the severance agreements with the former CEO and CFO.
For the year ended December 31, 2018, these charges include future rent of $7 million and $1 million of professional and
other fees. For the year ended December 31, 2017, these charges include accelerated depreciation of $2 million, redundant
rent expense of $2 million and a $1 million loss recorded on the sale of an asset related to the relocation of the Company’s
corporate headquarters, which we refer to as our Global Service Center. For the year ended December 31, 2016, represents
impairment charges of $1 million and professional fees and other costs of $1 million related to the relocation of the
Company’s Global Service Center.
Gain on Sale of Merry Maids Branches
We recorded a gain of $2 million for the year ended December 31, 2016, associated with the branch conversions. There were
no gains recorded in the years ended December 31, 2018 and 2017. As of October 10, 2016, the branch conversion process was
complete.
Interest Expense
Interest expense was $133 million, $150 million and $153 million for the years ended December 31, 2018, 2017 and 2016,
respectively. The decline in interest expense in the year ended December 31, 2018 compared to the year ended December 31, 2017
was driven by a reduction of debt outstanding by approximately $1 billion on October 1, 2018, when, in connection with the
Separation, Frontdoor’s outstanding indebtedness was included in the transfer of assets and liabilities to Frontdoor. The decrease in
interest expense in the year ended December 31, 2017 compared to the year ended December 31, 2016 was driven by the partial
repurchase of the 2038 Notes in 2017 and the refinancing of 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 was $5 million, $2 million and $1 million for the years ended December 31, 2018, 2017
and 2016, respectively, and comprised interest income on cash and restricted cash balances.
Loss on Extinguishment of Debt
A loss on extinguishment of debt of $10 million was recorded in the year ended December 31, 2018, related to the
prepayment of $982 million aggregate principal amount of term loans outstanding under our senior secured term loan facility on
August 1, 2018. A loss on extinguishment of debt of $6 million was recorded in the year ended December 31, 2017 related to the
purchase of $13 million of our 2038 Notes on September 18, 2017, and $17 million of our 2038 Notes on May 11, 2017. 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. See Note 12 to the consolidated financial statements for more details.
51
(Loss) income from Continuing Operations before Income Taxes
(Loss) income from continuing operations before income taxes was $(126) million, $99 million and $(2) million for the years
ended December 31, 2018, 2017 and 2016, 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:
(In millions)
Reportable segments and Corporate(1)
Depreciation expense(2)
Amortization expense(3)
Acquisition-related costs(4)
401(k) Plan corrective contribution(5)
Fumigation related matters(6)
Insurance reserve adjustment(7)
Impairment of software and other related costs(8)
Restructuring charges(9)
Gain on sale of Merry Maids branches(10)
Interest expense(11)
Loss on extinguishment of debt(12)
Mark-to-market loss on investment in frontdoor, inc.(13)
Other(14)
(Decrease) increase in income from continuing operations before income taxes
___________________________________
Year Ended December 31,
2018 vs. 2017
2017 vs. 2016
$
$
24 $
—
—
(5)
(3)
1
—
2
3
—
17
(4)
(249)
(11)
(225) $
(32)
(15)
9
1
5
89
23
(1)
(6)
(2)
3
26
—
1
101
(1)(cid:3)
(2)(cid:3)
(3)(cid:3)
(4)(cid:3)
(5)(cid:3)
(6)(cid:3)
(7)(cid:3)
(8)(cid:3)
(9)(cid:3)
(10)(cid:3)
(11)(cid:3)
(12)(cid:3)
(13)(cid:3)
Represents the net change in Adjusted EBITDA as described in “—Segment Review.”
Represents the net change in depreciation expense, driven by investments in vehicles and technology.
Represents the net change in amortization expense as described in “—Amortization Expense.”
Represents the net change in acquisition-related costs as described in “—Acquisition-Related Costs.”
Represents the $3 million reversal recorded in the year ended December 31, 2017, and the $2 million of charges recorded in
the year ended December 31, 2016, related to the 401(k) Plan as described in “—401(k) Plan Corrective Contribution.” No
similar adjustment was made in 2018.
Represents the $3 million, $4 million and $93 million of charges for fumigation related matters recorded in the years ended
December 31, 2018, 2017 and 2016 respectively, a described in “—Fumigation Related Matters.”
Represents the $23 million insurance reserve adjustment recorded in the year ended December 31, 2016 as described in “—
Insurance Reserve Adjustment.” No similar adjustments were made in 2018.
Represents impairment charges of $2 million and $1 million recorded in the years ended December 31, 2017 and 2016,
respectively, as described in “—Impairment of Software and Other Related Costs.” No impairment charges were recognized
in 2018.
Represents the $17 million, $21 million and $15 million charges recorded in the years ended December 31, 2018, 2017 and
2016, respectively, as described in “—Restructuring Charges.”
Represents the $2 million gain in the year ended December 31, 2016, as described in “—Gain on Sale of Merry Maids
branches.” The branch conversion process was completed in 2016.
Represents the net change in interest expense as described in “—Interest Expense.”
Represents the $10 million, $6 million and $32 million loss on extinguishment of debt recorded in the years ended
December 31, 2018, 2017 and 2016, respectively, as described in “—Loss on Extinguishment of Debt.”
Represents the $249 million mark-to-market loss on our retained investment in frontdoor, inc. in the year ended December
31, 2018, as described in “—Loss on Investment in frontdoor, inc.”
(14)(cid:3)
Primarily represents the net change in stock-based compensation.
Provision for Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act” or “U.S. Tax Reform”) was signed into law. The Act includes
numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from 35 percent to 21
percent. The rate reduction took effect on January 1, 2018, however, the Act was signed in 2017 and had an immediate one-time effect
52
of an income tax benefit of $271 million for us for the year ended December 31, 2017 and additional income tax expense of $3 million
for the year ended December 31, 2018. See Note 6 to the consolidated financial statements for more details.
The effective tax rate on income from continuing operations was (29.1) percent, (245.6) percent and 203.5 percent for the
years ended December 31, 2018, 2017 and 2016, respectively. The effective tax rate on income from continuing operations for the
year ended December 31, 2018 was primarily unfavorably impacted by the loss recognized on our retained investment in Frontdoor
which is not deductible for income tax purposes. The effective rate on income from continuing operations for the year ended
December 31, 2017 was primarily favorably impacted by the Act. The effective rate on income from continuing operations for the
year ended December 31, 2016 was primarily unfavorably impacted by the reflection of American Home Shield as discontinued
operations. Additional information on income taxes, including our effective tax rate reconciliation and liabilities for uncertain tax
positions, can be found in Note 6 to the consolidated financial statements.
(Loss) Income from Continuing Operations
(Loss) Income from Continuing Operations was $(163) million, $341 million and $2 million for the years ended
December 31, 2018, 2017 and 2016, respectively. The $504 million decrease for the year ended December 31, 2018 compared to the
year ended December 31, 2017 was primarily driven by a $249 million loss on our retained investment in Frontdoor, a significant tax
benefit of $270 million in 2017 resulting from U.S. tax reform. The $339 million increase for the year ended December 31, 2017
compared to the year ended December 31, 2016 was primarily driven by a $101 million increase in income from continuing operations
before income taxes and a $237 million reduction in the provision for income taxes.
Gain from Discontinued Operations, Net of Income Taxes
Gain from discontinued operations, net of income taxes, was $122 million, $169 million and $153 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
Net (Loss) Income
Net (loss) income was $(41) million, $510 million and $155 million for the years ended December 31, 2018, 2017 and 2016,
respectively. The $551 million decrease for the year ended December 31, 2018 compared to the year ended December 31, 2017 was
primarily driven by a $225 million decrease in income from continuing operations before income taxes, a $280 million increase in the
provision for income taxes and a $46 million decrease in the gain from discontinued operations, net of income taxes. The $355 million
increase for the year ended December 31, 2017 compared to the year ended December 31, 2016 was driven by a $101 million increase
in income from continuing operations before income taxes and a $237 million reduction in the provision for income taxes.
53
Segment Review
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.
Revenue and Adjusted EBITDA by reportable segment and for Corporate are as follows:
(In millions)
Revenue:
Terminix
ServiceMaster Brands
Corporate
Total Revenue:
Adjusted EBITDA:(1)
Terminix
ServiceMaster Brands
Reportable Segment Adjusted EBITDA
Corporate(2)
Costs historically allocated to American Home
Shield(3)
Total Adjusted EBITDA
___________________________________
Year Ended December 31,
2017
2018
2016
2018 vs. 2017
2017 vs. 2016
Increase (Decrease)
$
$
$
$
$
1,655 $
244
1
1,900 $
1,541 $
212
2
1,755 $
1,524
200
2
1,726
333 $
89
422 $
9
(33)
398 $
330 $
87
417 $
1
(44)
374 $
372
79
450
(3)
(42)
406
7 %
15 %
(50) %
8 %
1 %
2 %
1 %
800 %
25 %
6 %
1 %
6 %
— %
2 %
(11) %
10 %
(7) %
133 %
(5) %
(8) %
(1)(cid:3)
(2)(cid:3)
(3)(cid:3)
For our definition of Adjusted EBITDA and a reconciliation to net (loss) income, see “—Selected Historical Financial Data.”
Represents unallocated corporate expenses.
Includes amounts historically allocated to the American Home Shield segment not permitted to be classified as discontinued
operations under GAAP as described in Note 8 to the consolidated financial statements.
Terminix Segment
The Terminix segment, which provides termite and pest control services to residential and commercial customers and
distributes pest control products, reported a seven percent increase in revenue and a one percent increase in Adjusted EBITDA for the
year ended December 31, 2018 compared to the year ended December 31, 2017. The Terminix segment reported a one percent
increase in revenue and an 11 percent decrease in Adjusted EBITDA for the year ended December 31, 2017 compared to the year
ended December 31, 2016.
Revenue
Revenue by service line is as follows:
(In millions)
Residential Pest Control
Commercial Pest Control
Termite and Home Services
Other
Total revenue
(In millions)
Residential Pest Control
Commercial Pest Control
Termite and Home Services
Other
Total revenue
Year Ended
December 31,
2018
2017
$
655 $
317
599
84
613 $
255
593
81
$ 1,655 $ 1,541 $
Growth
42
62
6
3
113
7 % $
24 %
1 %
3 %
7 % $
Acquired
15
66
2
—
84
2 % $
26 %
— %
— %
5 % $
Organic
27
(4)
4
3
30
4 %
(2) %
1 %
3 %
2 %
Year Ended
December 31,
2017
2016
$
613 $
255
593
81
621 $
255
571
77
$ 1,541 $ 1,524 $
Growth
(8)
0
22
4
18
(1) % $
— %
4 %
5 %
1 % $
Acquired
Organic
7
1
3
—
10
1 % $
— %
1 %
— %
1 % $
(15)
(1)
19
4
7
(2) %
— %
3 %
5 %
— %
54
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Residential pest control revenue increased seven percent. Organic residential pest control revenue increased four percent,
primarily reflecting the impact of new unit sales and operational improvements in start rates and completion rates. Residential pest
control revenue also increased two percent from acquisitions completed during the year.
Commercial pest control revenue increased 24 percent, primarily driven by the impact of the Copesan and other acquisitions.
Organic commercial pest control revenue decreased two percent, primarily reflecting a decline in services volume.
Termite revenue, including the wildlife exclusion, crawl space encapsulation and attic insulation products that are managed
as a component of our termite line of business, increased one percent, primarily resulting from increases in core termite, wildlife
exclusion and attic insulation. In 2018, termite renewal revenue comprised 48 percent of total termite revenue, while the remainder
consisted of termite new unit revenue. Termite revenue benefited approximately $2 million from a one-time acceleration of revenue in
the fourth quarter of 2018 to conform our accounting method for a small sub-set of our customers to those adopted under ASC 606,
more than offset by the impact of an initiative to upgrade our bait stations in 2017.
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, 2017 Compared to Year Ended December 31, 2016
Residential pest control revenue decreased one percent. Organic pest control revenue decreased two percent and was
significantly impacted by a $19 million organic revenue decline associated with Alterra. Excluding Alterra, organic pest control
revenue growth was $3 million and less than one percent.
Commercial pest control revenue was consistent with the year ended December 31, 2016.
Termite revenue, including the wildlife exclusion, crawl space encapsulation and attic insulation products that are managed
as a component of our termite line of business, increased four percent. In 2017, termite renewal revenue comprised 49 percent of total
termite revenue, while the remainder consisted of termite new unit revenue. Organic termite revenue increased three percent,
reflecting an increase in core termite, wildlife exclusion and attic insulation sales and an impact from our initiative to upgrade bait
monitoring stations for a small subset of our customers.
Hurricanes Harvey and Irma negatively impacted revenue in the year ended December 31, 2017 by approximately $4 million
as the result of 53 branches, primarily in Texas and Florida, being temporarily closed for a period of time during August and
September.
55
Adjusted EBITDA
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
(In millions)
Year Ended December 31, 2016
Impact of change in revenue
Impact of Hurricanes
Production labor
Fuel prices
Vehicles and insurance program
Damage claims
Technology costs
Sales and marketing costs
Other
Year Ended December 31, 2017
Impact of change in revenue
Acquisition selling and administrative expenses
Bad debt
Chemicals and materials
Sales and marketing costs
Incentive compensation
Production labor
Fuel prices
Damage claims
Spin-off dis-synergies
Investments in growth
Other
Year Ended December 31, 2018
$
$
$
372
10
(3)
(11)
4
(6)
(10)
(2)
(20)
(5)
330
36
(14)
8
6
(11)
(5)
(3)
(4)
(3)
(5)
(6)
2
333
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The impact of the change in revenue on Adjusted EBITDA reflects the increase in relatively low margin revenue from our
acquisition of Copesan. We expect the Adjusted EBITDA contribution from Copesan and other acquisition revenues to increase in the
future as we continue to drive synergies from Copesan and other acquisitions, leveraging world-class service capabilities from
Copesan and our service partners, and working towards systematically incorporating those service capabilities into our owned branch
locations. Additionally, we incurred incremental selling and administrative expenses as a result of the acquisitions completed during
the year. The decrease in bad debt expense was driven by enhanced credit policies and collection rates. The decrease in chemicals and
materials was driven by sourcing savings. The increase in sales and marketing costs was driven by targeted investments to drive sales
growth. The increase in production labor resulted from higher technician incentive and overtime pay due to more work orders than
anticipated principally in the third quarter, driven, in part, by an initiative to increase route completion, higher sales and improved
sales start rates. The increase in damage claims was driven by increased termite warranty claims, primarily in the Gulf Coast region.
The increase in spin-off dis-synergies represent increased corporate allocations to Terminix as a result of the American Home Shield
spin-off. The increase in investments in growth includes our partnership with Salesforce to replace legacy operating systems.
We expect total dis-synergies in 2019 to impact Terminix Adjusted EBITDA by approximately $16 million. In 2018, we
announced our partnership with Salesforce to replace our legacy operating systems. We expect to incur incremental operating costs in
2019 of approximately $9 million in connection with this project.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The aforementioned hurricane-related revenue loss negatively impacted Adjusted EBITDA in 2017 by $3 million. The
increase in production labor was driven by investments in field operations focused on improving safety, customer service and
retention. The increase in our insurance programs was principally driven by an increase in the number of company-owned sales
vehicles. The increase in damage claims was driven by increased termite warranty claims. The increase in technology costs was driven
by investments to improve our customers’ experiences through technology. The increase in sales and marketing costs was driven by
investments to grow and train our sales force, higher commissions attributable to the growth in core termite, wildlife exclusion, attic
insulation and pest sales and incremental marketing investments.
There were $1 million of acquisition-related costs added back to Adjusted EBITDA for the year ended December 31, 2016 to
conform to the current period presentation.
56
ServiceMaster Brands Segment
The ServiceMaster Brands segment, which consists of the ServiceMaster Restore (restoration), ServiceMaster Clean
(commercial cleaning), Merry Maids (residential cleaning), Furniture Medic (cabinet and furniture repair) and AmeriSpec (home
inspection) businesses, reported a 15 percent increase in revenue and a two percent increase in Adjusted EBITDA for the year ended
December 31, 2018 compared to the year ended December 31, 2017. The ServiceMaster Brands segment reported a six percent
increase in revenue and a 10 percent increase in Adjusted EBITDA for the year ended December 31, 2017 compared to the year ended
December 31, 2016.
Revenue
Revenue by service line is as follows:
(In millions)
Royalty Fees
Company-Owned Merry Maids Branches
Commercial Cleaning National Accounts
Sales of Products
Other
Total revenue
Year Ended December 31,
2017
2016
2018
$
$
132 $
—
65
16
32
244 $
127 $
—
53
16
17
212 $
120
6
43
16
15
200
2018
54 %
— %
26 %
6 %
13 %
100 %
% of Revenue
2017
60 %
— %
25 %
7 %
8 %
100 %
2016
60 %
3 %
22 %
8 %
7 %
100 %
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The increase in royalty fees was primarily driven by higher restoration services. Royalty fees from restoration services in
2018 benefited from area-wide events, such as hurricanes Florence and Michael and California wildfires. The increase in revenue from
commercial cleaning national accounts was driven by increased sales activity. The increase in other was primarily driven by the
recognition of approximately $14 million of national advertising fund franchisee contributions as revenue pursuant to our adoption of
ASC 606 that took effect on January 1, 2018. Prior to 2018, contributions to the national advertising fund by our franchisees were
treated as an offset to advertising expense. The adoption had no impact on Adjusted EBITDA.
Recovery activity is unpredictable in its nature. Factors that can impact recovery activity include the occurrence of severe
weather conditions.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The increase in royalty fees was primarily driven by higher restoration services. Royalty fees from restoration services in
2017 were benefited by hurricanes Harvey and Irma. The decline in revenue from company-owned Merry Maids branches was
attributable to the branch conversions, which were completed in 2016. The increase in revenue from commercial cleaning national
accounts was driven by increased sales activity.
Adjusted EBITDA
The following table provides a summary of changes in the segment’s Adjusted EBITDA:
(In millions)
Year Ended December 31, 2016
Impact of change in revenue
Sale of Merry Maids branches
Sales and marketing costs
Other
Year Ended December 31, 2017
Impact of change in revenue
Spin-off dis-synergies
Other
Year Ended December 31, 2018
$
$
$
79
8
1
(1)
1
87
6
(1)
(3)
89
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The impact of the change in revenue reflected an increase in high margin royalty fees, as well as relatively low margin
revenue from commercial cleaning national accounts and the recognition of national advertising fund contributions from franchisees
as revenue upon our adoption of ASC 606 on January 1, 2018 of $14 million with an equal and offsetting amount recognized in Sales
57
and marketing expense with no net effect on Adjusted EBITDA. The increase in spin-off dis-synergies represent primarily increased
corporate allocations to ServiceMaster Brands as a result of the American Home Shield spin-off.
We expect total dis-synergies in 2019 to impact ServiceMaster Brands Adjusted EBITDA by approximately $2 million.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The impact of the increase in revenue was driven by the increase in royalty fees and relatively low margin revenue from
commercial cleaning national accounts. The reduction in revenue from company-owned Merry Maids branches was more than offset
by cost reductions resulting in a $1 million favorable impact on Adjusted EBITDA.
