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TMX Terminix Global

Filed: 9 Nov 20, 1:42pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-36507

________________________________________________

Terminix Global Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-8738320

(State or other jurisdiction of incorporation or organization)

(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)

ServiceMaster Global Holdings, Inc.

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common, par value $0.01

TMX

NYSE

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 x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company o

Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares of the registrant’s common stock outstanding as of November 2, 2020: 132,107,419 shares of common stock, par value $0.01 per share.

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In millions, except per share data)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

Revenue

$

512

$

465

$

1,502

$

1,378

Cost of services rendered and products sold

299

278

876

790

Selling and administrative expenses

140

137

423

398

Amortization expense

9

6

26

16

Acquisition-related costs

(1)

8

12

Mobile Bay Formosan termite settlement

49

49

Restructuring and other charges

2

4

14

12

Realized (gain) on investment in frontdoor, inc.

(40)

Interest expense

22

19

67

64

Interest and net investment income

(1)

(1)

(2)

(4)

Loss on extinguishment of debt

1

1

6

(Loss) Income from Continuing Operations before Income Taxes

(7)

13

50

124

Provision for income taxes

15

4

31

22

Equity in earnings of joint ventures

1

2

(Loss) Income from Continuing Operations

(21)

8

20

103

Net earnings from discontinued operations

14

17

40

51

Net (Loss) Income

$

(7)

$

25

$

61

$

154

Total Comprehensive Income

$

(16)

$

18

$

3

$

141

Weighted-average common shares outstanding - Basic

132.0

135.8

132.9

135.9

Weighted-average common shares outstanding - Diluted

132.0

136.5

133.1

136.5

Basic Earnings Per Share:

(Loss) Income from Continuing Operations

$

(0.17)

$

0.06

$

0.14

$

0.76

Net (Loss) Income

(0.06)

0.19

0.44

1.13

Diluted Earnings Per Share:

(Loss) Income from Continuing Operations

$

(0.17)

$

0.06

$

0.14

$

0.75

Net (Loss) Income

(0.06)

0.19

0.44

1.13

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Financial Position (Unaudited)

(In millions, except share data)

As of

As of

September 30,

December 31,

2020

2019

Assets:

Current Assets:

Cash and cash equivalents

$

288

$

280

Receivables, less allowances of $24 and $22, respectively

214

178

Inventories

40

46

Prepaid expenses and other assets

73

81

Current assets held for sale

892

45

Total Current Assets

1,507

629

Other Assets:

Property and equipment, net

181

204

Operating lease right-of-use assets

83

95

Goodwill

2,127

2,096

Intangible assets, primarily trade names, service marks and trademarks, net

1,113

1,169

Restricted cash

89

89

Notes receivable

32

32

Long-term marketable securities

13

13

Deferred customer acquisition costs

105

94

Other assets

76

68

Long-term assets held for sale

834

Total Assets

$

5,326

$

5,322

Liabilities and Stockholders' Equity:

Current Liabilities:

Accounts payable

$

100

$

96

Accrued liabilities:

Payroll and related expenses

92

54

Self-insured claims and related expenses

87

72

Accrued interest payable

17

16

Other

159

82

Deferred revenue

104

107

Current portion of lease liability

17

19

Current portion of long-term debt

100

69

Current liabilities held for sale

62

42

Total Current Liabilities

740

557

Long-Term Debt

1,565

1,666

Other Long-Term Liabilities:

Deferred taxes

480

499

Other long-term obligations, primarily self-insured claims

203

158

Long-term lease liability

99

110

Long-term liabilities held for sale

11

Total Other Long-Term Liabilities

783

777

Commitments and Contingencies (Note 6)

 

 

Stockholders' Equity:

Common stock $0.01 par value (authorized 2,000,000,000 shares with 148,256,197 shares issued and 132,043,971 outstanding at September 30, 2020 and 147,872,959 shares issued and 135,408,054 outstanding at December 31, 2019)

2

2

Additional paid-in capital

2,352

2,334

Retained Earnings

351

291

Accumulated other comprehensive (loss) income

(49)

9

Less common stock held in treasury, at cost (16,212,226 shares at September 30, 2020 and 12,464,905 shares at December 31, 2019)

(417)

(313)

Total Stockholders' Equity

2,239

2,322

Total Liabilities and Stockholders' Equity

$

5,326

$

5,322

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements


Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(In millions)

Retained

Accumulated

Additional

Earnings

Other

Common

Paid-in

(Accumulated

Comprehensive

Treasury

Total

Shares

Stock

Capital

Deficit)

(Loss) Income

Shares

Amount

Equity

Balance December 31, 2018

147

$

2

$

2,309

$

156

$

5

(12)

$

(267)

$

2,204

Net income

70

70

Other comprehensive loss, net of tax

(2)

(2)

Total comprehensive income (loss)

70

(2)

68

Exercise of stock options

5

5

Stock-based employee compensation

4

4

Repurchase of common stock

(2)

(2)

Balance March 31, 2019

148

$

2

$

2,318

$

226

$

3

(12)

$

(269)

$

2,280

Net income

59

59

Other comprehensive income, net of tax

(4)

(4)

Total comprehensive income (loss)

59

(4)

55

Exercise of stock options

4

4

Stock-based employee compensation

4

4

Repurchase of common stock

(15)

(15)

Balance June 30, 2019

148

$

2

$

2,326

$

285

$

(1)

(12)

$

(283)

$

2,329

Net income

25

25

Other comprehensive income, net of tax

(7)

(7)

Total comprehensive income

25

(7)

18

Issuance of common stock

3

3

Exercise of stock options

1

1

Stock-based employee compensation

3

3

Repurchase of common stock

(16)

(16)

Balance September 30, 2019

148

$

2

$

2,330

$

313

$

(8)

(12)

$

(300)

$

2,337

Balance December 31, 2019

148

$

2

$

2,334

$

291

$

9

(12)

$

(313)

$

2,322

Net income

14

14

Other comprehensive loss, net of tax

(50)

(50)

Total comprehensive income (loss)

14

(50)

(36)

Exercise of stock options

2

2

Stock-based employee compensation

5

5

Repurchase of common stock

(4)

(103)

(103)

Balance March 31, 2020

148

$

2

$

2,341

$

305

$

(41)

(16)

$

(417)

$

2,190

Net income

53

53

Other comprehensive loss, net of tax

1

1

Total comprehensive income

53

1

54

Stock-based employee compensation

6

6

Balance June 30, 2020

148

$

2

$

2,348

$

358

$

(40)

(16)

$

(417)

$

2,251

Net loss

(7)

(7)

Other comprehensive loss, net of tax

(10)

(10)

Total comprehensive income (loss)

(7)

(10)

(16)

Stock-based employee compensation

4

4

Balance September 30, 2020

148

$

2

$

2,352

$

351

$

(49)

(16)

$

(417)

$

2,239

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

Nine Months Ended

September 30,

2020

2019

Cash and Cash Equivalents and Restricted Cash at Beginning of Period

$

368 

$

313 

Cash Flows from Operating Activities from Continuing Operations:

Net Income

61

154

Adjustments to reconcile net income to net cash provided from operating activities:

Net earnings from discontinued operations

(40)

(51)

Depreciation expense

55

53

Amortization expense

26

16

Amortization of debt issuance costs

3

2

Amortization of lease right-of-use assets

14

14

Mobile Bay Formosan termite settlement

49

Payments on fumigation related matters

(2)

Realized (gain) on investment in frontdoor, inc.