Corporate
Corporate reported an $8 million increase in Adjusted EBITDA for the year ended December 31, 2018 compared to the year
ended December 31, 2017. Corporate reported a $4 million increase in Adjusted EBITDA for the year ended December 31, 2017
compared to the year ended December 31, 2016.
Adjusted EBITDA
The following table provides a summary of changes in Corporate’s Adjusted EBITDA:
(In millions)
Year Ended December 31, 2016
Insurance program
Year Ended December 31, 2017
Insurance program
Other
Year Ended December 31, 2018
$
$
$
(3)
4
1
9
(2)
9
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Corporate reported an $8 million increase in Adjusted EBITDA for the year ended December 31, 2018 compared to the year
ended December 31, 2017. The year ended December 31, 2018 included reduced reserves in our automobile, general liability and
workers’ compensation insurance program of $9 million driven by improved claims management and favorable claims results in 2018.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Corporate reported a $4 million increase in Adjusted EBITDA for the year ended December 31, 2017 compared to the year
ended December 31, 2016. The year ended December 31, 2016 included increased reserves in our automobile, general liability and
workers’ compensation insurance program of $4 million driven by unfavorable claims trends, which 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 (an amount
equal to our insurance deductibles under our general liability insurance program). There were no material changes to reserves in our
automobile, general liability and workers’ compensation insurance program for the year ended December 31, 2017.
Costs Historically Allocated to American Home Shield
We have historically incurred the cost of certain corporate-level activities which we performed on behalf of our businesses,
including American Home Shield, such as executive functions, communications, public relations, finance and accounting, tax treasury,
internal audit, human resources operations and benefits, risk management and insurance, supply management, real estate management,
legal, marketing, facilities, information technology and other general corporate support services. The cost of such activities were
historically allocated to our segments, including American Home Shield. Certain corporate expenses which were historically allocated
to the American Home Shield segment are not permitted to be classified as discontinued operations under GAAP (“Historically
Allocated Services”). Such Historically Allocated Services amounted to $33 million, $44 million and $42 million for the years ended
December 31, 2018, 2017 and 2016, respectively, and are included in Corporate through the date of the Separation.
On the date of the spin-off, where it was practicable, employees who provided Historically Allocated Services to the
American Home Shield business were separated from us and transferred to Frontdoor.
The costs of Historically Allocated Services which were not transferred to Frontdoor will be borne by our remaining
businesses in the future as dis-synergies. We estimate these dis-synergies to be approximately $5 million in 2018 and expect total dis-
synergies to be approximately $18 million in 2019.
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
indebtedness. The Credit Facilities contain covenants that limit or restrict our ability, including the ability of certain of our
subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends)
58
and enter into transactions with affiliates. As of December 31, 2018, we were in compliance with the covenants under the agreements
that were in effect on such date.
Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as
required, borrowings under the Credit Facilities. 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, including our investment in frontdoor, inc., totaled $690 million as of December 31, 2018, compared with
$213 million as of December 31, 2017. As of December 31, 2018, there were $33 million of letters of credit outstanding and
$267 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 could
repurchase up to $300 million of outstanding shares of our common stock. As of December 31, 2018, we had repurchased $145
million of outstanding shares under this program, which is included in treasury stock on the consolidated statements of financial
position. On February 19, 2019, our board of directors approved a three-year extension of the share repurchase plan allowing for $150
million of repurchases though February 19, 2022. Under the share repurchase program, we may repurchase shares in accordance with
all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent
to which we repurchase our shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including
market conditions, regulatory requirements and other corporate considerations, as determined by us. The repurchase program may be
suspended or discontinued at any time. 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 stockholder
value.
As of December 31, 2018, we had posted $31 million in letters of credit, which were issued under the Revolving Credit
Facility, and $89 million of cash, which is included in Restricted cash on the consolidated statements of financial position, as
collateral under our automobile, general liability and workers’ compensation insurance program. We may from time to time change
the amount of cash or marketable securities used to satisfy collateral requirements under our automobile, general liability and workers’
compensation insurance program. The amount of cash or marketable securities utilized to satisfy these collateral requirements will
depend on the relative cost of the issuance of letters of credit under the Revolving Credit Facility and our cash position. Any change in
cash or marketable securities used as collateral would result 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
contracts exceeds a certain agreed upon liability level and in other circumstances required by the agreement with the counterparty. As
of December 31, 2018, the estimated fair value of our fuel swap contracts was a net liability of $4 million, and we had posted
$2 million in letters of credit as collateral under our fuel hedging program, which were also issued under the Revolving Credit
Facility. The continued use of letters of credit for this purpose in the future could limit our ability to post letters of credit for other
purposes and could limit our borrowing availability under the Revolving Credit Facility. However, we do not expect the fair value of
the outstanding fuel swap contracts to materially impact our financial position or liquidity.
We may from time to time repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or
otherwise improve our financial position, results of operations or cash flows. These actions may include open market debt
repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of
debt that may be repurchased or otherwise retired or refinanced, if any, will depend on market conditions, trading levels of our debt,
our cash position, compliance with debt covenants and other considerations.
The Company currently holds approximately 16.7 million shares of Frontdoor common stock with a fair value of
approximately $445 million as of December 31, 2018. The Company currently intends to responsibly dispose of all of the Frontdoor
common stock by June 14, 2019 to reduce debt in accordance with terms set forth in a private letter ruling with the IRS governing the
tax-free status of the Distribution.
Refinancing of Indebtedness
In connection with the Separation and in accordance with the terms set forth in a private letter ruling with the IRS governing
the tax-free status of the Distribution related to a debt-for-debt exchange, we borrowed an aggregate principal amount of $1 billion
under a short-term credit facility on August 1, 2018, the proceeds of which were used to prepay $982 million aggregate principal
amount of term loans outstanding under our senior secured term loan facility. Such prepayment resulted in a loss on extinguishment of
debt of $10 million for the year ended December 31, 2018. On August 16, 2018, Frontdoor incurred in favor of the Company $350
million aggregate principal of 6.75% Senior Notes due 2026 and a $650 million senior secured term loan facility, and obtained a $250
million senior secured revolving credit facility. We then transferred and assigned our rights and obligations in respect of Frontdoor’s
senior notes and senior secured term loan facility to the lender under such short-term credit facility through a debt-for-debt exchange
to satisfy our obligations thereunder.
59
On October 1, 2018, in connection with the Separation, Frontdoor’s senior secured term loan facility and senior notes were
included in the transfer of assets and liabilities to Frontdoor, reducing the Company’s total long-term debt by approximately $1
billion.
On September 18, 2017, we purchased $13 million in aggregate principal amount of our 7.25% notes maturing in 2038 at a
price of 104.625% of the principal amount using available cash. On May 11, 2017, we purchased $17 million in aggregate principal
amount of our 7.25% notes maturing in 2038 at a price of 97% of the principal amount using available cash. The repurchased notes
were delivered to the trustee for cancellation. In connection with these partial repurchases, we recorded a loss on extinguishment of
debt of $6 million in the year ended December 31, 2017.
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% 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%, plus the incremental borrowing margin of 2.50%. 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, 2018, we acquired $32 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%. 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 2019 will range from approximately $35 million to
$45 million.
Limitations on Distributions and Dividends by Subsidiaries
We are a holding company, and as such have no independent operations or material assets other than ownership of equity
interests in our subsidiaries. We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses,
including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us
depends on their operating results, cash requirements and financial condition and general business conditions, as well as restrictions
under the laws of our subsidiaries’ jurisdictions.
The agreements governing the Credit Facilities may restrict the ability of our subsidiaries to pay dividends, make loans or
otherwise transfer assets to us. Further, our subsidiaries are permitted under the terms of the Credit Facilities and other indebtedness to
incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans
by such subsidiaries to us.
Furthermore, there are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to us. These
restrictions are related to a subsidiary borrowing arrangement at our financing subsidiary. As of December 31, 2018, the total net
assets subject to these third-party restrictions was $23 million. We expect that such limitations will be in effect for the foreseeable
future. None of our subsidiaries are obligated to make funds available to us through the payment of dividends.
We previously considered the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded
no deferred income taxes. The Act imposes a one-time tax (“Transition Tax”) on undistributed and previously untaxed post-1986
foreign earnings and profits, as determined in accordance with U.S. tax principles, of certain foreign owned corporations owned by
U.S. stockholders. While the Transition Tax resulted in all pre-2018 undistributed foreign earnings being subject to U.S. tax, an actual
repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. Included
in our December 31, 2017 U.S. income tax provision is less than $1 million in Transition Tax. The amount of cash associated with
indefinitely reinvested foreign earnings was approximately $30 million and $29 million as of December 31, 2018 and 2017,
respectively.
60
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of
cash flows, are summarized in the following table.
(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,
2017
2016
2018
$
$
229 $
(250)
(350)
121
(1)
(250) $
204 $
(79)
(147)
198
1
177 $
148
(79)
(102)
122
—
89
Net cash provided from operating activities from continuing operations increased $25 million to $229 million for the year
ended December 31, 2018 compared to $204 million for the year ended December 31, 2017 and $148 million for the year ended
December 31, 2016.
Net cash provided from operating activities in 2018 comprised $217 million in earnings adjusted for non-cash charges, offset,
in part, by $2 million in payments related to fumigation matters and a $13 million decrease in cash required for working capital (a $4
million increase excluding the working capital impact of accrued interest and taxes). For the year ended December 31, 2018, working
capital requirements were favorably impacted by the timing of income tax payments.
Net cash provided from operating activities in 2017 comprised $241 million in earnings adjusted for non-cash charges, offset,
in part, by $12 million in payments related to fumigation matters and a $25 million increase in cash required for working capital (an
$8 million increase excluding the working capital impact of accrued interest and taxes). For the year ended December 31, 2017,
working capital requirements were unfavorably impacted by the timing of income tax payments.
Net cash provided from operating activities in 2016 comprised $271 million in earnings adjusted for non-cash charges, offset,
in part, by $90 million in payments related to fumigation matters and a $33 million increase in cash required for working capital (a
$33 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.
Investing Activities
Net cash used for investing activities from continuing operations was $250 million for the year ended December 31, 2018
compared to $79 million for the year ended December 31, 2017 and $79 million for the year ended December 31, 2016.
Capital expenditures decreased to $49 million ($41 million, net of government grants) in 2018 from $68 million ($66 million,
net of government grants) in 2017 and increased from $46 million in 2016 and included recurring capital needs, investments in our
new Global Service Center and information technology projects. Approximately $21 million of capital expenditures related to our
Global Service Center relocation were funded by a tenant improvement allowance. We anticipate capital expenditures for the full year
2019 will range from $35 million to $45 million, reflecting our partnership with Salesforce to upgrade our technology platforms and
additional recurring capital needs. 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 $2 million, $4 million and $8 million in 2018, 2017 and 2016,
respectively, primarily driven by the branch conversions at Merry Maids in 2016. The branches were sold for a total purchase price of
$9 million in 2016. In 2016, we received cash of $6 million, and provided financing of $2 million, respectively. As of October 10,
2016, the branch conversion process was complete.
Cash payments for acquisitions totaled $191 million in 2018 compared with $13 million in 2017 and $34 million in 2016. In
2018, we completed 20 acquisitions, including Copesan, a Terminix franchisee and a ServiceMaster Restore master distributor within
ServiceMaster Brands. In 2017, consideration given for the purchase of a master distributor and for tuck-in acquisitions consisted of
cash payments of $13 million and deferred payments of $3 million. In 2016, we completed several pest control and termite
acquisitions. We expect to continue our tuck-in acquisition program at Terminix and to periodically evaluate other strategic
acquisitions in the United States and internationally.
Cash flows used for purchases of available-for-sale securities in 2017 were $2 million.
Cash flows used for notes receivable, net, were $20 million, $2 million and $4 million in 2018, 2017 and 2016, respectively,
and were a result of increased financing provided by our financing subsidiary to our franchisees and retail customers of our operating
units and other long-term financing arrangements.
61
Financing Activities
Net cash used for financing activities from continuing operations was $350 million for the year ended December 31, 2018
compared to $147 million for the year ended December 31, 2017 and $102 million for the year ended December 31, 2016.
During 2018, we completed a debt-for-debt exchange with Frontdoor which resulted in $1 billion of borrowings and $1
billion of repayments of long-term debt. In addition, we repaid $114 million of other debt, including $79 million to repay our 2018
Notes upon their maturity. In completing the spin-off, we contributed $242 million to Frontdoor. We also received $7 million from the
issuance of common stock upon the exercise of stock options.
During 2017, we made scheduled principal payments on long-term debt of $61 million, purchased $30 million in aggregate
principal amount of our 7.25% notes maturing in 2038 using available cash, repurchased $85 million of common stock and received
$30 million from the issuance of common stock upon the exercise of stock options and shares issued under the Employee Stock
Purchase Plan.
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 $60 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.
Contractual Obligations
The following table presents our contractual obligations and commitments as of December 31, 2018.
(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
Less than 1 Yr
1 - 3 Yrs
3 - 5 Yrs
$
$
1,734 $
92
498
146
57
176
8
2,711 $
30 $
31
74
17
27
55
1
236 $
60 $
46
140
36
20
57
1
359 $
More than 5 Yrs
997
1
151
67
—
42
4
1,262
647 $
14
133
25
10
23
2
854 $
*
(1)(cid:3)
(2)(cid:3)
(3)(cid:3)
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, 2018, payments related to
variable debt are based on applicable rates at December 31, 2018 plus the specified margin in the associated debt agreements
for each period presented. As of December 31, 2018, the estimated debt balance (including capital leases) as of each fiscal
year end from 2019 through 2022 is $1,764 million, $1,726 million, $1,659 million, $1,647 million and $998 million,
respectively. The weighted-average interest rate on the estimated debt balances at each fiscal year end from 2019 through
2022 is expected to be 5.0 percent. See Note 12 to the consolidated financial statements for the terms and maturities of
existing debt obligations.
These amounts primarily represent future payments relating to real estate operating leases. See Note 9 to the consolidated
financial statements for additional discussion of our restructuring costs. 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
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, 2018, we are unable to reasonably estimate the period of cash settlement with the respective taxing authority.
Accordingly, $15 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See the
discussion of income taxes in Note 6 to the consolidated financial statements.
Financial Position—Continuing Operations
The following discussion describes changes in our financial position from December 31, 2017 to December 31, 2018.
62
An investment in Frontdoor was recorded at fair value based on Frontdoor’s stock price on December 31, 2018 for the
common shares of Frontdoor retained after the American Home Shield spin-off.
Receivables increased from prior year levels, primarily related to acquisitions at Terminix.
Prepaid expenses and other assets decreased due to a change in the timing of income tax payments.
Property and equipment decreased from prior year levels, reflecting purchases for recurring capital needs and information
technology projects and the acquisition of vehicles under the Fleet Agreement, more than offset by depreciation expense.
Goodwill and intangible assets, primarily trade names, service marks and trademarks, net, increased from prior year levels
due to several pest control and termite acquisitions, the purchase of a Terminix franchisee and the purchase of a master distributor. See
Notes 5 and 7 to the consolidated financial statements for more details.
Restricted cash represents amounts posted as collateral under our automobile, general liability and workers’ compensation
insurance program.
Notes receivable increased due to an increase in long-term financing arrangements.
Current Deferred customer acquisition costs decreased and long-term Deferred customer acquisition costs increased as a
result of our adoption of ASC 606 on January 1, 2018.
Payroll and related expenses increased from prior year levels reflecting an increase in accrued payroll and incentive
compensation expense.
Deferred revenue increased from prior year levels, primarily reflecting growth at Terminix.
The current portion of long-term debt and long-term debt decreased from prior year levels, primarily due to the prepayment
of approximately $982 million aggregate principal amount of term loans outstanding on August 1, 2018 and repayment of $79 million
of our 2018 Notes on March 1, 2018. See Note 12 to the consolidated financial statements for more details.
Deferred taxes increased from prior year levels, primarily due to the basis differences related to intangible assets. See Note 6
to the consolidated financial statements for more details.
Total stockholders’ equity was $2,204 million as of December 31, 2018 compared to $1,167 million as of December 31,
2017. The increase was primarily driven by the $1,078 million of net liabilities distributed to Frontdoor. See the consolidated
statements of stockholders’ equity for further information.
Off-Balance Sheet Arrangements
As of December 31, 2018, we did not have any significant off-balance sheet arrangements.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, established for the purpose of facilitating off- balance sheet arrangements or other
contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk
that could arise if we had engaged in such relationships.
Critical Accounting Policies and 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 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
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.
63
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 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. 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 two reporting units: Terminix and
ServiceMaster Brands. The October 1, 2018 estimated fair values for both 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, 2018. Our 2018,
2017 and 2016 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 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
consolidated financial statements for more details.
Contingent Liabilities
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
64
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, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09,
“Revenue from Contracts with Customers,” ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial
Liabilities,” ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” ASU 2017-09,
“Stock Compensation – Scope of Modification Accounting,” and ASU 2018-02, “Income Statement – Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” 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. 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. These forward-looking statements
also include, but are not limited to statements regarding our intentions, beliefs, assumptions or current expectations concerning, among
other things, financial position; results of operations; cash flows; prospects; growth strategies or expectations; the continuation of
acquisitions, including the integration of any acquired company and risks relating to any such acquired company; fuel prices;
attraction and retention of key personnel; the impact of fuel swaps; the valuation of marketable securities; estimates of accruals for
self-insured claims related to workers’ compensation, auto and general liability risks; estimates of future payments under operating
and 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 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 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:
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
lawsuits, enforcement actions and other claims by third parties or governmental authorities;
compliance with, or violation of, environmental, health and safety laws and regulations;
cyber security breaches, disruptions or failures in our information technology systems and our failure to protect the
security of personal information about our customers;
our ability to attract and retain key personnel, including our ability to attract, retain and maintain positive relations with
trained workers and third-party contractors;
(cid:120)(cid:3)
adverse weather conditions;
(cid:120)(cid:3) weakening general economic conditions, especially as they may affect home sales, unemployment and consumer
confidence or spending levels;
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations;
our ability to successfully implement our business strategies;
increase in prices for fuel and raw materials, and in minimum wage levels;
changes in the source and intensity of competition in our segments;
our franchisees, subcontractors, third-party distributors and vendors taking actions that harm our business;
changes in our services or products;
our ability to protect our intellectual property and other material proprietary rights;
negative reputational and financial impacts resulting from future acquisitions or strategic transactions;
65
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
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
(cid:120)(cid:3)
other factors described in this report and from time to time in documents that we file with the SEC.
You should read this report completely and with the understanding that actual future results may be materially different from
expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking
statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law,
to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events,
unanticipated or otherwise, and changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future
performance, unless expressed as such, and should only be viewed as historical data.
ITEM 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,
unemployment rates, insurance costs and medical costs could have a material adverse impact on future results of operations.
We do not hold or issue derivative financial instruments for trading or speculative purposes. We have entered into specific
financial arrangements, primarily fuel swap agreements and interest rate swap agreements, in the normal course of business to manage
certain market risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of
derivative financial instrument transactions could have a material impact on our financial statements.
Interest Rate Risk
We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-
rate debt and by utilizing interest rate swaps.
On November 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% 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%, plus the incremental borrowing margin of 2.50%.
Our variable rate debt is fully hedged under our interest rate swap and, therefore, we believe our exposure to interest rate
fluctuations, when viewed on a net basis, is not material to our overall results of operations. Assuming all revolving loans were fully
drawn as of December 31, 2018, 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.