(40)

Loss on extinguishment of debt

6

Deferred income tax provision

12

Stock-based compensation expense

13

10

Restructuring and other charges

14

12

Payments for restructuring and other charges

(9)

(13)

Acquisition-related costs

12

Payments for acquisition-related costs

(4)

(6)

Other

(24)

(26)

Change in working capital, net of acquisitions:

Receivables

(44)

(13)

Inventories and other current assets

(4)

(11)

Accounts payable

12

16

Deferred revenue

(1)

4

Accrued liabilities

52

(7)

Accrued interest payable

1

7

Current income taxes

39

3

Net Cash Provided from Operating Activities from Continuing Operations

211

152

Cash Flows from Investing Activities from Continuing Operations:

Property additions

(20)

(19)

Sale of equipment and other assets

6

1

Business acquisitions, net of cash acquired

(29)

(338)

Origination of notes receivable

(26)

(81)

Collections on notes receivable

32

89

Net Cash Used for Investing Activities from Continuing Operations

(37)

(348)

Cash Flows from Financing Activities from Continuing Operations:

Borrowings of debt

720

Payments of debt

(103)

(639)

Debt issuance costs paid

(2)

Repurchase of common stock

(103)

(33)

Issuance of common stock

4

10

Net Cash (Used For) Provided From Financing Activities from Continuing Operations

(205)

57

Cash Flows from Discontinued Operations:

Cash provided from operating activities

43

59

Cash used for investing activities

(1)

(4)

Cash used for financing activities

(1)

(1)

Net Cash Provided from Discontinued Operations

41

54

Effect of Exchange Rate Changes on Cash

(1)

Cash Increase During the Period

9

(85)

Cash and Cash Equivalents and Restricted Cash at End of Period

$

377

$

228

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements 

TERMINIX GLOBAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

Terminix Global Holdings, Inc. (formerly known as ServiceMaster Global Holdings, Inc.) and its majority-owned subsidiary partnerships, limited liability companies and corporations (collectively, “Terminix,” the “Company,” “we,” “us” and “our”) is a leading provider of essential services to residential and commercial customers in the termite and pest control markets. Our portfolio of well‑recognized brands includes Terminix (residential termite and pest control), Terminix Commercial (commercial termite and pest control), Copesan (commercial national accounts pest management), Assured Environments (commercial pest control), Gregory Pest Solutions (commercial pest control), McCloud Services (commercial pest control), Nomor (European pest control), Pelias (European pest control) and Terminix UK (European pest control). All consolidated Company subsidiaries are wholly-owned. Intercompany transactions and balances have been eliminated.

The unaudited condensed consolidated financial statements have been prepared by us in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). We recommend that the quarterly unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC (the “2019 Form 10-K”). The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results that might be achieved for any other interim period or for the full year.

Sale of ServiceMaster Brands

On January 21, 2020, we announced we were exploring strategic alternatives related to ServiceMaster Brands, including the potential sale of the business. The divestiture group includes the assets and liabilities of the ServiceMaster Brands businesses, which is comprised of the Amerispec, Furniture Medic, Merry Maids, ServiceMaster Clean and ServiceMaster Restore brands, certain assets and liabilities of ServiceMaster Acceptance Corporation, our financing subsidiary that was historically reported as part of European Pest Control and Other, and the ServiceMaster trade name (the “ServiceMaster Brands Divestiture Group”). These operations were reported in our Annual Report on Form 10-K as part of continuing operations. Beginning with the quarterly report on Form 10-Q for the period ended March 31, 2020, the ServiceMaster Brands business was classified as held for sale and reported in discontinued operations for all periods presented. On October 1, 2020, we completed the sale of the ServiceMaster Brands Divestiture Group for $1,553 million to RW Purchaser LLC, an affiliate of investment funds managed by Roark Capital Management LLC (“Roark”).

Recent Events

The effects of COVID-19 and related actions to attempt to control its spread negatively impacted our business beginning in the last few weeks of March 2020. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic, and governments around the world mandated, orders to slow the transmission of the virus. States in the United States, including Tennessee, where we are headquartered, declared states of emergency, and countries around the world, including the United States, took steps to restrict travel, instituted work from home policies, enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. Uncertainty with respect to the economic effects of the pandemic and the restrictive policies to mitigate its spread have introduced significant volatility in the financial markets. The exact timing and pace of recovery are uncertain. Certain markets have reopened while others remain closed or have closed again in an effort to control the spread of the virus. Although demand for our services improved through the third quarter, it remains marginally below prior year demand, particularly in our Terminix Commercial service line.

Within the United States, our residential and commercial pest control businesses have been designated essential businesses by the U.S. Department of Homeland Security, which has allowed us to continue to serve our customers while ensuring the health and safety of our employees and our customers. We have also continued serving our customers in all of the international markets in which we operate.

Note 2. Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2019 Form 10-K. There have been no material changes to the significant accounting policies for the nine months ended September 30, 2020, other than those described below.

Adoption of New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical

experience, current conditions and reasonable and supportable forecasts. This ASU also requires enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as the credit quality. We adopted this ASU on January 1, 2020, and this adoption did not have a material impact on our financial condition or the results of our operations.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement.” Under ASU 2018-13, entities are required to disclose the amount of total gains or losses for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held as of the balance sheet date and categorized within Level 3 of the fair value hierarchy. Additionally, the ASU requires the disclosure of the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated for fair value measurements categorized within Level 3 of the fair value hierarchy. We adopted this ASU on January 1, 2020, and this adoption had no impact to our disclosures. See Note 16 for further discussion of our Level 3 investments.

In March 2020, the FASB issued ASU 2020-03, “Codification Improvements.” This ASU does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2020. We adopted the updates, as applicable, in 2020, and this adoption did not have a material impact on our financial condition or the results of our operations.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (LIBOR). This amendment provides for optional expedients and exceptions for applying generally accepted accounting principles to contracts and hedging relationships that are affected by LIBOR and other reference rates. The ASU generally allows for a hedge accounting to continue if the hedge was highly effective or met other standards prior to reference rate reform. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU is only available for a limited time, generally through December 31, 2022. Our debt agreement and interest rate swap that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt and interest rate swap arrangements change to another accepted rate, we will utilize the relief in this ASU to continue hedge accounting as we expect the remaining critical terms of our hedging relationship will still match.

Accounting Standards Issued But Not Yet Effective

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.

We have reviewed all other recently issued, but not yet effective, accounting pronouncements and do not expect the future adoption of any such pronouncements will have a material impact on our financial condition or the results of our operations. 

Note 3. Revenues

The following tables present our reportable segment revenues from continuing operations, disaggregated by revenue source. We disaggregate revenue from contracts with customers into major product lines. We have determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. As noted in the business segment reporting information in Note 15, our reportable segment is Terminix.

Revenue related to fumigation completion services and the related renewals (the “Fumigation Services”) is shown in Termite and Home Services below and prior period amounts related to the Fumigation Services have been reclassified from Fumigation to Termite and Home Services to conform to the current period presentation. Additionally, prior period revenue for Residential Pest Control and Commercial Pest Control has been reclassified to conform to the current period presentation.

European Pest Control

Terminix

and Other

Total

Three months ended

Three months ended

Three months ended

September 30,

September 30,

September 30,

(In millions)

2020

2019

2020

2019

2020

2019

Major service line

Residential Pest Control

$

193

$

183

$

$

$

193

$

183

Commercial Pest Control

119

110

119

110

Termite and Home Services

151

144

151

144

Sales of Products and Other

28

24

28

24

European Pest Control

21

4

21

4

Total

$

491

$

461

$

21

$

4

$

512

$

465

European Pest Control

Terminix

and Other

Total

Nine months ended

Nine Months ended

Nine Months ended

September 30,

September 30,

September 30,

(In millions)

2020

2019

2020

2019

2020

2019

Major service line

Residential Pest Control

$

534

$

519

$

$

$

534

$

519

Commercial Pest Control

332

309

332

309

Termite and Home Services

502

483

502

483

Sales of Products and Other

78

64

78

64

European Pest Control

56

4

56

4

Total

$

1,446

$

1,375

$

56

$

4

$

1,502

$

1,378

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. Contracts with customers are generally for a period of one year or less and are generally renewable. We record a receivable related to revenue recognized on services once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivables are recorded within Receivables, less allowances, on the Condensed Consolidated Statements of Financial Position. The current portion of Notes receivable, which represents amounts financed for Terminix customers, are included within Receivables, less allowances, on the condensed consolidated statement of financial position and totaled $28 million and $38 million as of September 30, 2020 and December 31, 2019, respectively.

Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable. For Terminix, amounts are recognized as revenue upon completion of services.

Changes in deferred revenue for the nine months ended September 30, 2020 and 2019 were as follows:

(In millions)

Deferred revenue

Balance, December 31, 2019

$

92

Deferral of revenue

89

Recognition of deferred revenue

(89)

Balance, September 30, 2020

$

92

Balance, December 31, 2018

$

91

Deferral of revenue

104

Recognition of deferred revenue

(99)

Balance, September 30, 2019

$

96

Approximately $12 million and $15 million of deferred revenue is recognized in the Condensed Consolidated Statements of Financial Position in European Pest Control and Other as of September 30, 2020 and December 31, 2019, respectively.

There was approximately $11 million and $51 million of revenue recognized in the three and nine months ended September 30, 2020, that was included in the deferred revenue balance as of December 31, 2019. There was approximately $11 million and $56 million of revenue recognized in the three and nine months ended September 30, 2019, that was included in the deferred revenue balance as of December 31, 2018.

Note 4. Restructuring and Other Charges

We incurred restructuring charges of $2 million ($2 million, net of tax) in each of the three months ended September 30, 2020 and 2019. We incurred restructuring charges of $14 million ($10 million, net of tax) and $10 million ($7 million, net of tax) in the nine months ended September 30, 2020 and 2019, respectively. Restructuring charges were comprised of the following:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In millions)

2020

2019

2020

2019

Terminix(1)

$

2

$

1

$

6

$

4

Corporate Functions(2)

1

1

8

5

Global Service Center relocation(3)

1

Total restructuring charges

$

2

$

2

$

14

$

10

___________________________________

(1)For the three and nine months ended September 30, 2020, these charges included $1 million and $3 million of severance and other costs and $1 million and $3 million of impairment and other charges related to our call center right of use assets, which we exited during the second quarter. Severance and other costs of $2 million were unpaid and accrued as of September 30, 2020. For the three and nine months ended September 30, 2019, these charges included $1 million and $4 million, respectively, of severance and other costs.

(2)We have historically made changes on an ongoing basis to enhance capabilities and reduce costs in our corporate functions that provide company-wide administrative services to support operations. Of the restructuring charges incurred by European Pest Control and Other, $2 million was unpaid and accrued as of September 30, 2020. For the three and nine months ended September 30, 2020 and 2019, these charges were comprised of the following:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In millions)

2020

2019

2020

2019

Severance

$

$

$

3

$

1

Other costs(a)

1

5

4

Total Corporate Functions

$

1

$

1

$

8

$

5

___________________________________

(a)Represents costs incurred in connection with our CEO transition, charges associated with the marketing of our corporate aircraft for sale and accelerated depreciation on systems we are replacing with the implementation of our new customer experience platform.

(3)For the nine months ended September 30, 2019, these charges included lease termination and other charges of $1 million related to our headquarter relocation.

The pretax charges discussed above are reported in Restructuring and other charges in the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

A reconciliation of the beginning and ending balances of accrued restructuring charges, which are included in Accrued liabilities—Other on the unaudited Condensed Consolidated Statements of Financial Position, is presented as follows:

Accrued

Restructuring

(In millions)

Charges

Balance as of December 31, 2019

$

1

Costs incurred

14

Costs paid or otherwise settled

(12)

Balance as of September 30, 2020

$

4

Balance as of December 31, 2018

$

7

Costs incurred

10

Costs paid or otherwise settled

(16)

Balance as of September 30, 2019

$

1

We expect substantially all of our accrued restructuring charges to be paid by December 31, 2020.

Other Charges

Other charges represent professional fees incurred that are not closely associated with our ongoing operations. Other charges were $2 million ($1 million, net of tax) for the three and nine months ended September 30, 2019. NaN similar charges were incurred in the three and nine months ended September 30, 2020.

Note 5. Discontinued Operations

In January 2020, we announced we were exploring strategic alternatives related to ServiceMaster Brands in order to focus on our core pest control and termite business. On October 1, 2020, we completed the sale of the ServiceMaster Brands Divestiture Group for $1,553 million, resulting in an estimated gain of approximately $400 million, net of taxes, which will be recorded in net earnings from discontinued operations. After applicable taxes and fees, we expect net proceeds of approximately $1,116 million.