66
The following table summarizes information about our debt as of December 31, 2018 (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, 2018.
(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)
2019
2020
Expected Year of Maturity
2022
2021
2023
Thereafter
Total
Fair
Value
$
$
18 $
5.0 %
43 $
4.8 %
12 $
5.0 %
27 $
5.1 %
48 $
5.0 %
19 $
5.1 %
2 $
5.0 %
10 $
5.1 %
645 $
4.0 %
4 $
5.1 %
997 $ 1,722 $ 1,688
5.7 %
1 $
5.1 %
5.0 %
103 $
4.9 %
103
$
650
1.5 %
2.0 %
(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 2019. As of December 31, 2018, a 10
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, 2018, we had
fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $25 million, maturing through 2019. The
estimated fair value of these contracts as of December 31, 2018 was a net liability of $4 million. These fuel swap contracts provide a
fixed price for approximately 69 percent of our estimated fuel usage for 2019.
67
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ServiceMaster Global Holdings, Inc.
Memphis, Tennessee
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of ServiceMaster Global Holdings, Inc. and
subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations and
comprehensive (loss) income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018,
and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018
and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February, 28, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
February 28, 2019
We have served as the Company's auditor since 2002.
68
Consolidated Statements of Operations and Comprehensive (Loss) Income
(In millions, except per share data)
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
Amortization expense
Acquisition-related costs
401(k) Plan corrective contribution
Fumigation related matters
Insurance reserve adjustment
Impairment of software and other related costs
Mark-to-market loss on investment in frontdoor, inc.
Restructuring charges
Gain on sale of Merry Maids branches
Interest expense
Interest and net investment income
Loss on extinguishment of debt
(Loss) Income from Continuing Operations before Income Taxes
Provision (benefit) for income taxes
Equity in losses of joint venture
(Loss) Income from Continuing Operations
Gain from discontinued operations, net of income taxes
Net (Loss) Income
Other Comprehensive (Loss) Income, Net of Income Taxes:
Net unrealized gains (losses) on securities
Net unrealized gains on derivative instruments
Foreign currency translation (loss) gain
Other Comprehensive (Loss) Income, Net of Income Taxes
Total Comprehensive (Loss) Income
Weighted-average common shares outstanding - Basic
Weighted-average common shares outstanding - Diluted
Basic Earnings Per Share:
(Loss) Income from Continuing Operations
Gain from discontinued operations, net of income taxes
Net (Loss) Income
Diluted Earnings Per Share:
(Loss) Income from Continuing Operations
Gain from discontinued operations, net of income taxes
Net (Loss) Income
$
$
$
$
$
Year Ended December 31,
2018
1,900 $
1,041
555
18
5
—
3
—
—
249
17
—
133
(5)
10
(126)
37
—
(163)
122
(41) $
—
1
(3)
(3)
(44) $
135.5
135.5
(1.20) $
0.90
(0.30)
(1.20) $
0.90
(0.30)
2017
1,755 $
962
500
18
—
(3)
4
—
2
—
21
—
150
(2)
6
99
(242)
—
341
169
510 $
1
4
3
8
518 $
134.4
135.4
2.54 $
1.26
3.79
2.52 $
1.25
3.76
2016
1,726
924
462
27
1
2
93
23
1
—
15
(2)
153
(1)
32
(2)
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2
153
155
(2)
20
—
18
173
135.3
137.3
0.01
1.13
1.14
0.01
1.11
1.13
See accompanying Notes to the Consolidated Financial Statements.
69
Consolidated Statements of Financial Position
(In millions, except share data)
As of
December 31,
2018
As of
December 31,
2017
Assets:
Current Assets:
Cash and cash equivalents
Investment in frontdoor, inc.
Receivables, less allowances of $21 and $22, respectively
Inventories
Prepaid expenses and other assets
Deferred customer acquisition costs
Current assets of discontinued operations
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
Deferred customer acquisition costs
Other assets
Long-term assets of discontinued operations
Total Assets
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable
Accrued liabilities:
Payroll and related expenses
Self-insured claims and related expenses
Accrued interest payable
Other
Deferred revenue
Current liabilities of discontinued operations
Current portion of long-term debt
Total Current Liabilities
Long-Term Debt
Other Long-Term Liabilities:
Deferred taxes
Long-term liabilities of discontinued operations
Other long-term obligations, primarily self-insured claims
Total Other Long-Term Liabilities
Commitments and Contingencies (Note 10)
Stockholders’ Equity:
Common stock $0.01 par value (authorized 2,000,000,000 shares with 147,209,928 shares
issued and 135,687,558 shares outstanding at December 31, 2018, and 146,662,232 shares
issued and 135,141,048 outstanding at December 31, 2017)
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss
Less common stock held in treasury, at cost (11,522,370 shares at December 31, 2018, and
11,521,184 shares at December 31, 2017)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
224 $
445
186
45
61
—
—
962
201
1,956
1,588
89
43
21
77
87
—
5,023 $
89 $
$
$
60
58
14
61
95
—
49
425
1,727
484
—
182
666
2
2,309
156
5
(267)
2,204
5,023 $
$
See accompanying Notes to the Consolidated Financial Statements.
192
—
162
41
88
18
740
1,242
202
1,780
1,526
89
41
21
—
67
678
5,646
82
56
60
14
43
90
693
136
1,174
2,642
451
44
168
663
2
2,321
(895)
5
(267)
1,167
5,646
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71
Consolidated Statements of Cash Flows
(In millions)
Year Ended December 31,
2017
2016
2018
Cash and Cash Equivalents and Restricted Cash at Beginning of Period
Cash Flows from Operating Activities from Continuing Operations:
Net (Loss) Income
$
563 $
386 $
(41)
510
Adjustments to reconcile net (loss) income to net cash provided from operating activities:
Gain 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
Mark-to-market loss on investment in frontdoor, inc.
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
Restructuring charges
Cash payments related to restructuring charges
Other
Change in working capital, net of acquisitions:
Receivables
Inventories and other current assets
Accounts payable
Deferred revenue
Accrued liabilities
Accrued interest payable
Current income taxes
Net Cash Provided from Operating Activities from Continuing Operations
Cash Flows from Investing Activities from Continuing Operations:
Property additions
Government grant fundings for property additions
Sale of equipment and other assets
Business acquisitions, net of cash acquired
Purchases 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:
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 frontdoor, inc.
Repurchase of common stock and RSU vesting
Issuance of common stock
Net Cash Used for Financing Activities from Continuing Operations
(122)
—
73
18
4
—
3
(2)
—
—
249
—
10
8
14
(1)
17
(15)
(2)
(6)
(6)
(1)
(2)
12
(1)
17
229
(49)
7
2
(191)
—
(120)
100
1
(250)
1,000
(1,114)
—
—
—
(242)
—
7
(350)
(169)
—
68
18
5
(3)
4
(12)
—
2
—
—
6
(233)
10
—
21
(6)
9
(2)
(1)
(6)
(11)
12
(1)
(15)
204
(68)
2
4
(13)
(2)
(102)
100
(1)
(79)
—
(91)
—
—
(1)
—
(85)
30
(147)
296
155
(153)
1
53
27
5
2
93
(90)
23
1
—
(2)
32
20
12
—
15
(8)
(4)
—
(11)
6
1
(30)
6
(5)
148
(46)
—
8
(34)
—
(100)
97
(3)
(79)
2,400
(2,416)
(4)
(34)
—
—
(60)
13
(102)
72
Consolidated Statements of Cash Flows (Continued)
(In millions)
(In millions)
Cash Flows from Discontinued Operations:
Cash provided from operating activities
Cash used for investing activities
Cash used for financing activities
Net Cash Provided from Discontinued Operations
Effect of Exchange Rate Changes on Cash
Cash (Decrease) Increase During the Period
Cash and Cash Equivalents and Restricted Cash at End of Period
Year Ended December 31,
2017
2016
2018
146
(1)
(24)
121
(1)
(250)
313 $
210
(6)
(5)
198
1
177
563 $
177
(54)
(1)
122
—
89
386
$
See accompanying Notes to the Consolidated Financial Statements.
73
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. Our services include residential termite
and pest control, commercial termite and pest control, national accounts pest control services, restoration, commercial cleaning,
residential cleaning, cabinet and furniture repair and home inspection. We provide these services through an extensive service network
of company-owned, franchised and licensed locations operating primarily under the following leading brands: Terminix, Terminix
Commercial, Copesan, ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and AmeriSpec. All of our
consolidated subsidiaries are wholly-owned. Intercompany transactions and balances have been eliminated.
American Home Shield Spin-off
On October 1, 2018, we completed the previously announced separation of our American Home Shield business (the
“Separation”). The Separation was effectuated through a pro rata dividend (the “Distribution”) to our stockholders of approximately
80.2% of the outstanding shares of common stock of frontdoor, inc. (“Frontdoor”), which was formed as a wholly owned subsidiary of
the Company to hold its American Home Shield business. As a result of the Distribution, Frontdoor is an independent public company
that trades on the Nasdaq Global Select Market under the symbol “FTDR.”
The Distribution was made to our stockholders of record as of the close of business on September 14, 2018 (the “Record
Date”), and such stockholders received one share of Frontdoor common stock for every two shares of ServiceMaster common stock
held as of the close of business on the Record Date. We distributed 67,781,527 shares of common stock of Frontdoor in the
Distribution and retained 16,734,092 shares, or approximately 19.8%, of the common stock of Frontdoor immediately following the
Distribution. These investments are accounted for as available for sale securities. We currently intend to responsibly dispose of all of
the Frontdoor common stock retained after the Distribution through one or more subsequent exchanges for debt by June 14, 2019, in
accordance with terms set forth in a private letter ruling with the IRS governing the tax-free status of the Distribution.
As a result of the Separation, we now have two reportable segments: Terminix and ServiceMaster Brands. The historical
results of the American Home Shield Business, including the results of operations, cash flows and related assets and liabilities are
reported as discontinued operations for all periods presented herein.
Note 2. Significant Accounting Policies
Consolidation
The consolidated financial statements include all of our 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 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, including the valuation of retained shares of Frontdoor common stock; and the valuation of tangible and intangible assets.
In 2018, 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, other than the valuation of our retained shares of Frontdoor common stock.
The allowance for uncollectible 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.
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 policies from third-party insurance carriers, which typically incorporate
significant deductibles or self-insured retentions. We are responsible for all claims that fall below the retention limits. In determining
our accrual for self-insured claims, we use historical claims experience to establish both the current year accrual and the underlying
provision for future losses. This actuarially determined provision and related accrual include known claims, as well as incurred but not
reported claims. We adjust the 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.
74
We seek 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 our losses from large exposure and permit recovery of a portion of direct unpaid losses,
insurance does not relieve us of ultimate liability. Accordingly, the accruals for insured claims represent our 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.
Termite damage claim accruals in the Terminix business are recorded based on both the historical rates of claims incurred
within a contract year and the cost per claim. Current activity could differ causing a change in estimates. We have certain liabilities
with respect to existing or potential claims, lawsuits, and other proceedings. We accrue for these liabilities when it is probable that
future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are
recorded in the period the adjustments are identified.
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. We record deferred tax items based on the estimated
value of the tax basis. We adjust 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. We record a liability for unrecognized tax benefits resulting
from uncertain tax positions taken or expected to be taken in a tax return. We recognize potential interest and penalties related to our
uncertain tax positions in Provision (benefit) for income taxes on the consolidated statements of operations and comprehensive (loss)
income.
Revenue
On January 1, 2018, we adopted FASB Accounting Standards Codification (“ASC”) 606. Results for reporting periods
beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported
in accordance with the Company’s historic accounting under ASC 605, “Revenue Recognition.” See Note 3 to the consolidated
financial statements for more details.
Deferred Customer Acquisition Costs
Customer acquisition costs, which are incremental and direct costs of obtaining a customer, are deferred and amortized over
the expected customer relationship period. See Note 3 to the consolidated financial statements for more details.
Advertising
Advertising costs are expensed when the advertising occurs. Advertising expense for the years ended December 31, 2018,
2017 and 2016 was $85 million, $71 million and $66 million, respectively.
Inventory
Inventories are recorded at the lower of cost (primarily on a weighted-average cost basis) or net realizable value. Our
inventory primarily consists of finished goods to be used on the customers’ premises or sold to franchisees.
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
As of December 31,
2018
2017
5 $
47
208
242
19
521
(320)
201 $
4
50
190
222
13
480
(277)
202
$
$
Estimated
Useful Lives
(Years)
N/A
10 - 40
3 - 7
3 - 9
5 - 7
Depreciation of property and equipment, including depreciation of assets held under capital leases was $73 million,
$68 million and $53 million for the years ended December 31, 2018, 2017 and 2016, respectively.
We recorded impairment charges of $2 million and $1 million in the years ended December 31, 2017 and 2016, respectively,
relating to our decisions to replace certain software. No impairment charges were recorded in the year ended December 31, 2018.
As of December 31, 2018 and 2017, goodwill was $1,956 million and $1,780 million, respectively. Intangible assets
consisted of indefinite-lived trade names of $1,482 million and $1,468 million and other amortizable intangible assets in the amount of
$106 million and $59 million as of December 31, 2018 and 2017, respectively.
75
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, 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 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.
Goodwill and indefinite-lived intangible assets, primarily 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 2018, 2017 and 2016
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 our automobile, general liability and workers’ compensation
insurance program.
Restricted Net Assets
There are third-party restrictions on the ability of certain of our subsidiaries to transfer funds to the Company. These
restrictions are related to a subsidiary borrowing arrangement at our financing subsidiary. As of December 31, 2018, the total net
assets subject to these third-party restrictions was $23 million. None of our subsidiaries are obligated to make funds available to us
through the payment of dividends.
Financial Instruments and Credit Risk
We have 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 our financial statements. We do not hold or issue derivative financial
instruments for trading or speculative purposes. We have historically hedged a significant portion of our annual fuel consumption and
have also historically hedged the interest payments on a portion of our variable rate debt using interest rate swap agreements. All our
fuel swap contracts and interest rate swap contracts are classified as cash flow hedges, and, as such, the hedging instruments are
recorded on the 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.
Financial instruments, which potentially subject us to financial and credit risk, consist principally of investments and
receivables. Investments consist primarily of publicly traded debt and common equity securities. Financial instruments are accounted
for at fair value with adjustments to fair value recognized in Interest and net investment income in the consolidated statements of
operations and comprehensive (loss) income in the period incurred. Most of our 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. We maintain 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
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 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
We and our 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. We account for income taxes using an asset and liability approach for the expected future tax consequences of events
that have been recognized in our 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. We record a liability for
76
unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in our tax return. We recognize potential
interest income, interest expense and penalties related to uncertain tax positions in income tax expense.
Earnings Per Share
Basic earnings per share is computed by dividing net (loss) income by the weighted-average number of shares of common
stock outstanding. Diluted earnings per share is computed by dividing net (loss) 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, restricted stock units
(“RSUs”) and performance shares are reflected in diluted earnings per share by applying the treasury stock method. See Note 19 to the
consolidated financial statements for more details.
Newly Issued Accounting Standards
Adoption of New Accounting Standards
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. On January 1, 2018, we adopted FASB Accounting Standards Codification (“ASC”) 606 using
the modified retrospective method for those contracts which were not completed as of January 1, 2018. Results for reporting periods
beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported
in accordance with our historic accounting under ASC 605, “Revenue Recognition.” We implemented internal controls and system
functionality where necessary to enable the preparation of financial information on adoption. See Note 3 to the consolidated financial
statements for more details.
In January 2016, the FASB issued Accounting Standards Update (“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 (loss) income. In March 2018, the FASB issued an amendment to this standard
(ASU 2018-03), which provides further clarification regarding this standard. We adopted this ASU on January 1, 2018. As a result of
the adoption, approximately $2 million was reclassified from Accumulated other comprehensive income (“AOCI”) to Accumulated
deficit related to unrealized gains on available-for-sale equity securities upon adoption.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a
Business.” The ASU clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses by providing a screen to determine when an integrated set of assets or
activities is not a business. We adopted this ASU on January 1, 2018. The consolidated financial statements may be impacted if an
acquisition does not qualify as a business combination under the ASU. Such acquisitions would be accounted for as asset purchases.
In May 2017, the FASB issued ASU 2017-09, “Stock Compensation – Scope of Modification Accounting.” The ASU clarifies
the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification
accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the
modification. We adopted this ASU on January 1, 2018 and applied the guidance prospectively to awards modified on or after the
adoption date.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” allowing a reclassification from AOCI to
Retained Earnings for stranded tax effects resulting from the corporate income tax rate change in the Tax Cuts and Jobs Act (the “Act”
or “U.S. Tax Reform”). It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. As
allowed by the ASU, we elected to early adopt the amendments of this ASU on January 1, 2018 and reclassified approximately
$4 million of unrealized losses from AOCI to Accumulated deficit.
In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” This ASU does not prescribe any new
accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards
Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately
while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. We adopted this
ASU on January 1, 2019 and applied the guidance prospectively.
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software: Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This ASU requires
implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the
same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing
arrangements plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is
controlled by the service provider. The amendments in ASU 2018-15 will be effective for fiscal years beginning after December 15,
2019, and interim periods within those fiscal years. We early adopted this ASU on January 1, 2019 and applied the guidance
prospectively to implementation costs incurred related to cloud computing arrangements. We expect the adoption of this ASU will
77
result in the capitalization of certain development costs that would have otherwise been expensed to our consolidated statements of
operations and comprehensive (loss) income as we implement Salesforce.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,”
amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the
amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the
amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note
or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for
which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018, with relief
provided for filings made shortly after the final rule’s effective date in SEC Question 105.09 of the Exchange Act Forms C&DIs. We
adopted this final rule on November 5, 2018.
Following are the results of the adoption of these standards on our consolidated statements of stockholders’ equity previously
reported:
(In millions)
As reported, December 31, 2017
Impact of adopting ASC 606 (Note 3)
Impact of adopting ASU 2016-01
Impact of adopting ASU 2018-02
As revised, January 1, 2018
Accumulated other comprehensive
income
Accumulated deficit
$
$
5
—
(2)
4
7
$
$
(895)
16
2
(4)
(881)
Accounting Standards Issued But Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” which is the final standard on accounting for leases.
In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, which amend ASU 2016-02 to provide companies an alternative
transition method whereby it may elect to recognize and measure leases by applying the cumulative impact of adopting ASU 2016-02
to the opening retained earnings balance in the period of adoption, thereby removing the requirement that the financial statements of
prior periods be restated. The Company plans to utilize this alternative transition method. While both lessees and lessors are affected
by the new guidance, the effects on lessees are much more significant. The most significant change for lessees is the requirement
under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. Entities are
required to use a modified retrospective approach to adopt the guidance. We adopted the new lease guidance effective January 1,
2019, and elected the available practical expedients upon adoption. The adoption resulted in the recognition of a right of use asset of
approximately $195 million and a lease liability of approximately $230 million on January 1, 2019.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities.” The ASU simplifies certain aspects of hedge accounting and improves disclosures of hedging
arrangements through the elimination of the requirement to separately measure and report hedge ineffectiveness. The ASU generally
requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged
item in order to align financial reporting of hedging relationships with economic results. Entities must apply the amendments to cash
flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The
presentation and disclosure requirements must be applied prospectively. We adopted the amendments in this ASU on January 1, 2019
and will apply the guidance prospectively to our hedges.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement.” This ASU modifies the disclosure requirements
for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in ASU 2018-13 will be
effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted
for the removed disclosures and delayed adoption is permitted until fiscal 2021 for the new disclosures. We are currently evaluating
the disclosure changes necessary to our consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-16, “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight
Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes,” which amends ASC 815, Derivatives and
Hedging. This ASU adds the OIS rate based on SOFR to the list of permissible benchmark rates for hedge accounting purposes. The
company will early adopt the ASU in the first quarter of fiscal year 2019. The adoption will not have a material effect on our
consolidated financial statements.