The ServiceMaster Brands Divestiture Group is classified as held for sale on the Condensed Consolidated Statements of Financial Position and as discontinued operations on the Condensed Consolidated Statements of Operations and Comprehensive Income and Condensed Consolidated Statements of Cash Flows for all periods presented. The net amount of assets and liabilities held for sale related to discontinued operations are required to be recorded at the lower of carrying value or fair value less costs to sell.

In connection with the sale of the ServiceMaster Brands Divestiture Group, the Company and Roark entered into a transition services agreement whereby the Company will provide certain post-closing services to Roark and ServiceMaster Brands related to the business of ServiceMaster Brands. 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 Company and Roark also entered into a sublease agreement whereby ServiceMaster Brands will sublease a portion of the Company’s headquarters in Memphis, Tennessee.

The following table summarizes the comparative financial results of discontinued operations which are presented as Net earnings from discontinued operations on the Condensed Consolidated Statements of Operations and Comprehensive Income:

Three Months Ended September 30,

Nine Months Ended September 30,

(In millions)

2020

2019

2020

2019

Revenue

$

71

$

63

$

198

$

191

Cost of services rendered and products sold

32

27

93

79

Selling and administrative expenses

11

12

34

38

Amortization expense

1

1

3

Restructuring and other charges(1)

9

1

18

3

Interest and net investment income

(1)

Income before income taxes

18

22

53

69

Provision for income taxes

4

5

13

18

Net earnings from discontinued operations

$

14

$

17

$

40

$

51

Weighted-average common shares outstanding - Basic

132.0

135.8

132.9

135.9

Weighted-average common shares outstanding - Diluted

132.0

136.5

133.1

136.5

Basic Earnings Per Share:

Net earnings from discontinued operations

$

0.11

$

0.13

$

0.30

$

0.38

Diluted Earnings Per Share:

Net earnings from discontinued operations

$

0.11

$

0.13

$

0.30

$

0.38

___________________________________

(1)Includes $9 million and $18 million of professional fees and other costs incurred in connection with the strategic evaluation and ultimate sale in the three and nine months ended September 30, 2020, respectively.

The total assets and liabilities held for sale related to discontinued operations are stated separately in the Condensed Consolidated Statements of Financial Position and comprised the following items:

As of

As of

(In millions)

September 30, 2020

December 31, 2019

Assets:

Current Assets:

Receivables, less allowances of $5 and $3, respectively

$

47

$

40

Inventories

6

2

Prepaid expenses and other assets

3

3

Total Current Assets

56

45

Other Assets:

Property and equipment, net

12

8

Operating lease right-of-use assets

2

2

Goodwill

180

183

Intangible assets, primarily trade names, service marks and trademarks, net

626

622

Notes receivable

11

13

Deferred customer acquisition costs

1

1

Other assets

4

5

Total Assets

$

892

$

879

Liabilities and Stockholders' Equity:

Current Liabilities:

Accounts payable

$

11

$

8

Accrued liabilities:

Payroll and related expenses

4

5

Other

30

23

Deferred revenue

4

4

Current portion of lease liability

1

1

Current portion of long-term debt

2

1

Total Current Liabilities

51

42

Long-Term Debt

1

2

Other Long-Term Liabilities:

Deferred taxes

2

1

Other long-term obligations

6

6

Long-term lease liability

1

2

Total Liabilities

$

62

$

52

All assets and liabilities held for sale were classified as Current assets held for sale and Current liabilities held for sale as of September 30, 2020 in the Condensed Consolidated Statements of Financial Position. Certain assets and liabilities have been reclassified to assets and liabilities held for sale as of December 31, 2019, to conform to the current period presentation.

The following selected financial information of ServiceMaster Brands is included in the Condensed Consolidated Statements of Cash Flows as cash flows from discontinued operations:

Three Months Ended September 30,

(In millions)

2020

2019

Depreciation

$

$

1

Amortization

1

Capital expenditures

(1)

(1)


Note 6. Commitments and Contingencies

We carry insurance policies on insurable risks at levels that we believe to be appropriate, including workers’ compensation, automobile and general liability risks. We purchase insurance policies from third-party insurance carriers, which typically incorporate significant deductibles or self-insured retentions. We are responsible for all claims that fall below the retention limits, exceed our coverage limits or are otherwise not covered by our insurance policies. In determining our accrual for self-insured claims, we use historical claims experience to establish both the current year accrual and the underlying provision for future losses. This actuarially determined provision and related accrual include known claims, as well as incurred but not reported claims. We adjust our estimate of accrued self-insured claims when required to reflect changes based on factors such as changes in health care costs, accident frequency and claim severity.

In the normal course of business, we periodically enter into agreements that incorporate indemnification provisions. While the maximum amount to which we may be exposed under such agreements cannot be estimated, we do not expect these guarantees and indemnifications to have a material effect on our business, financial condition, results of operations or cash flows.

A reconciliation of beginning and ending accrued self-insured claims, which are included in Accrued liabilities—Self-insured claims and related expenses and Other long-term obligations, primarily self-insured claims on the Condensed Consolidated Statements of Financial Position, net of insurance recoverables, which are included in Prepaid expenses and other assets and Other assets on the Condensed Consolidated Statements of Financial Position, is presented as follows:

Accrued

Self-insured

(In millions)

Claims, Net

Balance as of December 31, 2019

$

111

Provision for self-insured claims

35

Cash payments

(21)

Balance as of September 30, 2020

$

125

Balance as of December 31, 2018

$

111

Provision for self-insured claims

26

Cash payments

(28)

Balance as of September 30, 2019

$

108

Our Terminix business is subject to a significant number of damage claims related to termite activity in homes for which we provide termite control services, often accompanied by a termite damage warranty. Our termite damage warranty is a differentiator in the industry that has enabled us to become a market leader of this product line. Termite damage claims include circumstances when a customer notifies us that they have experienced damage to their property and we reach an agreement to remediate that damage (a “Non-litigated Claim”); and circumstances when we do not reach an agreement with a customer to remediate the damage and that customer initiates litigation or arbitration proceedings (a “Litigated Claim”). We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Current activity can differ, causing a change in estimates which could be material.

During the fourth quarter of the year ended December 31, 2019, we recorded a change in estimate of our reserve for termite damages for Litigated Claims and Non-Litigated Claims in the amount of $53 million.