We have reviewed all other recently issued, but not yet effective, accounting pronouncements and do not expect the future
adoption of any such pronouncements will have a material impact on our financial condition or the results of our operations.
78
Note 3. Revenues
The following table presents our reportable segment revenues, disaggregated by revenue source. We disaggregate revenue
from contracts with customers into major product lines. We have determined that disaggregating revenue into these categories
achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by
economic factors.
As noted in the business segment reporting information in Note 4, our reportable segments are Terminix and ServiceMaster
Brands.
(In millions)
Major service line
$
Residential Pest Control
Commercial Pest Control
Termite and Home Services
Royalty Fees
Commercial Cleaning
National Accounts
Sales of Products and Other
Corporate
Total
Terminix
Year ended December 31,
2017
2018
2016
ServiceMaster Brands
Year ended December 31,
2017
2018
2016
Total
Year ended December 31,
2017
2018
2016
655 $
317
599
—
613 $
255
593
—
621 $
255
571
77
— $
—
—
— $
—
—
— $
—
—
132
127
120
655 $
317
599
132
613 $
255
593
127
621
255
571
197
—
84
—
—
81
—
—
—
—
$ 1,655 $ 1,541 $ 1,524 $
65
48
—
244 $
53
32
—
212 $
43
43
37
37
—
2
200 $ 1,900 $ 1,755 $ 1,726
65
132
1
53
113
2
At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance
obligation for each promise to transfer to the customer a good or service (or a bundle of goods and services) that is distinct. To
identify the performance obligation, we consider all of the goods and services promised in the contract regardless of whether they are
explicitly stated or are implied by customary business practices.
Terminix segment
Residential pest control services
Residential pest control services can be for one-time or recurring services. Revenues from residential pest control services are
recognized at the agreed-upon contractual amount over time as the services are provided, most of which are started and completed
within one day, as the customer simultaneously receives and consumes the benefits of the services as they are performed. Upon
completion of service, a receivable is recorded related to this revenue as we have an unconditional right to invoice and receive
payment. Payments are typically received shortly after services have been rendered.
Commercial pest control services
Commercial pest control services are largely for recurring services. Revenues from commercial pest control services are
recognized at the agreed-upon contractual amount over time as the services are provided, most of which are started and completed
within one day, as the customer simultaneously receives and consumes the benefits of the services as they are performed. Upon
completion of service, a receivable is recorded related to this revenue as we have an unconditional right to invoice and receive
payment. Payments are typically received shortly after services have been rendered.
Termite and home services
We eradicate termites through the use of baiting systems and non-baiting methods (e.g., fumigation or liquid treatments).
Termite services using liquid and baiting systems are sold through annual renewable contracts. We also perform other related services,
including wildlife exclusion, crawl space encapsulation and attic insulation, which may be one-time or renewable services. Revenues
for termite services are recognized at the agreed-upon contractual amount upon the completion of the service. All termite services are
generally started and completed within one day. Upon completion of the service, a receivable is recorded related to this revenue as we
have an unconditional right to invoice and receive payment. Payments are typically received shortly after services have been rendered.
Most termite services can be renewed after the initial year. Revenue on renewal contracts is recognized upon completion of
an annual inspection and receipt of payment from the customer which evidences the extension of the contract into a renewal period.
Advanced renewal payments generate a contract liability and are deferred until the related renewal period.
Termite inspection and protection contracts are frequently sold through annual contracts. For these contracts, we have a stand
ready obligation of which the customer receives and consumes the benefits over the annual period. Associated service costs are
expensed as incurred. We measure progress toward satisfaction of our stand ready obligation over time using costs incurred as the
79
measure of progress under the input method, which results in straight-line recognition of revenue. Payments are received at the
commencement of the contract, which generates a contract liability, or in installments over the contract period.
Sales of products and other
Product revenues are generated from selling products to distributors and franchisees. Revenues from product sales are
generally recognized once control of the products transfers to the customer. A receivable is recorded related to these sales as we have
an unconditional right to invoice and receive payment. Payments are typically received shortly after a customer is invoiced.
ServiceMaster Brands segment
Royalty fees
We have franchise agreements in our ServiceMaster Restore, ServiceMaster Clean, Merry Maids, Furniture Medic and
AmeriSpec businesses. Royalty fee revenue consists principally of sales-based royalties received as part of the consideration for the
franchise right and is calculated as a percentage of customer level revenue. Revenue is recognized by us at the agreed-upon
contractual rates over time as the customer level revenue is generated by the franchisees. A receivable is recognized for an estimate of
the unreported royalty fees, which are reported and remitted to us in arrears.
Commercial cleaning national accounts
National account revenues are recognized at the agreed-upon contractual amounts over time as services are completed based
on contractual arrangements to provide services at the customers’ locations. We engage either a franchisee or non-franchisee business
to perform the services. Under these agreements, we are directly responsible for providing the services and receive payment directly
from the customer. A receivable is recorded related to this revenue as we have an unconditional right to invoice and receive payment.
Payments are typically received shortly after services have been rendered.
Sales of products and other
Product revenues are generated from selling products to franchisees. Revenues from product sales are generally recognized
once control of the products transfers to the customer. A receivable is recorded related to these sales as we have an unconditional right
to invoice and receive payment. Payments are typically received shortly after a customer is invoiced.
Initial franchise fees result from the sale of a franchise license, which includes the use of the name, trademarks and
proprietary methods. The franchise license is considered symbolic intellectual property and revenue related to the sale of this right is
recognized at the agreed-upon contractual amount over the term of the initial franchise agreement.
Franchisees contribute a percentage of customer level revenue into a national advertising fund managed by the Company. In
cases where we have ultimate control of the marketing and advertising, we recognize both revenue and expense for the amount
earned. Prior to the adoption of ASC 606, this revenue was recorded net of the advertising expense incurred. The impact to revenues
as a result of applying ASC 606 was an increase of $14 million for the year ended December 31, 2018.
In addition, we have contractual arrangements with several national insurance companies to maintain a call center which
receives and provides non-recurring recovery and restoration referrals from the insurers to qualifying franchisees. We receive a
referral fee from the franchisee. We recognize the referral fee at the agreed-upon contractual amount as revenue in the month the
referral is issued.
Costs to obtain a contract with a customer
Terminix
We capitalize the incremental costs of obtaining a contract with a customer, primarily commissions, and recognize the
expense on a straight-line basis over the expected customer relationship period. As of January 1, 2018, the date we adopted ASC 606,
we capitalized a total of $61 million in deferred customer acquisition costs related to contracts that were not completed. As
of December 31, 2018, we had long-term deferred customer acquisition costs of $75 million related to contracts that were not
completed. In the year ended December 31, 2018, the amount of amortization was $69 million. There was no impairment loss in
relation to costs capitalized.
ServiceMaster Brands
We capitalize the incremental costs of selling a new franchise license, primarily commissions, and recognize the expense over
the term of the initial franchise agreement. As of January 1, 2018, the date the Company adopted ASC 606, we capitalized a total
of $1 million in deferred customer acquisition costs related to contracts that were not completed. As of December 31, 2018, we had
capitalized a total of $1 million in deferred customer acquisition costs related to contracts that were not completed. In the year
ended December 31, 2018, the amount of amortization was $1 million. There was no impairment loss in relation to costs capitalized.
Contract balances
Timing of revenue recognition may differ from the timing of invoicing customers. Contracts with customers are generally for
a period of one year or less, and are generally renewable. We record a receivable related to revenue recognized on services once we
have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivables are
80
recorded within Receivables, less allowances, on the consolidated statements of financial position. The current portion of Notes
receivable, which represent amounts financed for customers through our financing subsidiary, are included within Receivables, less
allowances, on the consolidated statements of financial position and totaled $42 million as of December 31, 2018 and 2017.
Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the
performance of services, including when the amounts are refundable. For Terminix, amounts are recognized as revenue upon
completion of services.
Deferred revenue by segment was as follows (in millions):
(In millions)
Terminix
ServiceMaster Brands(1)
Total
___________________________________
As of December 31,
2018
2017
$
$
91 $
11
101 $
90
—
90
(1)
Includes approximately $7 million of Deferred revenue included within Other long-term obligations, primarily self-insured
claims on the consolidated statement of financial position as of December 31, 2018.
Changes in deferred revenue for the year ended December 31, 2018 were as follows (in millions):
(In millions)
Balance, January 1, 2018
Deferral of revenue
Recognition of deferred revenue
Balance, December 31, 2018
Deferred revenue
$
$
101
149
(149)
101
There was approximately $67 million of revenue recognized in the year ended December 31, 2018, that was included in the
deferred revenue balance as of January 1, 2018.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to
each performance obligation based on its relative standalone selling price. Any discounts given are allocated to the services to which
the discounts relate.
Practical Expedients and Exemptions
We offer certain interest-free contracts to customers where payments are received over a period not exceeding one year.
Additionally, certain Terminix customers may pay in advance for services. We do not adjust the promised amount of consideration for
the effects of these financing components. At contract inception, the period of time between the performance of services and the
customer payment is one year or less.
Revenue is recognized net of any taxes collected from customers which are subsequently remitted to taxing authorities.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year
or less.
Certain non-commission related incremental costs to obtain a contract with a customer are expensed as incurred because the
amortization period would have been one year or less. These costs are included in Selling and administrative expenses on the
consolidated statements of operations and comprehensive (loss) income.
We utilize the portfolio approach to recognize revenue in situations where a portfolio of contracts have similar
characteristics. The revenue recognized under the portfolio approach is not materially different than if every individual contract in the
portfolio was accounted for separately.
Impact of ASC 606 on the Consolidated Financial Statements
We recorded a net reduction to opening retained earnings of $16 million, net of tax, as of January 1, 2018 due to the
cumulative impact of adopting ASC 606. Changes to the consolidated statements of operations and comprehensive (loss) income
include: i) costs of obtaining a contract that would have been incurred regardless of whether the contract was obtained, such as direct
mail and digital advertising, are now expensed as incurred; ii) initial fees and the related commissions from sales of franchise licenses,
previously recognized in the year of the sale, are now recognized over the term of the initial franchise agreement; iii) ServiceMaster
Brands national advertising fund income, previously recorded net of advertising expense incurred for our advertising programs, will
now be reported gross, generally with offsetting increases to both revenue and expense such that there will not be a significant, if any,
81
impact on net (loss) income; and iv) commissions costs at Terminix incremental to a successful sale are deferred and recognized over
the expected customer relationship period. Previously, commissions and other sales-related costs were deferred and recognized over
the initial contract period.
The primary change to the consolidated statements of financial position is the reclassification of Deferred customer
acquisition costs to long-term assets as costs are recognized over the expected customer relationship period, which is in excess of one
year.
The following tables compare affected lines of the consolidated financial statements as prepared under the provisions of ASC
606 to a presentation of these financial statements under the prior revenue recognition guidance (in millions):
Consolidated Statement of Financial Position
Current Assets:
Receivables
Prepaid expenses and other assets
Deferred customer acquisition costs
Other Assets:
Deferred customer acquisition costs
Total Assets
Current Liabilities:
Deferred revenue
Other Long-Term Liabilities:
Deferred taxes
Other long-term obligations, primarily self-insured claims
Total Liabilities
Retained earnings (accumulated deficit)
Accumulated other comprehensive income
Net (Loss)
Liabilities and Equity
(cid:3)
Consolidated Statement of Operations and Comprehensive (Loss)
Income
Revenue
Cost of services rendered and products sold
Selling and administrative expenses
Provision for income taxes
Net (Loss)
$
$
$
$
$
$
As of December 31, 2018
As reported
Under Prior Revenue
Recognition Guidance
186 $
61
—
77
5,023 $
95 $
484
182
2,818
156
5
(41)
5,023 $
186
74
22
—
4,982
91
473
176
2,798
141
5
(46)
4,982
Year ended December 31, 2018
As reported
Under Prior Revenue
Recognition Guidance
1,900 $
1,041
555
37
(41) $
1,886
1,041
548
35
(46)
The adoption of ASC 606 had no significant impact on the Company’s cash flows. The aforementioned impacts resulted in
offsetting shifts in cash flows from operations between net (loss) income and various change in working capital line items.
Note 4. Business Segment Reporting
Through October 1, 2018, the date of the Separation, we conducted business through three reportable segments: Terminix,
ServiceMaster Brands and American Home Shield. After the Separation, our business is conducted through two reportable segments:
Terminix and ServiceMaster Brands.
In accordance with accounting standards for segments, our reportable segments are strategic business units that offer different
services. The Terminix segment provides termite and pest control services to residential and commercial customers and distributes
pest control products. The ServiceMaster Brands segment provides residential and commercial restoration and commercial cleaning
services through franchises primarily under the ServiceMaster, ServiceMaster Restore and ServiceMaster Clean brand names, home
cleaning services through franchises primarily under the Merry Maids brand name, cabinet and furniture repair primarily under the
Furniture Medic brand name and home inspection services primarily under the AmeriSpec brand name. Corporate includes our
corporate operations (substantially all of which costs are allocated to our reportable segments), which provide various technology,
human resources, finance, legal and other support services to the reportable segments.
82
Certain corporate expenses which were historically allocated to the American Home Shield segment are not permitted to be
classified as discontinued operations under GAAP. Such corporate expenses amounted to $33 million, $44 million and $42 million in
2018, 2017 and 2016, respectively, and are reflected in Corporate herein. The composition of our reportable segments is consistent
with that used by our chief operating decision maker (the “CODM”) to evaluate performance and allocate resources.
Information regarding our accounting policies is described in Note 2 to the consolidated financial statements. We derive
substantially all of our 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 our
operations.
We use Reportable Segment Adjusted EBITDA as our measure of segment profitability. Accordingly, the CODM evaluates
performance and allocates resources based primarily on Reportable Segment Adjusted EBITDA. Reportable Segment Adjusted
EBITDA is defined as net (loss) income before: depreciation and amortization expense; acquisition-related costs; 401(k) Plan
corrective contribution; fumigation related matters; insured reserve adjustment; non-cash stock-based compensation expense;
restructuring charges; gain on sale of Merry Maids branches; non-cash impairment of software and other costs; loss on investment in
frontdoor, inc.; (gain) loss from discontinued operations, net of income taxes; (benefit) provision for income taxes; loss on
extinguishment of debt; interest expense; and other non-operating expenses. Our definition of Reportable Segment Adjusted EBITDA
may not be calculated or comparable to similarly titled measures of other companies. We believe Reportable Segment Adjusted
EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance
comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of
facilities and equipment, restructuring initiatives, acquisition activities and equity-based, long-term incentive plans.
During 2018, 2017 and 2016, no single customer exceeded 10 percent of global sales.
83
Information for continuing operations for each reportable segment and Corporate is presented below:
(In millions)
Revenue:
Terminix
ServiceMaster Brands
Reportable Segment Revenue
Corporate
Total Revenue
Reportable Segment Adjusted EBITDA:(1)
Terminix
ServiceMaster Brands
Reportable Segment Adjusted EBITDA
Identifiable Assets:
Terminix
ServiceMaster Brands
Reportable Segment Identifiable Assets
Corporate
Total Identifiable Assets
Depreciation & Amortization Expense:
Terminix
ServiceMaster Brands
Reportable Segment Depreciation & Amortization Expense
Corporate
Total Depreciation & Amortization Expense(2)
Capital Expenditures:
Terminix
ServiceMaster Brands
Reportable Segment Capital Expenditures
Corporate
Total Capital Expenditures
________________________________
2018
Year Ended December 31,
2017
2016
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,655 $
244
1,899 $
1
1,900 $
333 $
89
422 $
3,162 $
491
3,653 $
1,370
5,023 $
59 $
8
67 $
24
91 $
12 $
2
14 $
34
49 $
1,541 $
212
1,754 $
2
1,755 $
330 $
87
417 $
2,821 $
489
3,310 $
917
4,228 $
58 $
7
65 $
21
86 $
12 $
2
15 $
53
68 $
1,524
200
1,724
2
1,726
372
79
450
2,820
480
3,300
808
4,109
58
7
65
15
80
11
2
13
33
46
84
(1)(cid:3)
Presented below is a reconciliation of Net (Loss) Income to Reportable Segment Adjusted EBITDA:
(In millions)
Net (Loss) Income
Unallocated corporate expenses
Costs historically allocated to American Home Shield
Depreciation and amortization expense
Acquisition-related costs
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
Mark-to-market loss on investment in frontdoor, inc.
Gain from discontinued operations, net of income taxes
Provision (benefit) for income taxes
Loss on extinguishment of debt
Interest expense
Other non-operating expenses
Reportable Segment Adjusted EBITDA
___________________________________
2018
Year Ended December 31,
2017
2016
(41) $
(9)
33
91
5
—
3
—
14
17
—
—
249
(122)
37
10
133
—
422 $
510 $
(1)
44
86
—
(3)
4
—
10
21
—
2
—
(169)
(242)
6
150
—
417 $
155
3
42
80
1
2
93
23
12
15
(2)
1
—
(153)
(5)
32
153
—
450
$
$
(2)(cid:3)
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 5 to the
consolidated financial statements for information relating to segment goodwill.
Note 5. Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a
fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. Our annual assessment
date is October 1. There were no goodwill or trade name impairment charges or accumulated impairment losses recorded in continuing
operations during the years ended December 31, 2018, 2017 and 2016.
The table below summarizes the goodwill balances for continuing operations by reportable segment:
(In millions)
Balance as of December 31, 2016
Acquisitions
Other (1)
Balance as of December 31, 2017
Acquisitions
Other (1)
Balance as of December 31, 2018
____________________________________
(1)(cid:3)
Reflects the impact of foreign exchange rates.
Terminix
Franchise
Services Group
Total
$
$
$
1,601 $
2
1
1,605 $
179
(2)
1,781 $
175 $
—
—
176 $
—
—
175 $
1,776
2
2
1,780
179
(2)
1,956
85
The table below summarizes the other intangible asset balances for continuing operations:
(In millions)
Trade names(1)
Customer relationships
Franchise agreements
Other
Total
___________________________________
$
$
As of December 31, 2018
As of December 31, 2017
Gross
Accumulated
Amortization
1,482 $
469
88
62
2,101 $
— $
(406)
(73)
(35)
(513) $
Net
1,482 $
64
15
27
1,588 $
Gross
Accumulated
Amortization
1,468 $
417
88
49
2,022 $
— $
(395)
(70)
(30)
(496) $
Net
1,468
22
18
19
1,526
(1)(cid:3)
Not subject to amortization.