A reconciliation of beginning and ending accrued Litigated Claims, which are included in Accrued liabilities—Other and Other long-term obligations, primarily self-insured claims on the Condensed Consolidated Statements of Financial Position, and Non-Litigated Claims, which are included in Accrued liabilities—Self-insured claims and related expenses on the Condensed Consolidated Statements of Financial Position, is presented as follows:

Accrued

Termite Damage

(In millions)

Claims

Balance as of December 31, 2019

$

80

Provision for termite damage claims

41

Cash payments

(42)

Balance as of September 30, 2020

$

79

Balance as of December 31, 2018

$

28

Provision for termite damage claims

28

Cash payments

(31)

Balance as of September 30, 2019

$

25

In March 2019, Company representatives met with representatives of the Office of the Attorney General of the State of Alabama (the “AL AG”) and other Alabama state representatives to discuss termite renewal pricing changes we made in the Mobile Bay area in 2019 and explain the Company’s perspective that the price increases complied with the Alabama Deceptive Trade Practices Act (the “ADTPA”). Subsequently, in September 2019, we received a subpoena (the “AL Subpoena”) from the AL AG requesting documents and information under the ADTPA related to our Formosan termite business practices in the Mobile Bay area, largely focused on the termite renewal pricing changes we made in the Mobile Bay area in 2019. Although the AL Subpoena requested broader information than that related to termite renewal pricing changes, we determined based on our prior interactions and evaluation of the matter that any potential exposure was not material to the Company. Over the course of several months, the Company produced the documents and information requested by the AL Subpoena. In August 2020, the AL AG expressed for the first time their belief that the Company’s inspection and treatment practices may have violated the ADTPA, and that they anticipated imposing certain potential unquantified remedies. In an effort to better understand these matters raised by the AL AG, Company representatives met with the AL AG in September 2020, at which point the AL AG provided details regarding the scope of the alleged potential ADTPA violations and of the potential remedies and the potential economic scope of those remedies. Following the September 2020 meeting with the AL AG, the Company determined that the inquiry could be material to its operations and financial results. In October 2020, Company representatives again met with the AL AG and the AL AG verbally presented allegations of ADTPA violations related to the 2019 price increase and certain inspection and treatment practices, as well as a draft consent decree to resolve those allegations. Over the next two weeks, the Company and the AL AG engaged in intensive negotiations and, on November 4, 2020, the Company entered into the Consent Judgment and Settlement Agreement (the “Settlement”) with the AL AG.

The Settlement provides for: immediate remediation measures to be provided directly to current and former customers in the Mobile Bay area, including refunds of certain price increases, rebates to certain former customers, the establishment of a $25 million consumer fund and a related receiver to oversee our compliance with these commitments and to act as an arbitrator for certain Non-litigated Claims; the reimbursement of certain investigative and monitoring costs incurred by the Attorney General’s office and the Department of Agriculture and Industries; and a university endowment intended to support termite and pest control research with an emphasis on Formosan termite research. The Company has also agreed to pay the state of Alabama $19 million. In the third quarter of 2020, the Company recorded a charge of $49 million and reduction of revenue of $3 million related to these immediate remediation measures. These charges represent our best estimate and may change based on a variety of factors, and these changes could be material to our financial results, including acceptance rates by current and former customers of the agreed remediation measures.

Pursuant to the Settlement, we have also agreed to provide the opportunity to reinstate service for customers who canceled their services during certain specified timeframes as well as the retreatment of certain customer premises and a commitment to certain specified response and remediation timeframes for future termite damage claims. We do not expect the financial impact of these remedies to have a material impact on our prospective results of operations or cash flows.

On December 16, 2016, the U.S. Virgin Islands Department of Justice filed a civil complaint in the Superior Court of the Virgin Islands related to a fumigation incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster Company, LLC, The Terminix International Company Limited Partnership, and Terminix International USVI, LLC. The amount and extent of any potential penalties, fines sanctions, costs and damages that the federal or other governmental authorities may yet impose, investigation or other costs and reputational harm, as well as the impact of any additional civil, criminal or other claims or judicial, administrative or regulatory proceedings resulting from or related to the U.S. Virgin Islands fumigation matter, which could be material, is not currently known or estimable, and any such further penalties, fines, sanctions, costs or damages would not be covered under our general liability insurance policies.

In addition to the matters discussed above, in the ordinary course of conducting business activities, we and our subsidiaries become involved in judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. We accrue for these liabilities when it is probable the future costs will be incurred and such costs can be reasonably estimated. Current activity can differ, causing a change in estimates which could be material. These proceedings include insured and uninsured matters that are brought on an individual, collective, representative and class action basis, or other proceedings involving regulatory, employment, general and commercial liability, automobile liability, wage and hour, environmental, shareholder and other matters. We have entered into settlement agreements in certain cases, including with respect to putative collective and class actions, which are subject to court or other approvals, and which require compliance with the terms of the agreements. If one or more of our settlements are not finally approved and implemented, we could have additional or different exposure, which could be material. Subject to the paragraphs above, we do not expect any of these proceedings to have a material effect on our reputation, business, financial position, results of operations or cash flows; however, we can give no assurance that the results of any such proceedings will not materially affect our reputation, business, financial position, results of operations and cash flows. 

Note 7. Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets, primarily trade names, are not amortized and are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. There were 0 impairment charges recorded in the three and nine months ended September 30, 2020 and 2019. There were 0 accumulated impairment losses recorded as of September 30, 2020. Customer relationships and Other intangible assets, which primarily includes trade names subject to amortization, are amortized over their respective useful lives. The table below summarizes the goodwill balances for continuing operations by reportable segment and European Pest Control and Other:

European Pest

(In millions)

Terminix

Control and Other(1)

Total

Balance as of December 31, 2019

$

1,946

$

150

$

2,096

Acquisitions

10

0

10

Purchase accounting adjustments

0

26

26

Impact of foreign exchange rates

(1)

(4)

(5)

Balance as of September 30, 2020

$

1,956

$

171

$

2,127

___________________________________

(1)European Pest Control and Other includes goodwill related to pest control operations in Europe.

The table below summarizes the other intangible asset balances for continuing operations:

As of September 30, 2020

As of December 31, 2019

Accumulated

Accumulated

(In millions)

Gross

Amortization

Net

Gross

Amortization

Net

Trade names(1)

$

888

$

$

888

$

888

$

$

888

Customer relationships(2)

640

(443)

197

659

(423)

236

Other(3)

68

(41)

28

79

(34)

45

Total

$

1,596

$

(483)

$

1,113

$

1,626

$

(457)

$

1,169

___________________________________

(1)Not subject to amortization.

(2)Includes purchase accounting adjustments subsequent to December 31, 2019, primarily related to our acquisition of Nomor, of approximately $17 million.

(3)Includes purchase accounting adjustments subsequent to December 31, 2019, primarily related to our acquisition of Nomor, of approximately $9 million.