Amortization expense of $18 million, $18 million and $27 million was recorded in the years ended December 31, 2018, 2017
and 2016, respectively. For the existing intangible assets, we anticipate amortization expense of $20 million, $18 million, $17 million,
$15 million and $12 million in 2019, 2020, 2021, 2022 and 2023, respectively.
Note 6. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act, the tax reform bill (the "Act" or “U.S. Tax Reform”) was signed into law.
The Act includes numerous changes in existing tax law, including a permanent reduction in the federal corporate income tax rate from
35 percent to 21 percent, effective January 1, 2018. The Securities and Exchange Commission provided up to a one-year measurement
period for companies to finalize the accounting for the impacts of this new legislation. As required, we finalized our accounting for
items previously considered provisional during 2018.
Corporate Tax Rate Change
We are subject to the provisions of the Financial Accounting Standards Board ASC 740-10, Income Taxes, which requires
that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted.
We remeasured deferred tax assets and liabilities at December 31, 2017, based on the new U.S. tax rates at which they are expected to
reverse in the future, which is generally 21 percent. The provisional amount recorded relating to the remeasurement of these deferred
tax balances was a net reduction of total deferred tax liabilities of $271 million. For the year ended December 31, 2018, the Company
has completed its review of the applicable provisions of the Act and has recognized an additional expense of $3 million during the
measurement period, primarily related to return to provision adjustments.
Deferred Tax Analysis
The Act changes the treatment of certain income and expense items for which we record deferred tax assets and liabilities.
We have assessed our valuation of deferred tax assets and liabilities at December 31, 2018, as well as valuation allowance analyses
affected by various aspects of the Act. The Company has recorded no amounts related to valuation allowances and revaluation of
deferred tax assets affected by various aspects of the Act.
Transition Tax
The Act imposed a Transition Tax on undistributed and previously untaxed post-1986 foreign earnings and profits, as
determined in accordance with U.S. tax principles, of certain foreign owned corporations owned by U.S. stockholders. We recorded a
one-time transition tax liability for the deemed distribution of earnings from our foreign subsidiaries resulting in an increase in income
tax expense of less than $1 million in 2017.
GILTI
The Act also created a new requirement that Global Intangible Low Taxed Income (GILTI) earned by controlled foreign
corporations (CFCs) must be included currently in the gross income of the CFCs U.S. shareholder. Under GAAP, we are allowed to
make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a
current-period expense when incurred (the period cost method) or (2) factoring such amounts into our measurement of deferred taxes
(the deferral method). At December 31, 2018, the Company has elected to account for GILTI in the year the tax is incurred and have
recorded GILTI tax expense of less than $1 million, which is included as a component of income tax expense from continuing
operations.
As of December 31, 2018, 2017 and 2016, we have $15 million, $14 million and $13 million, respectively, of tax benefits
primarily reflected in U.S. federal and state tax returns that have not been recognized for financial reporting purposes (“unrecognized
tax benefits”). At December 31, 2018 and 2017, $14 million and $13 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:
86
(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,
2017
2016
2018
14 $
—
—
3
(1)
15 $
13 $
—
—
3
(1)
14 $
16
—
(5)
3
(1)
13
$
$
Based on information currently available, it is reasonably possible that over the next 12-month period unrecognized tax
benefits may decrease by $3 million as the result of settlements of ongoing audits, statute of limitation expirations or final settlements
of uncertain tax positions in multiple jurisdictions.
We file 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, 2016 have been audited by the IRS. The IRS commenced pre-filing examinations of the
Company’s U.S. federal income tax returns for 2017 in the second quarter of 2017. Four 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 2013, except for a pending refund claim related to 2008.
Our policy is to recognize potential interest and penalties related to tax positions within the tax provision. Total interest and
penalties included in the consolidated statements of income are immaterial. As of December 31, 2018 and 2017, we had accrued for
the payment of interest and penalties of approximately $2 million.
The components of income 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,
2017
2016
2018
$
$
(130) $
4
(126) $
94 $
5
99 $
(5)
3
(2)
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:
Tax at U.S. federal statutory rate
State and local income taxes, net of U.S. federal benefit
Tax credits
Investment in frontdoor, inc. mark-to-market adjustment
Other permanent items
U.S. Tax Reform rate change(1)
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,
2017
2018
21.0 %
(7.1)
1.5
(41.5)
(2.1)
(2.7)
(0.9)
1.1
1.7
(29.1) %
35.0 %
5.7
(1.3)
—
1.8
(273.6)
—
(14.5)
1.4
(245.6) %
2016
35.0 %
(297.8)
91.5
—
(156.1)
—
205.1
274.0
51.9
203.5 %
(1)(cid:3)
Deferred income taxes in the consolidated statements of financial position at December 31, 2017, were remeasured for the
change in the U.S. income tax rate through income tax expense (see discussion on U.S. Tax Reform). This one-time
beneficial rate change adjustment for $271 million includes $11 million in state income tax expense for December 31, 2017
and $3 million additional tax expense for December 31, 2018.
87
The effective tax rate for discontinued operations for the years ended December 31, 2018, 2017 and 2016 was a tax provision
of 26.0 percent and benefit of 37.9 percent and 37.0 percent, respectively. 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
(Benefit) provision for income taxes
Year Ended December 31,
2017
2016
2018
$
$
23 $
1
6
29
1
1
6
8
37 $
(14) $
3
5
(6)
(242)
2
4
(235)
(242) $
(28)
2
4
(22)
14
(2)
5
17
(5)
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 our 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, 2018
and 2017 was $11 million.
Significant components of our 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
___________________________________
As of December 31,
2018
2017
$
$
(471) $
(25)
(20)
5
7
22
(6)
15
(11)
(484) $
(446)
(22)
(8)
9
7
13
(12)
19
(11)
(451)
(1)(cid:3)
The deferred tax liability relates primarily to the difference in the tax versus book basis of intangible assets. We had
$505 million and $507 million of deferred tax liability included in this net deferred tax liability as of December 31, 2018 and
2017, respectively, that will not actually be paid unless certain business units of the Company are sold.
As of December 31, 2018, we had deferred tax assets, net of valuation allowances, of $6 million for federal and state net
operating loss and capital loss carryforwards, which expire at various dates up to 2038. We 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.
We previously considered the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded
no deferred income taxes. Prior to the Transition Tax included in the Act discussed herein, we had an excess amount for financial
reporting over the tax basis in our foreign subsidiaries, including cumulative undistributed earnings of our foreign subsidiaries of $70
million as of December 31, 2018. While the Transition Tax resulted in all remaining undistributed foreign earnings being subject to
U.S. tax, an actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.S.
state taxes. Included in our December 31, 2017 U.S. income tax provision is less than $1 million in Transition Tax. The amount of
cash associated with indefinitely reinvested foreign earnings was approximately $30 million and $29 million as of December 31, 2018
and 2017, respectively.
88
Note 7. Acquisitions
Acquisitions have been accounted for as business combinations using the acquisition method and, accordingly, the results of
operations of the acquired businesses have been included in the consolidated financial statements since their dates of acquisition.
Asset acquisitions have been accounted for under ASU 2017-01. The assets and liabilities of these businesses were recorded in the
financial statements at their estimated fair values as of the acquisition dates.
2018
During the year ended December 31, 2018, we completed 20 acquisitions. On March 30, 2018, we acquired all of the
outstanding stock of Copesan Services, Inc. (“Copesan”) for an aggregate purchase price of $148 million, subject to certain post-
closing net working capital adjustments. The acquisition is expected to improve Terminix’s capabilities in commercial pest control as
Copesan is expected to provide us with significant expertise, system capabilities and processes for delivering pest management
solutions to sophisticated commercial customers. We funded $104 million at closing using available cash on hand. An
additional $35 million of deferred purchase price and up to $10 million earnout contingent on the successful achievement of projected
revenue targets are both due to the sellers three years from the acquisition date. Changes in projected revenue would result in a change
in the fair value of the recorded earnout obligation. The deferred purchase price and earnout are recorded at fair value on the
consolidated statements of financial position. Subsequent changes to the estimated earnout obligation will be recognized in the
consolidated statements of operations and comprehensive (loss) income when incurred.
As a result of this acquisition, we recognized a preliminary value of $99 million of goodwill, which is primarily attributable
to the expected benefits from synergies of the combination with existing businesses and growth opportunities and Copesan’s
workforce and is not deductible for tax purposes. Goodwill changed from the preliminary values recognized reflecting the valuation
work completed to date and the receipt of additional information which resulted in adjustments to working capital accounts. We also
recognized approximately $55 million of other intangibles, primarily customer lists and trade names. The weighted-average useful life
for each class of definite-lived intangible asset associated with Copesan is between three to five years. As of December 31, 2018, the
purchase price allocation for this acquisition has not been finalized as the Company is still evaluating the fair value and useful lives of
certain intangible assets. We will complete the purchase price allocation in the first quarter of 2019.
During the year ended December 31, 2018, we completed 17 additional pest control acquisitions and reacquired a Terminix
franchisee, all of which have been accounted for as business combinations, and purchased a ServiceMaster Restore master distributor
within ServiceMaster Brands which has been accounted for as an asset acquisition. We funded $86 million at closing for these
acquisitions using available cash on hand. An additional approximately $20 million of future payments, primarily deferred purchase
price, are due to the sellers between one and five years from the acquisition dates. We recorded a preliminary value of $80 million of
goodwill and $25 million of other intangibles, primarily customer lists and reacquired rights. Goodwill and intangibles recognized for
these acquisitions changed from the preliminary values recognized reflecting the valuation work completed to date and the receipt of
additional information which resulted in adjustments to working capital accounts. As of December 31, 2018, the purchase price
allocations for these acquisitions have not been finalized as we are still evaluating working capital balances and the fair value and
useful lives of the acquired intangible assets. The Company expects to complete the purchase price allocations within the respective
measurement periods during 2019. The weighted-average useful life for each class of definite-lived intangible asset associated with
these acquisitions is between three to five years.
Prior Years
During the year ended December 31, 2017, we completed four pest control acquisitions and purchased a ServiceMaster Clean
master distributor within ServiceMaster Brands. The total purchase price for these acquisitions was $16 million. We recorded
goodwill of $2 million and other intangibles, primarily reacquired rights, of $13 million related to those acquisitions. The weighted-
average useful life for each class of definite lived intangible asset associated with these acquisitions was approximately three years. (cid:3)
During the year ended December 31, 2016, we completed several pest control and termite acquisitions. The total purchase
price for these acquisitions was $43 million. We recorded goodwill of $34 million and other intangibles, primarily customer
relationships, of $6 million related to these acquisitions. The weighted-average useful life for each class of definite lived intangible
asset recorded for these acquisitions was five years.
89
Supplemental cash flow information regarding our acquisitions is as follows:
(In millions)
Assets acquired
Liabilities assumed
Net assets acquired(1)
Net cash paid
Seller financed debt
Purchase price
(cid:3)
2018
Year Ended December 31,
2017
2016
$
$
$
$
284 $
(30)
254 $
191 $
64
254 $
16 $
—
16 $
13 $
3
16 $
44
—
43
34
9
43
___________________________________
(1)(cid:3) Includes approximately $15 million of deferred tax liabilities recognized as a result of tax basis differences in intangible assets.
Acquisition-related costs, which represent legal, accounting and other expenses associated with completed or contemplated
acquisitions, were $5 million for the year ended December 31, 2018 and $1 million for the year ended December 31 2016. No
acquisition-related costs were incurred in the year ended December 31, 2017. Prior period amounts have been reclassified from Selling
and administrative expenses to Acquisition-related costs on the consolidated statements of income and comprehensive (loss) income to
conform to current period presentation.
90
Note 8. Discontinued Operations
American Home Shield Spin-off
On October 1, 2018, ServiceMaster completed the previously announced separation of its American Home Shield business.
The Separation was effectuated through a pro rata dividend to our stockholders of approximately 80.2% of the outstanding shares of
common stock of Frontdoor. We hold approximately 16.7 million shares of Frontdoor common stock with a fair value of
approximately $445 million as of December 31, 2018. The investment is accounted for as an available-for-sale security. For the year
ended December 31, 2018, approximately $249 million of unrealized losses were recorded within Loss on investment in frontdoor,
inc. related to a decline in value of the common stock held in Frontdoor in the consolidated statements of operations and
comprehensive income.
In connection with the American Home Shield spin-off, the Company and Frontdoor entered into (1) a separation and
distribution agreement containing key provisions relating to the separation of Frontdoor and the distribution of Frontdoor common
stock to ServiceMaster stockholders, as well as insurance coverage, non-competition, indemnification and other matters, (2) an
employee matters agreement allocating liabilities and responsibilities relating to employee benefit plans and programs and other
related matters and (3) a tax matters agreement governing the respective rights, responsibilities and obligations of the parties thereto
with respect to taxes, including allocating liabilities for income taxes attributable to Frontdoor and its subsidiaries generally to the
Company for tax periods (or portions thereof) ending on or before October 1, 2018, and generally to Frontdoor for tax periods (or
portions thereof) beginning after that date.
The charges for the transition services are designed to allow us to fully recover the direct costs of providing the services, plus
specified margins and any out-of-pocket costs and expenses. The services provided under the transition services agreement will
terminate at various specified times, and in no event later than December 31, 2019. Frontdoor may terminate the transition services
agreement (or certain services under the transition services agreement) for convenience upon 90 days written notice, in which case
Frontdoor will be required to reimburse us for early termination costs. Under this transition services agreement, in the year ended
December 31, 2018, we recorded approximately $1 million of fees from Frontdoor, which is included, net of costs incurred, in Selling
and administrative expenses in the consolidated statements of operations and comprehensive (loss) income. As of December 31, 2018,
approximately $1 million owed by Frontdoor under this agreement was unpaid. Subsequent to December 31, 2018, all amounts under
this agreement have been paid.
During the year ended December 31, 2018, we processed certain of Frontdoor’s accounts payable transactions. Through this
process, in the year ended December 31, 2018, approximately $2 million was paid on Frontdoor’s behalf, approximately $1 million of
which was repaid by Frontdoor as of December 31, 2018. Subsequent to December 31, 2018, all amounts under this agreement have
been paid.
The Company and Frontdoor also entered into a sublease agreement for the space Frontdoor retained in our Global Service
Center and Memphis customer care center after the spin-off. We recognized approximately $1 million of rental income related to these
sublease agreements during the year ended December 31, 2018 in Selling and administrative expenses on the consolidated statements
of operations and comprehensive (loss) income. Payments received under the sublease agreements during the year ended December
31, 2018 totaled approximately $1 million.
The historical results of the American Home Shield segment, including the results of operations, cash flows and related assets
and liabilities, are reported as discontinued operations for all periods presented herein. For all periods after the Separation,
discontinued operations includes spin-off transaction costs primarily related to transaction fees to effect the spin-off and receipts
pursuant to the transition services agreement.
American Home Shield Goodwill and Intangible Assets
Goodwill and indefinite lived intangible assets are assessed annually for impairment during the fourth quarter or earlier upon
the occurrence of certain events or substantive changes in circumstances. No goodwill or indefinite-lived intangible asset impairments
were recorded relating to American Home Shield in the years ended December 31, 2018, 2017 and 2016.
Financial Information for Discontinued Operations
Loss from discontinued operations, net of income taxes, for all periods presented includes the operating results of Frontdoor
and previously sold businesses.
91
The operating results of discontinued operations are as follows:
(In millions)
Revenue
Cost of services rendered and products sold
Operating expenses(1)
Interest and net investment income
Income before income taxes
Provision for income taxes
Gain from discontinued operations, net of income taxes
___________________________________
2018
Year Ended December 31,
2017
2016
979 $
534
282
(1)
164
43
122 $
1,157 $
591
296
(2)
272
103
169 $
1,020
524
257
(5)
243
90
153
$
$
(1)
Includes spin-off transaction costs incurred of $35 million and $13 million for the years ended December 31, 2018 and 2017,
respectively.
The following table presents the aggregate carrying amount of the major classes of assets and liabilities of discontinued
operations. At December 31, 2017, these balances reflect the historical assets and liabilities of the American Home Shield business,
which was spun off in the year ended December 31, 2018.
(In millions)
Assets of Discontinued Operations:
Cash and cash equivalents
Receivables, net
Inventories and other current assets
Current assets of discontinued operations
Property and equipment, net
Goodwill
Intangible assets, net
Other long-term assets
Total Assets of Discontinued Operations
Liabilities of Discontinued Operations:
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
Deferred taxes
Other long-term obligations
Total Liabilities of Discontinued Operations
___________________________________
$
$
$
$
December 31, 2017
282
408
50
740
35
476
165
2
1,418
34
7
57
1
13
573
9
693
42
2
737
The following selected financial information of American Home Shield is included in the statements of cash flows:
(In millions)
Depreciation
Amortization
Capital expenditures
Significant operating and investing non-cash items:
Net assets acquired through seller financed debt
Year ended December 31,
2017
2016
2018
8 $
6 $
(18) $
9 $
8 $
(9) $
8
6
(10)
— $
— $
14
$
$
$
$
92
Note 9. Restructuring Charges
We incurred restructuring charges of $17 million ($13 million, net of tax), $21 million ($15 million, net of tax) and
$15 million ($9 million, net of tax) for the years ended December 31, 2018, 2017 and 2016, respectively. Restructuring charges are
comprised of the following:
(In millions)
Terminix(1)
ServiceMaster Brands(2)
Corporate(3)
Leadership transition(4)
Global Service Center relocation(5)
Total restructuring charges
___________________________________
Year Ended December 31,
2017
2016
2018
$
$
2 $
1
7
—
8
17 $
2 $
1
2
11
5
21 $
7
—
5
—
3
15
(1)(cid:3)
(2)(cid:3)
(3)(cid:3)
(4)(cid:3)
(5)(cid:3)
For the years ended December 31, 2018, 2017 and 2016, these charges include $2 million, $2 million and $4 million,
respectively, of lease termination and severance costs driven by Terminix’s branch optimization program. Of this amount $1
million was unpaid and accrued as of December 31, 2018. 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.
Represents severance and other costs related to the reorganization of ServiceMaster Brands.
We have historically made changes on an ongoing basis to enhance capabilities and reduce costs in our corporate functions
that provide company-wide administrative services for our operations. In 2017, we began taking actions to enhance
capabilities and align our corporate functions with those required to support our strategic needs as two stand-alone companies
in anticipation of the American Home Shield spin-off. For the years ended December 31, 2018, 2017 and 2016, these charges
include severance and other costs of $3 million, $2 million and $2 million, respectively. For the year ended December 31,
2018, these charges also included $4 million of costs incurred due to the Separation that were not included in discontinued
operations. 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. Of this
amount, $1 million was unpaid and accrued as of December 31, 2018.
For the year ended December 31, 2017, these charges include $5 million of severance costs and $5 million of stock-based
compensation expense as part of the severance agreements with the former CEO and CFO. Of this amount, $2 million was
unpaid and accrued as of December 31, 2018.
For the year ended December 31, 2018, these charges include future rent of $7 million and $1 million of professional and
other fees. For the year ended December 31, 2017, these charges include accelerated depreciation of $2 million, redundant
rent expense of $2 million and a $1 million loss recorded on the sale of an asset related to the relocation of the Company’s
corporate headquarters, which we refer to as our Global Service Center. For the year ended December 31, 2016, represents
impairment charges of $1 million and professional fees and other costs of $1 million related to the relocation of the
Company’s Global Service Center. Of this amount, $4 million was unpaid and accrued as of December 31, 2018.