For the existing intangible assets, we anticipate amortization expense for the remainder of 2020 and each of the next five years as follows:

(In millions)

2020

2021

2022

2023

2024

2025

Amortization expense

$

8

$

35

$

33

$

30

$

22

$

18

 

Note 8. Stock-Based Compensation

For each of the three months ended September 30, 2020 and 2019, we recognized stock-based compensation expense of $3 million ($3 million, net of tax) and $3 million ($2 million, net of tax), respectively. For the nine months ended September 30, 2020 and 2019, we recognized stock-based compensation expense of $13 million ($9 million, net of tax) and $10 million ($8 million, net of tax), respectively. These charges are recorded within Selling and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.

As of September 30, 2020, there were $39 million of total unrecognized compensation costs related to non-vested stock options, restricted stock units (“RSUs”) and performance share units granted under the Amended and Restated Terminix Global Holdings, Inc. 2014 Omnibus Incentive Plan (the “Omnibus Incentive Plan”). These remaining costs are expected to be recognized over a weighted-average period of 1.95 years.

On February 24, 2015, our board of directors approved and recommended for approval by our stockholders the Terminix 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 1 million shares of common stock authorized for sale under the plan. On November 3, 2015, we filed a registration statement on Form S-8 under the Securities Act to register the 1 million shares of common stock that may be issued under the Employee Stock Purchase Plan and, as a result, all shares of common stock acquired under the Employee Stock Purchase Plan will be freely tradable under the Securities Act, unless

purchased by our affiliates. Our Compensation Committee amended the Employee Stock Purchase Plan in February 2019 to allow for more frequent purchase periods and to change the allowed 10 percent discount to a company match of 10 percent of employee contributions. The authorized number of shares remaining in the Employee Stock Purchase Plan was not changed from 843,584 and the expiration date of the Employee Stock Purchase Plan was not changed from April 27, 2025. As of September 30, 2020 there were 790,543 shares available for issuance under the Employee Stock Purchase Plan.

Note 9. Comprehensive (Loss) Income

Comprehensive (loss) income, which primarily includes net income, unrealized gain (loss) on derivative instruments and the effect of foreign currency translation, is included in the Condensed Consolidated Statements of Operations and Comprehensive Income.

During the nine months ended September 30, 2019, we terminated $479 million of our then-existing $650 million interest rate swap, receiving $12 million from the counterparty. We terminated the remaining $171 million of our then-existing $650 million interest rate swap later in 2019, receiving $1 million from the counterparty. The fair value of the terminated agreement of $12 million as of September 30, 2019, and $12 million as of December 31, 2019, is recorded within accumulated other comprehensive (loss) income on the Condensed Consolidated Statements of Financial Position and will be amortized into interest expense over the original term of the agreement. The remaining unamortized balance at September 30, 2020 is $7 million.

The following tables summarize the activity in accumulated other comprehensive (loss) income, net of the related tax effects.

Unrealized

Gains

Foreign

(Losses) on

Currency

(In millions)

Derivatives

Translation

Total

Balance as of December 31, 2019

$

13

$

(5)

$

9

Other comprehensive income before reclassifications:

Pre-tax amount

(66)

(7)

(73)

Tax provision

12

12

After-tax amount

(54)

(7)

(61)

Amounts reclassified within accumulated other comprehensive (loss) income(1)

17

(17)

Amounts reclassified from accumulated other comprehensive (loss) income(2)

3

3

Net current period other comprehensive (loss) income

(34)

(24)

(58)

Balance as of September 30, 2020

$

(21)

$

(29)

$

(49)

Balance as of December 31, 2018

$

20

$

(15)

$

5

Other comprehensive income before reclassifications:

Pre-tax amount

(14)

(2)

(16)

Tax benefit

7

7

After-tax amount

(7)

(2)

(9)

Amounts reclassified from accumulated other comprehensive (loss) income(2)

(3)

(3)

Net current period other comprehensive (loss) income

(10)

(2)

(13)

Balance as of September 30, 2019

$

9

$

(18)

$

(8)

___________________________________

(1)Represents unrealized gains (losses) on our cross currency swap and net investment hedge related to foreign currency exchange rate fluctuations.

(2)Amounts are net of tax. Reclassifications out of accumulated other comprehensive (loss) income included the following components for the periods indicated.

Amounts Reclassified from Accumulated

Other Comprehensive (Loss) Income

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In millions)

2020

2019

2020

2019

Gains (losses) on derivatives:

Fuel swap contracts

$

(1)

$

$

(3)

$

Interest rate swap contracts

(1)

1

(2)

4

Net gains (losses) on derivatives

(2)

1

(4)

4

Impact of income taxes

1

2

Total reclassifications for the period

$

(2)

$

1

$

(3)

$

3

 

 

Note 10. Supplemental Cash Flow Information

Supplemental information relating to the Condensed Consolidated Statements of Cash Flows is presented in the following table:

Nine Months Ended

September 30,

(In millions)

2020

2019

Cash paid for or (received from):

Interest expense(1)

$

57

$

55

Interest and dividend income

(1)

(2)

Income taxes, net of refunds

4

23

___________________________________

(1)For the nine months ended September 30, 2019, excludes $12 million received in connection with our partial terminations of the then-existing interest rate swap.

Cash and Cash Equivalents and Restricted Cash at Beginning of Period on the Condensed Consolidated Statements of Cash Flows consists of the following as presented on the Condensed Consolidated Statements of Financial Position:

As of

As of

September 30,

December 31

(In millions)

2020

2019

2019

2018

Cash and cash equivalents

$

288

$

140

$

280

$

224

Restricted cash

89

89

89

89

Total Cash and cash equivalents and Restricted cash

$

377

$

228

$

368

$

313

The non-cash lease transactions are described in Note 12. The proceeds from the frontdoor, inc. (“Frontdoor”) debt issuances described in Note 11 were retained by the lender in satisfaction of the short-term credit facility and have been excluded from the Condensed Consolidated Statements of Cash Flows as non-cash financing activities.

 

Note 11. Long-Term Debt

Long-term debt is summarized in the following table:

As of

As of

September 30,

December 31,

(In millions)

2020

2019

Senior secured term loan facility maturing in 2026(1)

$

538

$

593

Revolving credit facility maturing 2024

5.125% notes maturing in 2024(2)

743

742

7.45% notes maturing in 2027(3)

169

167

7.25% notes maturing in 2038(3)

41

40

Vehicle finance leases(4)

93

95

Other(5)

82

98

Less current portion(6)

(100)

(69)

Total long-term debt

$

1,565

$

1,666

__________________________________

(1)As of September 30, 2020 and December 31, 2019, presented net of $7 million and $6 million in unamortized debt issuance costs, respectively, and $1 million of unamortized original issue discount in each period. On September 30, 2020, we made an advanced amortization payment of $51 million on the Term Loan B. See further discussion in Term Loan Facility below.

(2)As of September 30, 2020 and December 31, 2019, presented net of $7 million and $8 million, respectively of unamortized debt issuance costs.

(3)As of September 30, 2020 and December 31, 2019, collectively presented net of $26 million and $28 million, respectively, of unamortized fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown above.