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
liabilities—Other on the consolidated statements of financial position, is presented as follows:
(In millions)
Balance as of December 31, 2016
Costs incurred
Costs paid or otherwise settled
Balance as of December 31, 2017
Costs incurred
Costs paid or otherwise settled
Balance as of December 31, 2018
We expect substantially all of our accrued restructuring charges to be paid within one year.
Accrued
Restructuring
Charges
$
$
3
21
(17)
6
17
(17)
7
93
Note 10. Commitments and Contingencies
We lease certain property and equipment under various operating lease arrangements. Most of the property leases provide
that we pay taxes, insurance and maintenance applicable to the leased premises. As leases for existing locations expire, we expect to
renew the leases or substitute another location and lease.
Rental expense for the years ended December 31, 2018, 2017 and 2016 was $33 million, $29 million and $28 million,
respectively. Based on leases in place as of December 31, 2018, future long-term non-cancelable operating lease payments will be
approximately $26 million in 2019, $23 million in 2020, $20 million in 2021, $18 million in 2022, $14 million in 2023, and $92
million in 2024, and thereafter. We expect to receive sublease income from Frontdoor’s sublease of space in our Global Service
Center and Memphis customer care center of approximately $2 million in each year through 2033. Sublease income of approximately
$1 million was recognized within Selling and administrative expenses on the consolidated statements of operations and comprehensive
(loss) income for the year ended December 31, 2018.
In the normal course of business, we periodically enter into agreements that incorporate indemnification provisions. While
the maximum amount to which we may be exposed under such agreements cannot be estimated, we do not expect these guarantees
and indemnifications to have a material effect on our business, financial condition, results of operations or cash flows.
We carry insurance policies on insurable risks at levels that we believe to be appropriate, including workers’ compensation,
automobile and general liability risks. We purchase insurance policies from third-party insurance carriers, which typically incorporate
significant deductibles or self-insured retentions. We are responsible for all claims that fall below the retention limits, exceed our
coverage limits or are otherwise not covered by our insurance policies. In determining our accrual for self-insured claims, we use
historical claims experience to establish both the current year accrual and the underlying provision for future losses. This actuarially
determined provision and related accrual include known claims, as well as incurred but not reported claims. We adjust our estimate of
accrued self-insured claims when required to reflect changes based on factors such as changes in health care costs, accident frequency
and claim severity.
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, 2016
Provision for self-insured claims
Cash payments
Balance as of December 31, 2017
Provision for self-insured claims
Cash payments
Balance as of December 31, 2018
Accrued
Self-insured
Claims, Net
$
$
120
36
(42)
115
29
(33)
111
Termite damage claim accruals in the Terminix business are recorded based on both the historical rates of claims incurred
within a contract year and the cost per claim. Current activity could differ causing a change in estimates. We have certain liabilities
with respect to existing or potential claims, lawsuits and other proceedings. We accrue for these liabilities when it is probable that
future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are
recorded in the period the adjustments are identified.
In addition to the matters discussed above and the fumigation related matters discussed below, 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 below, 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.
Fumigation Related Matters
On January 20, 2017, TMX USVI and TMX LP, each an indirect, wholly-owned subsidiary of the Company, entered into a
revised 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 Plea Agreement was intended to resolve four
misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act related to improper applications of
94
methyl bromide. At a hearing on November 20, 2017, TMX USVI and TMX LP were sentenced for pleading guilty to four
misdemeanor charges of violations of the Federal Insecticide, Fungicide, and Rodenticide Act related to improper applications of
methyl bromide. Under the terms of sentencing handed down, TMX USVI and TMX LP each paid fines or costs of approximately $5
million (total of approximately $10 million). The court required TMX USVI and TMX LP to provide for training certification courses
with respect to pesticide application and safety in the U.S. Virgin Islands over the next five years. As a result of the sentencing, we
have recorded an additional $1 million in charges in the fourth quarter of 2017. The Company had previously recorded within
Fumigation related matters in the consolidated statement of operations and comprehensive (loss) income total charges of $10 million
in connection with the aforementioned criminal matter as of December 31, 2016.
On December 16, 2016, the U.S. Virgin Islands Department of Justice filed a civil complaint in the Superior Court of the
Virgin Islands related to the aforementioned fumigation incident in a matter styled Government of the United States Virgin Islands v.
The ServiceMaster Company, LLC, The Terminix International Company Limited Partnership, and Terminix International USVI,
LLC. The amount and extent of any further potential penalties, fines, sanctions, costs and damages that the federal or other
governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of any additional
civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S. Virgin Islands
matter, which could be material, is not currently known, and any such further penalties, fines, sanctions, costs or damages would not
be covered under the Company’s general liability insurance policies.
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.
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 alleged 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. Under the terms of the court approved settlement agreement, in addition to
the amounts that the Company’s insurance carriers agreed to pay to the family pursuant to our general liability insurance policies, the
Company 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 (loss) income a charge of $3 million in connection with civil claims related to the
Florida fumigation matter.
Note 11. Employee Benefit Plans
Discretionary contributions to our 401(k) plan were made in the amount of $13 million, $13 million and $12 million for the
years ended December 31, 2018, 2017 and 2016, respectively.
Note 12. Long-Term Debt
Long-term debt is summarized in the following table:
(In millions)
Senior secured term loan facility maturing in 2023(1)
5.125% notes maturing in 2024(2)
Revolving credit facility maturing in 2021
7.10% notes maturing in 2018(3)
7.45% notes maturing in 2027(4)
7.25% notes maturing in 2038(4)
Vehicle capital leases(5)
Other(6)
Less current portion
Total long-term debt
___________________________________
As of December 31,
2018
2017
637 $
740
—
—
172
42
90
94
(49)
1,727 $
1,615
739
—
79
169
42
90
45
(136)
2,642
$
$
(1)(cid:3)
As of December 31, 2018 and 2017, presented net of $5 million and $16 million, respectively, in unamortized debt issuance
costs and $1 million and $3 million, respectively, in unamortized original issue discount paid as described below under “––
Term Loan Facility.”
95
(2)(cid:3)
(3)(cid:3)
(4)(cid:3)
(5)(cid:3)
(6)(cid:3)
As of December 31, 2018 and 2017, presented net of $10 million and $11 million, respectively, in unamortized debt issuance
costs as described below under “––2024 Notes.”
On March 1, 2018, we paid $79 million upon their maturity.
As of December 31, 2018 and 2017, collectively presented net of $33 million and $36 million, respectively, of unamortized
fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown
above.
We have entered into the Fleet Agreement which, among other things, allows us 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%.
As of December 3, 2018, includes approximately $82 million of future payments in connection with our acquisitions of
Copesan and other companies as further described in Note 7.
Term Loan Facility
On November 8, 2016, we 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, 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.
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 our option, (i) an adjusted LIBOR (subject to a floor of zero percent) plus a margin of 2.50% per
annum or (ii) an alternate base rate (subject to a floor of 1.00%) plus a margin of 1.50% 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
Company and certain of our domestic subsidiaries, excluding certain subsidiaries subject to regulatory requirements in various states,
including pledges of all the capital stock of all direct domestic subsidiaries (other than foreign subsidiary holding companies, which
are deemed to be foreign subsidiaries) owned by the Company or any Guarantor and of up to 65% of the capital stock of each direct
foreign subsidiary owned by the Company or any Guarantor. The Term Loan Facility security interests are subject to certain
exceptions, including, but not limited to, exceptions for (i) equity interests, (ii) indebtedness or other obligations of subsidiaries,
(iii) real estate or (iv) any other assets, if the granting of a security interest therein would require that 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.
We have historically entered into interest rate swap agreements. Under the terms of these agreements, we pay a fixed rate of
interest on the stated notional amount and receive a floating rate of interest (based on one month LIBOR) on the stated notional
amount. Therefore, during the term of the swap agreements, the effective interest rate on the portion of the term loans equal to the
stated notional amount is fixed at the stated rate in the interest rate swap agreements plus the incremental borrowing margin.
On November 8, 2016, in connection with the repayment of the Old Term Loan Facility, we 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 was recorded within accumulated other comprehensive (loss) income on the consolidated statements of financial position
and is being amortized into interest expense over the original term of the agreements.
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% on the
$650 million notional amount, and we will receive a floating rate of interest (based on one-month LIBOR, subject to a floor of zero
percent) on the notional amount. Therefore, during the term on the agreement, the effective interest rate on $650 million of the Term
Loan Facility is fixed at a rate of 1.493%, plus the incremental borrowing margin of 2.50%.
Extinguishment of Debt and Repurchase of Notes
In connection with the spin-off of the American Home Shield Segment, we borrowed an aggregate principal amount
of $1 billion under a short-term credit facility on August 1, 2018, the proceeds of which were used to prepay $982 million aggregate
principal amount of term loans outstanding under our senior secured term loan facility. Such prepayment resulted in a loss on
extinguishment of debt of $10 million for the year ended December 31, 2018. On August 16, 2018, Frontdoor incurred in favor of the
Company $350 million aggregate principal of 6.75% Senior Notes due 2026 and a $650 million senior secured term loan facility, and
obtained a $250 million senior secured revolving credit facility. We then transferred and assigned our rights and obligations in respect
of Frontdoor’s senior notes and senior secured term loan facility to the lender under such short-term credit facility through a debt-for-
debt exchange to satisfy our obligations thereunder.
96
On October 1, 2018, in connection with the spin-off of the American Home Shield Segment, Frontdoor’s senior secured term
loan facility and senior notes were included in the transfer of assets and liabilities to Frontdoor, reducing our total long-term debt by
approximately $1 billion.
Interest Rate Swap Agreements
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, 2016
Terminated
Entered into effect
Interest rate swap agreements in effect as of December 31, 2017
Terminated
Entered into effect
Interest rate swap agreements in effect as of December 31, 2018
___________________________________
(1)(cid:3)
Before the application of the applicable borrowing margin.
Notional
Amount
650
—
—
650
—
—
650
$
$
Weighted
Average Fixed
Rate(1)
1.493 %
1.493 %
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
(loss) income. During the year ended December 31, 2018, concurrent with the repayment of $982 million of the term loan facility, we
de-designated approximately $7 million of the interest rate swaps as a cash flow hedge and recognized approximately $1 million of
ineffectiveness within Interest expense on the consolidated statements of operations and comprehensive (loss) income.
Revolving Credit Facility
On November 8, 2016, in connection with our refinancing, we 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, 2018, there were $33 million of letters of credit outstanding
and $267 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 our option, (i) an adjusted LIBOR plus a margin of 2.50% per annum or (ii) an alternate base rate
plus a margin of 1.50% per annum.
2024 Notes
On November 8, 2016, we sold $750 million of 2024 Notes. The 2024 Notes will mature on November 15, 2024 and bear
interest at a rate of 5.125% per annum. The 2024 Notes are jointly and severally guaranteed on a senior unsecured basis by our
domestic subsidiaries that guarantee or 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, 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.
2038 Notes
On September 18, 2017, we purchased $13 million in aggregate principal amount of our 7.25% notes maturing in 2038 at a
price of 104.625% of the principal amount using available cash. On May 11, 2017, we purchased $17 million in aggregate principal
amount of our 7.25% notes maturing in 2038 at a price of 97% of the principal amount using available cash. The repurchased notes
were delivered to the trustee for cancellation. In connection with these partial repurchases, we recorded a loss on extinguishment of
debt of $6 million in the year ended December 31, 2017.
97
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. We were in compliance with the covenants under these agreements at
December 31, 2018.
As of December 31, 2018, future scheduled long-term debt payments are $61 million, $38 million, $67 million, $12 million
and $649 million for the years ended December 31, 2019, 2020, 2021, 2022 and 2023, respectively. Certain of the Company’s assets,
including vehicles and equipment are leased under capital leases with $90 million in remaining lease obligations as of December 31,
2018. The long-term debt payments above include future capital lease payments of approximately $31 million in 2019, $27 million in
2020, $19 million in 2021, $10 million in 2022, and $4 million in 2023.
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 and cash equivalents on the consolidated statements of financial position. As of December 31, 2018 and 2017, our marketable
securities consisted primarily of common debt securities (“Debt securities”) and common equity securities (“Equity securities”). The
amortized cost, fair value and gross realized and unrealized gains and losses of our short- and long-term investments in Debt and
Equity securities are as follows:
(In millions)
Available-for-sale securities, December 31, 2018:
Debt securities
Equity securities
Total securities
Available-for-sale securities, December 31, 2017:
Debt securities
Equity securities
Total securities
Amortized
Cost
Gross Realized Gross Realized
and Unrealized
Losses
and Unrealized
Gains
Fair
Value
$
$
$
$
4 $
15
19 $
4 $
14
18 $
— $
1
1 $
— $
3
3 $
— $
—
— $
— $
—
— $
4
16
21
4
17
21
Following the adoption of ASC 2016-01, we account for equity securities at fair value with adjustments to fair value
recognized in Interest and net investment income in the consolidated statements of operations and comprehensive (loss) income.
Additionally, for the year ended December 31, 2018, approximately $2 million of realized and unrealized gains were recognized in
Interest and net investment income in the consolidated statements of operations and comprehensive (loss) income.
We periodically review our debt securities to determine whether there has been an other than temporary decline in value.
There were no impairment charges due to declines in the value of these investments for the year ended December 31, 2018.
Additionally, we hold minority interests in several strategic investments which do not have readily determinable fair values
and are recorded at cost and are remeasured upon the occurrence of observable price changes or impairments. We account for these
investments at fair value with adjustments to fair value recognized as unrealized gain (loss) on investments in our consolidated
statements of operations and comprehensive (loss) income within Interest and net investment income. The investments are included
within Other Assets on the consolidated statements of financial position. At December 31, 2018, the carrying amount of these
investments is $4 million, which increased approximately $1 million during the year ended December 31, 2018.
Note 14. Comprehensive (Loss) Income
Comprehensive (loss) income, which primarily includes net (loss) income, unrealized gains on derivative instruments and the
effect of foreign currency translation (loss) gain, is disclosed in the consolidated statements of operations and comprehensive (loss)
income. Unrealized gains on marketable securities of $3 million ($2 million, net of tax) were included in other comprehensive income
prior to our adoption of ASU 2016-01 on January 1, 2018. Subsequent to the adoption, these unrealized gains were reclassified to
retained earnings. Additionally, stranded tax effects of approximately $4 million resulting from the corporate income tax rate change
in U.S. Tax Reform were reclassified upon our adoption of ASU 2018-02 on January 1, 2018. The income tax effects remaining in
AOCI will be released into earnings as the related pre-tax amounts are reclassified to earnings.
The following tables summarize the activity in accumulated other comprehensive income, net of the related tax effects.
98
(In millions)
Balance as of December 31, 2016
Other comprehensive income before reclassifications:
Pre-tax amount
Tax provision
After-tax amount
Amounts reclassified from accumulated other comprehensive
(loss) income(1)
Net current period other comprehensive loss
Balance as of December 31, 2017
Reclassification of unrealized gain/loss on equity securities
Reclassification of tax rate change
As revised, January 1, 2018
Other comprehensive income before reclassifications:
Pre-tax amount
Tax provision
After-tax amount
Amounts reclassified from accumulated other comprehensive
income(1)
Net current period other comprehensive income
Balance as of December 31, 2018
___________________________________
Unrealized
(Losses) Gains on
Derivatives
Unrealized
Gains on
Available
-for-Sale
Securities
Foreign
Currency
Translation
(Loss) Gain
Total
$
12 $
1 $
(15) $
(3)
—
—
—
4
4
16 $
—
3
19 $
4
1
3
(3)
1
20 $
2
1
1
—
1
2 $
(2)
1
— $
—
—
—
—
—
— $
3
—
3
—
3
(12) $
—
—
(12) $
(3)
—
(3)
—
(3)
(15) $
5
1
4
4
8
5
(2)
4
7
1
1
—
(3)
(3)
5
$
$
$
(1)(cid:3)
Amounts are net of tax. See reclassifications out of accumulated other comprehensive income below for further details.
Reclassifications out of accumulated other comprehensive income included the following components for the periods
indicated.
(In millions)
Gains (losses) 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
As of December 31,
2017
2016
2018
Consolidated Statements of Operations
and Comprehensive (Loss) Income Location
3 $
1
4
(1)
3 $
— $
—
— $
3 $
3 $
(8)
(6)
2
(4) $
— $
—
— $
(4) $
(4) Cost of services rendered and products sold
(7) Interest expense
(11)
4 Provision for income taxes
(7)
3 Interest and net investment income
(1) Provision for income taxes
2
(5)
Supplemental information relating to the consolidated statements of cash flows is presented in the following table:
(In millions)
Cash paid for or (received from):
Interest expense(1)
Interest and dividend income
Income taxes, net of refunds
Year Ended December 31,
2017
2016
2018
$
123 $
(2)
52
134 $
(1)
109
133
—
72
(1)(cid:3)
For the year ended December 31, 2016, excludes $10 million paid in connection with the termination of interest rate swap
agreements.
99
As of December 31, 2018, Cash and cash equivalents of $224 million and Restricted cash of $89 million as presented on the
consolidated statements of financial position represent the amounts comprising Cash and cash equivalents and restricted cash of $313
million presented on the consolidated statements of cash flows. As of December 31, 2017, Cash and cash equivalents of $192 million
and Restricted cash of $89 million as presented on the consolidated statements of financial position and cash related to discontinued
operations of $282 million represent the amounts comprising Cash and cash equivalents and restricted cash of $563 million presented
on the consolidated statements of cash flows. As of December 31, 2016, Cash and cash equivalents of $123 million and Restricted
cash of $95 million presented on the consolidated statements of financial position and cash related to discontinued operations of $168
million represent the amounts comprising Cash and cash equivalents and restricted cash of $386 million presented on the consolidated
statements of cash flows.
We acquired $36 million, $41 million and $60 million of property and equipment through capital leases and other non-cash
financing transactions in the years ended December 31, 2018, 2017 and 2016, respectively, which have been excluded from the
consolidated statements of cash flows as non-cash investing and financing activities.
In the year ended December 31, 2016, we converted certain company-owned Merry Maids branches to franchises for a total
purchase price of $9 million. In the year ended December 31, 2016, we received cash of $6 million, and provided financing of
$2 million.
Note 16. Capital Stock
We are authorized to issue 2,000,000,000 shares of common stock. As of December 31, 2018, there were 147,209,928 shares
of common stock issued and 135,687,558 shares of common stock outstanding. We have no other classes of equity securities issued or
outstanding.
Note 17. Stock-Based Compensation
In connection with our initial public offering, our board of directors and stockholders adopted the Omnibus Incentive Plan.
Prior to our initial public offering, our board of directors and stockholders had adopted the Amended and Restated ServiceMaster
Global Holdings, Inc. Stock Incentive Plan, as amended as of October 25, 2012 (the “MSIP”). Upon adoption of the Omnibus
Incentive Plan, we 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,
deferred share equivalents, and other stock-based awards. The MSIP provided for the sale of shares and DSUs of our stock to our
executives, officers and other employees and to our directors as well as the grant of RSUs, performance-based RSUs and options to
purchase our shares to those individuals. Our Compensation Committee selects our executive officers, employees and directors
eligible to participate in the Omnibus Incentive Plan and determines the specific number of shares to be offered or options to be
granted to an individual.
On February 24, 2015, our board of directors approved and recommended for approval by our 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 may purchase common stock,
subject to Internal Revenue Service limits, during pre-specified offering periods at a discount established by us 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. Under the Employee Stock Purchase Plan, we
sold 52,051 shares in 2017 and 70,063 shares in 2016. As a result of the American Home Shield spin-off described in Note 1 to the
consolidated financial statements, the Employee Stock Purchase Plan was suspended effective January 1, 2018.
A maximum of 16,396,667 shares of our stock is authorized for issuance under the MSIP, the Omnibus Incentive Plan and
the Employee Stock Purchase Plan, of which, as of December 31, 2018, 6,661,265 shares remain available for future grants. We
currently intend to satisfy any need for our shares of common stock associated with the 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 we expect 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 our stock on the grant date.
Any stock options granted will generally have a term of 10 years and vesting will be subject to an employee’s continued employment.
Our Compensation Committee may accelerate the vesting of an option at any time. In addition, vesting of options will be accelerated
if we experience 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. Our stock option awards also
have a “double trigger provision” that provides for acceleration in the event of a change in control and subsequent termination of the
employee from the acquiring company within 24 months of the change in control. For RSUs granted in July 2018 or thereafter, the
Compensation Committee revised the RSU award agreements to include a double trigger provision relating to the acceleration of
vesting RSUs on a change in control and subsequent termination of the employee from the acquiring company within 24 months of the
change in control. Vesting of options and RSUs granted under the Omnibus Incentive Plan and the MSIP will also be accelerated, in
whole or in part, 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 and RSUs held by an employee are
100
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 our board of directors, the Omnibus Incentive Plan will remain in
effect until June 26, 2024.
In 2018, 2017 and 2016, we completed various equity offerings to certain of our executives, officers and employees pursuant
to the 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 Omnibus Incentive Plan. No other shares of common stock were sold by us in 2018, 2017 or 2016.
Stock Options
We granted our executives, officers and employees options to purchase 502,004; 747,761; and 684,329 shares of our
common stock in 2018, 2017 and 2016, respectively, at a weighted-average exercise price of $55.18 per share for options issued in
2018, $39.27 per share for options issued in 2017, and $39.54 per share for options issued in 2016. 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 our Compensation Committee of the fair market value of our 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 2018, 2017 and 2016, the expected volatility was
based on historical and implied volatilities of our publicly traded stock. 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 we do not have sufficient historical exercises to provide a reasonable basis upon which to estimate
expected life due to the limited period of time our equity shares have been publicly traded. The risk-free interest rates were based on
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
2018
Year Ended December 31,
2017
2016
25.9 %
0.0 %
6.3
27.7 %
0.0 %
6.3
32.3 %
0.0 %
6.3
2.63% - 2.94 %
1.83% - 2.29 %
1.25% - 1.46 %
The weighted-average grant-date fair value of the options granted during 2018, 2017 and 2016 was $17.68, $12.45 and
$13.58 per option, respectively. During the year ended December 31, 2018, we applied a forfeiture assumption of 19.22 percent per
annum in the recognition of the expense related to these options, with the exception of the options held by our CEO for which we
applied a forfeiture rate of zero. The total intrinsic value of stock options exercised during the years ended December 31, 2018, 2017
and 2016, was $6 million, $60 million and $20 million, respectively. The total fair value of stock options vested during the years
ended December 31, 2018, 2017 and 2016, was $3 million, $6 million and $6 million, respectively.
A summary of option activity under the MSIP and Omnibus Incentive Plan as of December 31, 2018 and changes during the
year then ended is presented below:
Total outstanding, December 31, 2017
Granted to employees
Equitable Adjustment
Exercised
Forfeited
Expired
Total outstanding, December 31, 2018
Total exercisable, December 31, 2018
RSUs
Stock
Options
Weighted Avg.
Exercise
Price
1,125,162 $
502,004 $
581,231 $
(232,527) $
(624,641) $
(8,386) $
1,342,843 $
329,287 $
34.84 $
55.18
29.48
27.41
38.21
39.55
29.34 $
21.81 $
Weighted Avg.
Aggregate
Intrinsic
Value
(in millions)
18
Remaining
Contractual
Term
(in years)
8.15
10
5
8.01
6.64
We granted our executives, officers and employees 354,931; 416,604; and 267,739; RSUs in 2018, 2017 and 2016,
respectively, with weighted-average grant date fair values of $52.40 per unit for 2018, $40.51 per unit for 2017, and $39.15 per unit
for 2016, which was equivalent to the then current fair value of our common stock at the grant date. All RSUs outstanding as of
December 31, 2018 will vest in three equal annual installments, subject to an employee’s continued employment. Upon vesting, each
101
RSU will be converted into one share of our common stock. The total fair value of RSUs vested during the years ended December 31,
2018, 2017 and 2016, was $18 million, $7 million and $10 million, respectively.
A summary of RSU activity under the Omnibus Incentive Plan as of December 31, 2018, and changes during the year then ended is
presented below:
Total outstanding, December 31, 2017
Granted to employees
Equitable Adjustment
Vested
Forfeited
Total outstanding, December 31, 2018
Weighted Avg.
RSUs
571,924 $
354,931 $
147,082 $
(306,145) $
(241,048) $
526,744 $
Grant Date
Fair Value
39.26
52.40
32.06
36.09
41.19
35.75
Included within the vested RSUs in the summary of RSU activity above are 97,920 grants of performance RSUs to certain
executives who were key to the American Home Shield spin-off. All such performance RSUs were contingent upon the successful
completion of the spin-off and subject to the employee’s continued employment. All of these performance RSUs vested on October 1,
2018, the date the spin-off occurred.
Performance Shares
We granted our executives 120,778 performance shares in 2017 with a weighted–average grant date fair value of $38.98 per
share and 131,352 performance shares in 2016 with a weighted-average grant date fair value of $39.59 per share, which were
equivalent to the then current fair value of our common stock at the grant date. The performance shares were scheduled to 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 2018 due the complexities in determining longer-term financial goals given the spin-off and
financial separation of the American Home Shield business. Effective July 23, 2018, the performance shares granted in 2016 and 2017
were cancelled by the Compensation Committee to the Board of Directors due to the complexities of adjusting such awards as a
consequence of the spin-off of the American Home Shield business and because the awards were tracking below payout threshold at
the time of cancellation.
A summary of performance share activity under the Omnibus Incentive Plan as of December 31, 2018, and changes during
the year then ended is presented below:
Total outstanding, December 31, 2017
Forfeited
Total outstanding, December 31, 2018
Stock-based compensation expense
Weighted Avg.
Performance
Shares
Grant Date
Fair Value
93,928 $
(93,928) $
— $
38.86
38.86
—
During the years ended December 31, 2018, 2017 and 2016, we recognized stock-based compensation expense of $14 million
($11 million, net of tax), $10 million ($6 million, net of tax) and $12 million ($8 million, net of tax), respectively. These charges are
recorded within Selling and administrative expenses in the consolidated statements of operations and comprehensive (loss) income
and included $3 million of stock-based compensation expense related to retention awards granted to employees instrumental to the
spin-off. For the years ended December 31, 2018, 2017 and 2016, stock-based compensation expense recognized related to employees
of Frontdoor is included within Gain on discontinued operations, net of income taxes on the consolidated statements of operations and
comprehensive (loss) income. Additionally, during the years ended December 31, 2017 and 2016, we recognized $5 million and
$3 million, respectively, of stock-based compensation expense due to the modification of non-vested stock options and RSUs as part
of the severance agreements with the former CEO (2017) and president of Terminix (2016), which has been included in Restructuring
charges in the consolidated statements of operations and comprehensive (loss) income.
As of December 31, 2018, there was $20 million of total unrecognized compensation costs related to non-vested stock
options and RSUs granted under the MSIP and Omnibus Incentive Plan. These remaining costs are expected to be recognized over a
weighted-average period of 2.23 years.
American Home Shield Spin-off
On October 1, 2018, in connection with the spin-off transaction, we adjusted our outstanding share-based awards issued to
employees and directors in accordance with the Separation and Distribution Agreement (the “Equitable Adjustment”). For purposes of
102
the vesting of these share-based awards, continued employment or service with the Company or with Frontdoor is treated as continued
employment for purposes of the Company’s and Frontdoor’s share-based awards. The adjustments were as follows:
In connection with the spin-off, stock options were converted to stock options of each participant’s employer post spin-off.
We completed the Equitable Adjustment by adjusting the exercise price of options held by our employees to reflect the fair market
value of our common stock after giving effect to the spin-off by multiplying the exercise price of such options immediately prior to the
spin-off by a fraction, the numerator of which was the fair market value of a share of our common stock immediately after the spin-off
and the denominator of which was the fair market value of a share of our common stock immediately prior to the spin-off.
To allow our employees to retain the intrinsic value of their stock options prior to the spin-off, we also adjusted the number
of shares underlying the options of such employees. The number of shares underlying the options was adjusted by dividing the total
intrinsic value of the underlying options held by each employee by the fair value of each underlying option immediately following the
spin-off.
In connection with the spin-off, we implemented an RSU Election Program whereby participants could elect to amend their
RSU Awards so that the employee received only RSUs in the participant’s employer post spin-off (“Concentration Election”). If a
Concentration Election was not made the employee would retain their existing ServiceMaster RSUs and receive Frontdoor RSUs
pursuant to the Distribution. If the Concentration Election was made, we adjusted the number of RSU awards to allow employees to
retain the intrinsic value of their RSUs prior to the spin-off. The number of RSUs was adjusted by dividing the total intrinsic value of
the RSUs prior to the spin-off by the share price of the participant’s employer immediately following the spin-off.
The change in the number of shares underlying options and the adjustment of the exercise price pursuant to the Equitable
Adjustment represent modifications to our share-based compensation awards. As a result, we compared the fair value of the awards
following the spin-off with the fair value of the original awards. The comparison did not yield incremental value. Accordingly, we did
not record any incremental compensation expense pursuant to the Equitable Adjustment.
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 debt securities also approximate fair value, with unrealized gains and losses
reported net of tax as a component of accumulated other comprehensive income 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 (loss) income if the decline in value is other than temporary. The carrying amount of total debt was $1,776 million and
$2,778 million and the estimated fair value was $1,791 million and $2,879 million as of December 31, 2018 and December 31, 2017,
respectively. The fair value of our debt is estimated based on available market prices for the same or similar instruments which are
considered significant other observable inputs (Level 2) within the fair value hierarchy. The fair values presented reflect the amounts
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date (exit price). The fair value estimates presented in this report are based on information available to the Company as
of December 31, 2018 and 2017.
We have estimated the fair value of our financial instruments measured at fair value on a recurring basis using the market and
income approaches. For investments in marketable securities, deferred compensation trust assets and derivative contracts, which are
carried at their fair values, our fair value estimates incorporate quoted market prices, other observable inputs (for example, forward
interest rates) and unobservable inputs (for example, forward commodity prices) at the balance sheet date.
Interest rate swap contracts are valued using forward interest rate curves obtained from third-party market data providers. The
fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present
value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as
of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap
contracts.
Fuel swap contracts are valued using forward fuel price curves obtained from third-party market data providers. The fair
value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value.
The expected future settlements are determined by comparing the contract fuel price to the expected forward fuel price as of each
settlement date and applying the difference between the contract and expected prices to the notional gallons in the fuel swap contracts.
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 us from other published sources.
The investment in frontdoor, inc. common stock of $445 million is categorized as a level 2 security as these shares were not
registered as of December 31, 2018. The value of this investment is based on Frontdoor’s common stock price as of December 31,
2018, which represents an identical equity investment under the Securities Act of 1933, as amended.
We have not changed our valuation techniques for measuring the fair value of any financial assets and liabilities during the
year. Transfers between levels, if any, are recognized at the end of the reporting period. There were no significant transfers between
levels during each of the years ended December 31, 2018 and 2017.
103
The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis
for the periods presented are as follows:
Statement of Financial
Position Location
Carrying
Value
Estimated Fair Value Measurements
Significant
Other
Observable
Inputs
(Level 2)
Quoted
Prices In
Active
Markets
(Level 1)
Inputs
(Level 3)
Significant
Unobservable
(In millions)
As of December 31, 2018:
Financial Assets:
Deferred compensation trust
Investment in Frontdoor
Investments in marketable
securities
Interest rate swap contracts
Total financial assets
Financial Liabilities:
Fuel swap contracts
Total financial liabilities
As of December 31, 2017:
Financial Assets:
$
13 $
Long-term marketable securities
Investment in frontdoor, inc.
Long-term marketable securities
Other assets
Other accrued liabilities
$
$
$
445
8
30
496 $
4 $
4 $
12 $
9
3
25
49 $
13 $
—
8
—
21 $
— $
— $
12 $
9
—
—
21 $
— $
445
—
30
475 $
— $
— $
— $
—
25
25 $
—
—
—
—
—
4
4
—
—
3
—
3
Deferred compensation trust
Investments in marketable
Fuel swap contracts
Interest rate swap contracts
Long-term marketable securities
Long-term marketable securities
Prepaid expenses and other assets
Other assets
$
Total financial assets
$
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, 2016
Total (losses) gains (realized and unrealized)
Included in earnings
Included in other comprehensive income
Settlements
Balance as of December 31, 2017
Total gains (losses) (realized and unrealized)
Included in earnings
Included in other comprehensive income
Settlements
Balance as of December 31, 2018
Fuel Swap
Contract
Assets
(Liabilities)
Location of Loss included in Earnings
$
5
3 Cost of services rendered and products sold
(2)
(3)
3
3 Cost of services rendered and products sold
(7)
(3)
(4)
$
104
The following tables present information relating to the significant unobservable inputs of our Level 3 financial instruments:
Fair Value
(in millions)
Valuation
Technique
Unobservable Input
Range
Weighted
Average
As of December 31, 2018:
Fuel swap contracts
$
As of December 31, 2017:
Fuel swap contracts
$
(4) Discounted
Cash Flows
Forward Unleaded Price per Gallon(1)
$2.09 - $2.43
$
2.26
3 Discounted
Cash Flows
Forward Unleaded Price per Gallon(1)
$2.43 - $2.90
$
2.66
___________________________________
(1)(cid:3)
Forward prices per gallon were derived from third-party market data providers. A decrease in the forward price would result
in an increase in the fair value liability of the fuel swap contracts.
We use derivative financial instruments to manage risks associated with changes in fuel prices and interest rates. We do not
hold or issue derivative financial instruments for trading or speculative purposes. In designating derivative financial instruments as
hedging instruments under accounting standards for derivative instruments, we formally document the relationship between the
hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument.
This documentation includes linking the derivatives to forecasted transactions. We assess at the time a derivative contract is entered
into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the projected changes in cash flows of the
associated forecasted transactions. All of our designated hedging instruments are classified as cash flow hedges.
We have historically hedged a significant portion of our annual fuel consumption. We have also historically hedged the
interest payments on a portion of our variable rate debt through the use of interest rate swap agreements. All of our fuel swap contracts
and interest rate swap contracts are classified as cash flow hedges, and, as such, the hedging instruments are recorded on the
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. 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, 2018, 2017 and 2016. As of December 31, 2018, we had
fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $30 million, maturing through 2018. Under the
terms of our fuel swap contracts, we are required to post collateral in the event that the fair value of the contracts exceeds a certain
agreed upon liability level and in other circumstances required by the counterparty. As of December 31, 2018, we had posted
$2 million in letters of credit as collateral under our fuel hedging program, which were issued under the Revolving Credit Facility.
The effective portion of the gain or loss on derivative instruments designated and qualifying as cash flow hedging
instruments is recorded in accumulated other comprehensive income. These amounts are reclassified into earnings in the same period
or periods during which the hedged forecasted debt interest settlement or the fuel settlement affects earnings. See Note 14 to the
consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in accumulated other
comprehensive income and for the amounts reclassified out of accumulated other comprehensive income and into earnings. The
amount expected to be reclassified into earnings during the next 12 months includes unrealized gains and losses related to open fuel
hedges and interest rate swaps. Specifically, as the underlying forecasted transactions occur during the next 12 months, the hedging
gains and losses in accumulated other comprehensive income expected to be recognized in earnings is a gain of $8 million, net of tax,
as of December 31, 2018. 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.
105
Note 19. Earnings Per Share
Basic earnings per share is computed by dividing net (loss) income by the weighted-average number of shares of common
stock outstanding. Diluted earnings per share is computed by dividing net (loss) 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 (loss) 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
diluted earnings per share from continuing operations is as follows:
(In millions, except per share data)
(Loss) 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 (loss) earnings per share from continuing operations
Diluted (loss) earnings per share from continuing operations
___________________________________
Year Ended December 31,
2017
2018
2016
$
(163) $
135.5
341 $
134.4
—
—
135.5
(1.20) $
(1.20) $
0.1
0.9
135.4
2.54 $
2.52 $
$
$
2
135.3
0.2
1.8
137.3
0.01
0.01
(1)(cid:3)
Options to purchase 0.9 million and 0.3 million shares for the years ended December 31, 2017 and 2016, respectively, were
not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.
Securities are not included in the table in periods when antidilutive. For the year ended December 31, 2018, weighted average
potentially dilutive shares from RSUs of 0.2 million and weighted average potentially dilutive shares from stock options of 0.4 million
with a weighted average exercise price of $29.34 were excluded from the dilutive (loss) earnings per share calculation due to the
antidilutive effect such shares would have had on net loss per common share.
Note 20. Subsequent Events
From January 1, 2019 through February 28, 2019, we completed 11 pest control acquisitions, for an aggregate purchase price
of approximately $94 million.
106
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ServiceMaster Global Holdings, Inc.
Memphis, Tennessee
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of ServiceMaster Global Holdings, Inc. and subsidiaries (the
“Company”) as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2018, of
the Company and our report dated February 28, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
February 28, 2019
107
Quarterly Operating Results (Unaudited)
Quarterly operating results for the last two years are shown in the table below. As a result of the Separation on October 1,
2018, the historical results of the American Home Shield segment are reported as discontinued operations for all periods presented
herein. For all periods after the Separation, discontinued operations includes spin-off transaction costs primarily related to transaction
fees to effect the spin-off and receipts pursuant to the transition services agreement.