(4)We have entered into a fleet management services agreement (the “Fleet Agreement”) which, among other things, allows us to obtain fleet vehicles through a leasing program. All leases under the Fleet Agreement are finance leases for accounting purposes. The lease rental payments include an interest component calculated using a variable rate based on one-month LIBOR plus other contractual adjustments and a borrowing margin totaling 2.45 percent.

(5)As of September 30, 2020 and December 31, 2019, includes approximately $81 million and $85 million, respectively, of future payments in connection with acquisitions.

(6)The current portion of long-term debt consists of deferred purchase price and earnout payments on acquisitions and scheduled principal payments of long-term debt due within 12 months.

Term Loan Facility

On November 5, 2019, we closed on an amended $600 million Term Loan B due 2026, as well as a $400 million revolving credit agreement due 2024 (the “Amended Term Loan Facility”).

On September 30, 2020, we amended our Term Loan B agreement to permit proceeds from the sale of the ServiceMaster Brands Divestiture Group to be used to retire subordinated debt or pay shareholder returns. In connection with the amendment, we made an advanced amortization payment of $51 million. The amendment was treated as a debt modification. We recorded $2 million in debt issuance costs related to the amendment. Such advanced amortization payment resulted in a loss on extinguishment of debt of $1 million for the three and nine months ended September 30, 2020.

The interest rates applicable to the loans under the Amended Term Loan Facility are based on a fluctuating rate of interest measured by reference to either, at the borrower’s option, (i) an adjusted LIBOR plus 1.75% per annum, or (ii) an alternate base rate (“ABR”) plus 0.75% per annum. Voluntary prepayments of borrowings under the Amended Term Loan Facility are permitted at any time, in minimum principal amounts, without premium or penalty.

The Term Loan Facility and the guarantees thereof are secured by substantially all of the tangible and intangible assets of the Company and certain of our domestic subsidiaries, excluding certain subsidiaries subject to regulatory requirements in various states, including pledges of all the capital stock of all direct domestic subsidiaries (other than foreign subsidiary holding companies, which are deemed to be foreign subsidiaries) owned by the Company or any Guarantor and of up to 65% of the capital stock of each direct foreign subsidiary owned by the Company or any Guarantor. The Term Loan Facility security interests are subject to certain exceptions, including, but not limited to, exceptions for (i) equity interests, (ii) indebtedness or other obligations of subsidiaries, (iii) real estate or (iv) any other assets, if the granting of a security interest therein would require that the 7.45% notes maturing in 2027 or 7.25% notes maturing in 2038 be secured. The Term Loan Facility is secured on a pari passu basis with the security interests created in the same collateral securing our $400 million revolving credit facility due 2024 (“the Revolving Credit Facility”).

Borrowing under the Revolving Credit Facility

On September 5, 2019, we borrowed an aggregate principal amount of $120 million under our former revolving credit facility to finance our acquisition of Nomor Holding AB. On November 5, 2019, in connection with the Amended Term Loan Facility, we repaid the $120 million outstanding.

Extinguishment of Debt and Repurchase of Notes

On March 12, 2019, in connection with the spin-off of the American Home Shield segment, we borrowed an aggregate principal amount of $600 million under a short-term credit facility to effectuate a debt-for-equity exchange of our Frontdoor retained shares. The proceeds of this short-term credit facility were used to repay $468 million aggregate principal amount of term loans outstanding under our senior secured term loan facility in March and April of 2019. Such prepayments resulted in a loss on extinguishment of debt of $4 million for the nine months ended September 30, 2019.

On March 27, 2019, we completed a non-cash debt-for-equity exchange in which we exchanged the 16.7 million retained shares of Frontdoor common stock (proceeds of $486 million, net), plus used $114 million of proceeds from the short-term credit facility, to extinguish $600 million of our indebtedness under the short-term credit facility. The sale of the Frontdoor common stock resulted in a realized gain of $40 million, which was recorded within Realized (gain) on investment in frontdoor, inc. on the Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended September 30, 2019.

In March 2019, we purchased approximately $7 million in aggregate principal amount of our 7.45% notes maturing in 2027 at a price of 105.5% and $3 million in aggregate principal amount of our 7.25% notes maturing in 2038 at a price of 99.5% using available cash. The repurchased notes were delivered to the trustee for cancellation. In connection with these partial repurchases, we recorded a loss on extinguishment of debt of $2 million in the nine months ended September 30, 2019.

In April 2019, we purchased $1 million in aggregate principal amount of our 7.45% notes maturing in 2027 at a price of 105.5%.

Interest Rate Swaps

We have historically entered into interest rate swap agreements. Under the terms of these agreements, we pay a fixed rate of interest on the stated notional amount and receive a floating rate of interest (based on one month LIBOR) on the stated notional amount. Therefore, during the term of the swap agreements, the effective interest rate on the portion of the term loans equal to the stated notional amount is fixed at the stated rate in the interest rate swap agreements plus the incremental borrowing margin.

On November 5, 2019, we entered into a seven year interest swap agreement effective November 5, 2019. The notional amount of the agreement is $550 million. Under the terms of the agreement, we will pay a fixed rate of interest of 1.615% on the $550 million notional amount, and we will receive a floating rate of interest (based on one-month LIBOR, subject to a floor of 0 percent) on the notional amount. Therefore, during the term of the agreement, the effective interest rate on $550 million of the new Term Loan B is fixed at a rate of 3.365%.

On September 30, 2020, in connection with the advanced amortization payment on our Term Loan Facility, we terminated $4 million of our interest rate swap.

In connection with the repayments of our previous Term Loan B due 2023 in 2019, we terminated $479 million of our then existing $650 million interest rate swap agreement, receiving $12 million from the counterparty. The remaining $171 million interest rate swap was terminated in November 2019 upon the final repayment of our previous Term Loan B due 2023, with 0 proceeds from the counterparty. The fair value of the terminated agreement of $12 million was recorded within accumulated other comprehensive income on the Condensed Consolidated Statements of Financial Position and is being amortized into interest expense over the original term of the agreement.

The changes in our interest rate swap agreement, as well as the cumulative interest rate swap outstanding, are as follows:





Notional

(In millions)

Amount

Fixed Rate(1) 

Interest rate swap agreement in effect as of December 31, 2018

$

650

1.493

%

Terminated

(479)

Entered into effect

Interest rate swap agreement in effect as of September 30, 2019

$

171

1.493 

%

Terminated

(171)

Entered into effect

550

1.615

%

Interest rate swap agreement in effect as of December 31, 2019

$

550

1.615

%

Terminated

(4)

Entered into effect

Interest rate swap agreement in effect as of September 30, 2020

$

546

1.615

%

___________________________________

(1)Before the application of the applicable borrowing margin.