(in millions, except per share data)
Operating Revenue
Gross Profit
Income from Continuing Operations(1)
Gain (loss) from Discontinued Operations, net of income taxes
Net (Loss) Income(1)
Basic earnings per share:
Income from Continuing Operations
Gain (loss) from Discontinued Operations, net of income taxes
Net (Loss) Income
Diluted earnings per share:
Income from Continuing Operations
Gain (loss) from Discontinued Operations, net of income taxes
Net (Loss) Income
(in millions, except per share data)
Operating Revenue
Gross Profit
Income from Continuing Operations(1)
Loss from Discontinued Operations, net of income taxes
Net (Loss) Income(1)
Basic earnings per share:
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Net (Loss) Income
Diluted earnings per share:
Income from Continuing Operations
Loss from Discontinued Operations, net of income taxes
Net (Loss) Income
Second
Quarter
2018
Third
Fourth
Quarter
Quarter
Year
First
Quarter
$
428 $
201
17
23
40
520 $
248
40
56
96
496 $
218
18
53
71
457 $
192
(237)
(11)
(248)
0.12
0.17
0.30
0.12
0.17
0.30
0.29
0.42
0.71
0.29
0.42
0.71
0.13
0.39
0.52
0.13
0.39
0.52
(1.75)
(0.08)
(1.83)
(1.75)
(0.08)
(1.83)
1,900
860
(163)
122
(41)
(1.20)
0.90
(0.30)
(1.20)
0.90
(0.30)
Second
Quarter
2017
Third
Fourth
Quarter
Quarter
Year
First
Quarter
$
415 $
191
15
23
39
0.11
0.17
0.29
0.11
0.17
0.29
481 $
229
30
55
85
0.23
0.41
0.64
0.22
0.41
0.63
450 $
200
19
61
80
0.14
0.45
0.60
0.14
0.45
0.59
409 $
174
276
30
306
2.04
0.22
2.26
2.04
0.22
2.26
1,755
794
341
169
510
2.54
1.26
3.79
2.52
1.25
3.76
108
(1)(cid:3)
The results include restructuring charges primarily related to an initiative to enhance capabilities and reduce costs in the
Company’s corporate functions, severance costs related to the former CEO and other executives and costs related to the
relocation of the Company’s Global Service Center. The table below summarizes the pre-tax and after-tax restructuring
charges, by quarter, for 2018 and 2017.
(in millions)
Pre-tax
After-tax
(in millions)
Pre-tax
After-tax
First
Quarter
$
$
12 $
9 $
Second
Quarter
2018
Third
Fourth
Quarter
Quarter
Year
— $
1 $
1 $
— $
4 $
3 $
17
13
First
Quarter
$
$
2 $
1 $
Second
Quarter
2017
Third
Fourth
Quarter
Quarter
Year
1 $
1 $
14 $
10 $
4 $
2 $
21
14
The results for the first, third and fourth quarters of 2018 include $5 million ($4 million, net of tax), $1 million ($0 million,
net of tax) and $4 million ($3 million, net of tax), respectively, of severance and other costs. The results for the first, third and
fourth quarters of 2017 include $1 million ($1 million, net of tax), $11 million ($8 million, net of tax) and $2 million ($2
million, net of tax), respectively, of severance and other costs and stock-based compensation expense.
The results for the first and second quarters of 2018 include $7 million ($5 million, net of tax) and less than $1 million ($1
million, net of tax), respectively, of Global Service Center relocation costs. The results for the first, second, third and fourth
quarters of 2017 include charges of $1 million ($0 million, net of tax), $1 million ($0 million, net of tax), $3 million ($2
million, net of tax) and $1 million ($1 million, net of tax), respectively, of Global Service Center relocation costs.
The results for the second, third and fourth quarters of 2018 include $1 million ($1 million, net of tax), $1 million ($0
million, net of tax) and $3 million ($3 million, net of tax), respectively, of acquisition-related costs.
The results for the third and fourth quarters of 2018 include $1 million ($0 million, net of tax) and $3 million ($2 million, net
of tax), respectively, for fumigation related matters. The results for the fourth quarter of 2017 include charges of $4 million ($4
million, net of tax) for fumigation related matters.
The results for the fourth quarter of 2018 include $249 million ($249 million, net of tax) of mark-to-market losses on the
investment in frontdoor, inc.
The results for the third quarter of 2018 include losses on extinguishment of debt of $10 million ($8 million, net of tax)
related to prepayment of term loans outstanding under our senior secured term loan facility. The results for the second and third
quarters of 2017 include losses on extinguishment of debt of $3 million ($1 million, net of tax) and $3 million ($1 million, net of tax)
related to partial repurchases of the Company’s 2038 Notes.
The results for the fourth quarter of 2017 includes $3 million ($2 million, net of tax) of a benefit related to the reversal of
expenses accrued related to the 401(k) Plan.
109
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, Nikhil M. Varty, and Senior Vice President and CFO, Anthony D. DiLucente, 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. Varty and DiLucente have concluded that both the design and operation of the Company’s disclosure controls and
procedures were effective as of December 31, 2018.
Changes in internal control over financial reporting
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 2018 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
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.
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.
The Company’s management assessed, under the supervision and with the participation of the Company’s CEO, Nikhil M.
Varty, and Senior Vice President and CFO, Anthony D. DiLucente, the effectiveness of its internal control over financial reporting as
of December 31, 2018. 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, 2018, 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, 2018 and has expressed an unqualified opinion in their report
which is included herein.
ITEM 9B. OTHER INFORMATION
Stockholders of the Company approved the Executive Annual Bonus Plan ("EABP") at the 2015 Annual Meeting of
Stockholders, providing for a maximum bonus that can be paid to any executive officer equal to one percent of Adjusted EBITDA.
The U.S. Tax Reform eliminated deductions under Section 162(m) of the Code rendering the EABP ineffective for its intended
purpose. Although effective for the 2018 fiscal year, the Compensation Committee terminated the EABP effective as of February 18,
2019.
110
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 2019 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 2019 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 2019 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 2019 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 2019 Annual
Meeting of Stockholders, which information is hereby incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a). Financial Statements, Schedules and Exhibits.
1. Financial Statements
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 (Loss) Income for the years ended December 31, 2018, 2017 and
2016 contained in Item 8 of this Annual Report on Form 10-K.
(cid:25)(cid:27)
(cid:25)(cid:28)
Consolidated Statements of Financial Position as of December 31, 2018 and 2017 contained in Item 8 of this Annual Report on
(cid:26)(cid:19)
Form 10-K.
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 contained in Item 8 of
(cid:26)(cid:20)
this Annual Report on Form 10-K.
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 contained in Item 8 of this
(cid:26)(cid:21)
Annual Report on Form 10-K.
Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
2. Exhibits
(cid:26)(cid:23)
(cid:20)(cid:20)(cid:21)
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.
3. 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 II—Valuation and Qualifying Accounts
ITEM 16. FORM 10-K SUMMARY
None.
(cid:20)(cid:21)(cid:19)
111
Exhibit
Number
EXHIBIT INDEX
Description
2.1 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.
2.2 Separation and Distribution Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings,
Inc. and frontdoor, inc. is incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of ServiceMaster
Global Holdings, Inc., filed October 1, 2018.
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
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 July 1997 and finalized 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 July 28, 1997.
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.
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 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 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.
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 July 28, 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.
112
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.
4.14
Indenture, dated as of August 16, 2018, among frontdoor, inc., 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 August 20, 2018.
4.15
First Supplemental Indenture, dated as of August 16, 2018, among frontdoor, inc., 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 August 20, 2018.
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 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 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.
113
10.6 # 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.
10.7 # 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, 2008.
10.8 # 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 March 28,
2008.
10.9 # 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.
10.10 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.
10.11 * Schedule of Signatories to a Director Indemnification Agreement.
10.12 # 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.
10.13 ServiceMaster Global Holdings, Inc. Directors’ Deferred Compensation Plan as awarded and restated October 24, 2017, is
incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2017, filed November 1, 2017.
10.14 # 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”).
10.15 # 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.
10.16 # ServiceMaster Global Holdings, Inc. Employee Stock Purchase Plan is incorporated by reference to Annex C to the 2015
Proxy Statement for stock purchases made prior to 2019.
10.17 # 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.
10.18 # 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.
10.19 # Form of Employee Stock Option Agreement under the Omnibus Plan for awards granted between February 22, 2016 and
July 22, 2018 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.
10.20 # 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.
114
10.21 # 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.
10.22 # Form of Employee Restricted Stock Unit Agreement under the Omnibus Plan for awards granted between February 22,
2016 and July 22, 2018 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.
10.23 # 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.
10.24 # Form of Performance Share Agreement under the Omnibus Plan for awards granted on or after February 20, 2017 is
incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K for the year ended December 31, 2016,
filed February 24, 2017.
10.25 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.
10.26 # 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, is incorporated by reference to Exhibit 10.33 to the
Annual Report on Form 10-K for the year ended December 31, 2016, filed February 24, 2017.
10.27 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.
10.28 # Employment Agreement, dated as of July 26, 2017, by and between Nikhil M. Varty and ServiceMaster Global Holdings,
Inc. is incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2017, filed August 1, 2017.
10.29 # Performance Restricted Stock Unit Agreement, dated as of July 26, 2017, by and between Nikhil M. Varty and
ServiceMaster Global Holdings, Inc. is incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2017, filed August 1, 2017.
10.30 # Employee Restricted Stock Agreement, dated as of July 26, 2017, by and between Nikhil M. Varty and ServiceMaster
Global Holdings, Inc. is incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2017, filed August 1, 2017.
10.31 # Employee Stock Option Agreement, dated as of July 26 2017, by and between Nikhil M. Varty and ServiceMaster Global
Holdings, Inc. is incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2017, filed August 1, 2017.
10.32 # Form of Performance Restricted Stock Unit Agreement under the Amended and Restated ServiceMaster Global Holdings,
Inc. 2014 Omnibus Incentive Plan (“Omnibus Plan”) for awards granted as of July 26, 2017, which awards will 100% vest
on the spin-off of American Home Shield from ServiceMaster is incorporated by reference to Exhibit 10.6 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed August 1, 2017.
10.33 # Form of Performance Restricted Stock Unit Agreement under the Omnibus Plan for awards granted as of July 26, 2017,
which will 50% vest on the spin-off of American Home Shield, and the other 50% vest on the first anniversary of the
spin-off from ServiceMaster is incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-
Q for the quarter ended June 30, 2017, filed August 1, 2017.
115
10.34 # Separation Agreement and General Release entered into with Martin Wick, dated December 31, 2017, is incorporated by
reference to Exhibit 1.41 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed
February 28, 2018.
10.35 # Severance Agreement and General Release, dated as of February 28, 2018, between Marvin O. Davis and The
ServiceMaster Company, LLC is incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2018, filed May 2, 2018
10.36 # Severance Agreement and General Release, dated as of March 31, 2018, between James T. Lucke and The ServiceMaster
Company, LLC is incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2018, filed May 2, 2018.
10.37 Form of Director Deferred Share Equivalent Agreement under the Omnibus Plan is incorporated by reference to Exhibit
10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed May 2, 2018.
10.38 # Employment Agreement, dated as of May 15, 2018, between Rex Tibbens and American Home Shield is incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed
August 1, 2018.
10.39 # Sign-on Restricted Stock Unit Agreement, dated as of May 15, 2018, with Rex Tibbens is incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed August 1, 2018.
10.40 # Sign-on Stock Option Agreement, dated as of May 15, 2018, with Rex Tibbens is incorporated by reference to Exhibit
10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed August 1, 2018.
10.41 # Restricted Stock Unit Agreement, dated as of May 15, 2018, with Rex Tibbens is incorporated by reference to Exhibit
10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed August 1, 2018.
10.42 # Stock Option Agreement, dated as of May 15, 2018, with Rex Tibbens is incorporated by reference to Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed August 1, 2018.
10.43 # Indemnification Agreement, dated as of May 15, 2018, between Rex Tibbens and ServiceMaster Global Holdings, Inc. is
incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2018, filed August 1, 2018.
10.44 # Form of Employee Stock Option Agreement under the ServiceMaster Global Holdings, Inc. 2014 Omnibus Incentive Plan
for awards granted between July 23, 2018 and February 17, 2019 is incorporated by reference to Exhibit 10.8 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed August 1, 2018.
10.45 # Form of Employee Restricted Stock Unit Agreement under the ServiceMaster Global Holdings, Inc. 2014 Omnibus
Incentive Plan for awards granted on or after July 23, 2018 is incorporated by reference to Exhibit 10.9 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed August 1, 2018.
10.46 # Form of Performance Share Termination Agreement is incorporated by reference to Exhibit 10.10 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed August 1, 2018.
10.47 # Transition Services Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and
frontdoor, inc. is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of ServiceMaster Global
Holdings, Inc., filed October 1, 2018.
116
10.48 Tax Matters Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and
frontdoor, inc. is incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of ServiceMaster Global
Holdings, Inc., filed October 1, 2018.
10.49 Employee Matters Agreement, dated as of September 28, 2018, by and between ServiceMaster Global Holdings, Inc. and
frontdoor, inc. is incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of ServiceMaster Global
Holdings, Inc., filed October 1, 2018.
10.50 Stockholder and Registration Rights Agreement, dated as of September 28, 2018, by and between ServiceMaster Global
Holdings, Inc. and frontdoor, inc. is incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of
ServiceMaster Global Holdings, Inc., filed October 1, 2018.
10.51 Credit Agreement, dated as of August 16, 2018, among frontdoor, inc., as borrower, The ServiceMaster Company, LLC,
as initial term loan lender, JPMorgan Change Bank, N.A., as administrative agent, and the other lenders and agents party
thereto from time to time, is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of
ServiceMaster Global Holdings, Inc., filed August 20, 2018.
10.52 Credit Agreement, dated as of August 1, 2018, among The ServiceMaster Company, LLC, JPMorgan Chase Bank N.A.,
as administrative agent, the lenders and other financial institutions party thereto, is incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K of ServiceMaster Global Holdings, Inc. filed August 7, 2018.
10.53 #* Separation Agreement and General Release entered into with Susan Hunsberger, dated October 3, 2018.
10.54 #* Form Employee Stock Option Agreement under the Omnibus Plan for awards granted on or after February 18, 2019.
10.55 #* ServiceMaster Global Holdings, Inc. Employee Stock Purchase Plan as amended and restated as of February 19, 2019.
21 * List of Subsidiaries as of December 31, 2018.
23 * Consent of Deloitte & Touche LLP.
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.
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.
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.
101.INS * XBRL Instance Document
101.SCH * XBRL Taxonomy Extension Schema
101.CAL * XBRL Taxonomy Extension Calculation Linkbase
101.DEF * XBRL Taxonomy Extension Definition Linkbase
117
101.LAB * XBRL Taxonomy Extension Label Linkbase
101.PRE * XBRL Extension Presentation Linkbase
________________________________________________________
# Denotes management compensatory plans, contracts or arrangements.
* Filed herewith.
118
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.
SIGNATURES
Date: February 28, 2019
SERVICEMASTER GLOBAL HOLDINGS, INC.
By:
/s/ NIKHIL M. VARTY
Name: Nikhil M. Varty
Title: Chief Executive Officer
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.
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
Date: February 28, 2019
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ MARK E. TOMKINS
Name: Mark E. Tomkins
Title: Director, Chairman of the Board
/s/ NIKHIL M. VARTY
Name: Nikhil M. Varty
Title: Chief Executive Officer and Director
(Principal Executive Officer)
/s/ ANTHONY D. DILUCENTE
Name: Anthony D. DiLucente
Title:
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
/s/ JOHN P. MULLEN
Name: John P. Mullen
Title: Vice President, Controller and Chief Accounting
Officer (Principal Accounting Officer)
/s/ JOHN B. CORNESS
Name: John B. Corness
Title: Director
/s/ LAURIE ANN GOLDMAN
Name: Laurie Ann Goldman
Title: Director
/s/ NAREN K. GURSAHANEY
Name: Naren K. Gursahaney
Title: Director
/s/ STEVEN B. HOCHHAUSER
Name: Steven B. Hochhauser
Title: Director
/s/ STEPHEN J. SEDITA
Name: Stephen J. Sedita
Title: Director
119
SCHEDULE II
SERVICEMASTER GLOBAL HOLDINGS, INC.
Valuation and Qualifying Accounts
(In millions)
Balance at
Beginning of
Period
Additions
Charged to
Costs and
Expenses
Deductions(1)
Balance at
End of
Period
As of and for the year ending December 31, 2018:
Continuing Operations—
Allowance for doubtful accounts
Accounts receivable
Notes receivable
Income tax valuation allowance
As of and for the year ending December 31, 2017:
Continuing Operations—
Allowance for doubtful accounts
Accounts receivable
Notes receivable
Income tax valuation allowance
As of and for the year ending December 31, 2016:
Continuing Operations—
Allowance for doubtful accounts
Accounts receivable
Notes receivable
Income tax valuation allowance
___________________________________
$
$
$
21 $
1
11
19 $
2
7
19 $
2
7
24 $
(1)
—
31 $
—
4
28 $
—
2
24 $
—
—
30 $
—
—
28 $
1
2
(1)(cid:3)
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 2018, 2017 and 2016 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.
20
1
11
21
1
11
19
2
7
120
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Board of Directors
Stockholder Information
SEC Reports
ServiceMaster maintains a
website at 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
charge 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 sec.gov,
from which interested persons
can also access our reports
electronically.
Mark Tomkins
Nikhil Varty
John Corness
Laurie Ann Goldman
Naren Gursahaney
Steven Hochhauser
Stephen Sedita
Executive Leadership
Nikhil Varty
Chief Executive Officer
Anthony DiLucente
Chief Financial Officer
Michael Bisignano
Senior Vice President,
General Counsel and Secretary
David Dart
Chief Human Resources Officer
Pratip Dastidar
Senior Vice President and
Chief Transformation Officer
Robert Doty
Chief Information Officer
Deni Naumann
Interim President, Terminix
Commercial;
President, Copesan Services, Inc.
Dion Persson
Senior Vice President, Strategy and
Business Development
Matthew Stevenson
President, Terminix Residential
Mary Kay Wegner
President, ServiceMaster Brands
Corporate Offices
150 Peabody Place
Memphis, TN 38103
901 597 1400
Corporate Website
servicemaster.com
Common Stock
Ticker Symbol — SERV
Listed New York Stock Exchange
Investor Relations
Jesse Jenkins
Treasurer & Vice President,
Investor Relations
150 Peabody Place
Memphis, TN 38103
901 597 3282
Annual Meeting Details
April 30, 2019, 2 p.m. Central
Marriott Milwaukee West Hotel
W 231 N 1600 Corporate Court
Waukesha, WI 53186
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
Memphis, TN
Transfer Agent
Computershare
Trust Company N.A.
211 Quality Circle, Suite 210
College Station, TX 77845
877 373 6374
computershare.com
Annual report design by Morgan Design (NYC)
Terminix Field Technician Brenda Bell rang the NYSE closing bell for ServiceMaster on Dec. 10, 2018.
About This Report
Every day, our ServiceMaster employees, service partners and franchise associates serve more than
50,000 customers, providing cleaner, healthier and safer environments wherever they are — at home,
at work or at play. Our customers have come to trust us during some of the most important moments of
their lives, whether protecting them from the effects of pests, helping them recover from the trauma of
unexpected disasters or keeping their homes clean and businesses orderly, so they can live hassle-free
lives. Our frontline serves our customers with passion because they care deeply about the work they do
and the relationships they have built.
We are continually redefining what service means for our company – and the work is starting on
our frontlines by harnessing their passion to make our services exceptional. How are individual field
technicians reimagining service? What do bed bugs, hurricanes and wedding dresses have to do with
creating growth? The stories highlighted in the following pages are just the beginning in a chronicle
about getting service right ... a chronicle that is the foundation for accelerating our growth.
We serve our customers by
We care deeply about the
We consistently deliver on our
providing exceptional customer
health, safety and wellbeing of
commitments to our customers, our
experiences that exceed their
our customers, associates and
employees and our shareholders.
expectations.
communities and constantly seek
new and better ways of
protecting them and improving
their environments in a
sustainable way.
One ServiceMaster Center150 Peabody PlaceMemphis, TN 38103servicemaster.comGrowth ThroughService2018 Annual Report ServiceMaster 2018 Annual Report