In accordance with accounting standards for derivative instruments and hedging activities, and as further described in Note 16, our interest rate swap agreement is classified as a cash flow hedge, and, as such, is recorded on the Condensed Consolidated Statements of Financial Position as either an asset or liability at fair value, with changes in fair value attributable to the hedged risks recorded in accumulated other comprehensive income.

Note 12. Leases

We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets, Current portion of lease liability and Long-term lease liability on the Condensed Consolidated Statements of Financial Position. Finance leases are included in Property and equipment, net; Current portion of long-term debt and Long-term debt on the Condensed Consolidated Statements of Financial Position.

As of September 30, 2020 and December 31, 2019, assets recorded under finance leases were $235 million and $220 million, respectively, and accumulated depreciation associated with finance leases was $148 million and $127 million, respectively.

The components of lease expense were as follows:

Three months ended September 30,

Nine months ended September 30,

(In millions)

2020

2019

2020

2019

Finance lease cost

Depreciation of finance lease ROU assets

$

10

$

9

$

29

$

25

Interest on finance lease liabilities

1

1

2

4

Operating lease cost

6

6

19

19

Variable lease cost

1

1

3

Sublease income

(1)

(1)

(2)

(2)

Total lease cost

$

16

$

17

$

49

$

48

Supplemental cash flow information and other information for leases was as follows:

Nine months ended September 30,

(In millions)

2020

2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases

$

21

$

17

Operating cash flows for finance leases

2

4

Financing cash flows for finance leases

28

25

ROU assets obtained in exchange for lease obligations:

Operating leases

3

7

Finance leases

23

39

As of September 30, 2020, there were $34 million and $58 million of finance leases included within Current portion of long-term debt and Long-term debt, respectively, on the Condensed Consolidated Statements of Financial Position. Future minimum lease payments under non-cancellable leases as of September 30, 2020 were as follows:

(In millions)

Operating Leases

Finance Leases

Year ended December 31,

2020 (excluding the nine months ended September 30, 2020)

$

7

$

10

2021

22

33

2022

19

23

2023

15

16

2024

11

8

Thereafter

85

4

Total future minimum lease payments

158

94

Less imputed interest

(42)

(3)

Total

$

116

$

92

 

Note 13. Acquisitions

Acquisitions have been accounted for as business combinations using the acquisition method and, accordingly, the results of operations of the acquired businesses have been included in the condensed consolidated financial statements since their dates of acquisition. Asset acquisitions have been accounted for under ASU 2017-01. The assets and liabilities of these businesses were recorded in the financial statements at their estimated fair values as of the acquisition dates.

During the nine months ended September 30, 2020, our investment in acquisitions was $29 million, using available cash on hand, which included $12 million for 9 tuck-in pest control acquisitions which have been accounted for as business combinations, as well as $18 million for final funding for 2 pest control acquisitions and minority interests completed in 2019 that were included in Accrued liabilities—Other on the Consolidated Statements of Financial Position as of December 31, 2019. Another $3 million of deferred purchase price on the 2020 acquisitions is due to the sellers between one year and three years from the acquisition dates. We recorded a preliminary value of $10 million of goodwill for the 2020 acquisitions. During the nine months ended September 30, 2020, we received $3 million from post-closing working capital adjustments related to acquisitions completed in 2019, and in the three months ended September 30, 2020, reversed $1 million of contingent consideration as the contingency was not met.

During the nine months ended September 30, 2019, our investment in acquisitions was $338 million, using available cash on hand. We completed 27 pest control acquisitions, including the acquisition of Nomor, 24 of which were accounted for as business combinations. NaN were accounted for as asset acquisitions. Excluding Nomor, which is described further below, we recorded approximately $224 million of goodwill, $35 million of trade names and $114 million of other intangibles, primarily customer lists, related to these acquisitions.

Supplemental cash flow information regarding the acquisitions was as follows:

Nine Months Ended

September 30,

(In millions)

2020

2019

Assets acquired

$

16

$

402

Liabilities assumed

(51)

Net assets acquired

$

16

$

352

Net cash paid

$

11

$

338

Seller financed debt

5

11

Contingent earnout

4

Purchase price

$

16

$

352

Nomor

On September 6, 2019, we acquired Nomor, a leading provider of pest control services in Sweden and Norway, for approximately 2 billion Swedish krona (approximately $198 million using the September 6, 2019 exchange rate, net of approximately $9 million of cash acquired). This strategic acquisition launched our expansion into the European pest control market. We funded the acquisition using cash on hand and proceeds from a $120 million borrowing under our Revolving Credit Facility. Nomor is included in the Condensed Consolidated Statements of Financial Position based on an allocation of the purchase price. The final purchase price allocation was as follows (in millions):

Current and other assets(1)

$

11

Property and equipment

6

Goodwill

153

Identifiable intangible assets(2)

66

Current liabilities(3)

(20)

Long-term liabilities(4)

(19)

Total purchase price

$

198

___________________________________

(1)Primarily trade receivables and net of approximately $9 million of cash acquired.

(2)Primarily customer lists.

(3)Primarily advanced collections from customers.

(4)Includes $15 million of deferred tax liabilities as a result of tax basis differences in intangible assets.

The following pro forma consolidated financial information presents the combined operations of Terminix (formerly ServiceMaster Global Holdings, Inc.) and Nomor for the three and nine months ended September 30, 2019:

(Unaudited)

Three months ended

Nine months ended

(In millions, except per share data)

September 30, 2019

September 30, 2019

Consolidated revenue

$

474

$

1,414

Consolidated net income

$

29

$

160

Basic earnings per share

$

0.22

$

1.18

Diluted earnings per share

$

0.21

$

1.17

ASC 805, “Business Combinations,” establishes guidelines regarding the presentation of unaudited pro forma information. Therefore, this unaudited pro forma information is not intended to represent, nor do we believe it is indicative of, the consolidated results of operations of Terminix that would have been reported had the acquisition been completed at the beginning of 2018. This unaudited pro forma information does not give effect to the anticipated business and tax synergies of the acquisition and is not representative or indicative of the anticipated future consolidated results of operations of Terminix. The most significant adjustments made to the pro forma financial information are the inclusion of $4 million of acquisition-related costs as if incurred in the first quarter of 2018, estimated quarterly interest expense of approximately $1 million related to financing obtained for the transaction and the estimated tax impact of these adjustments. The unaudited pro forma financial information includes various assumptions. The tax impact of these adjustments was calculated based on Nomor’s statutory rate.

Note 14. Income Taxes

As required by ASC 740, “Income Taxes,” we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from continuing operations before income taxes, except for significant unusual or infrequently occurring items. Our estimated tax rate is adjusted each quarter in accordance with ASC 740.

The effective tax rate was (231.3) percent and 34.8 percent for the three months ended September 30, 2020 and 2019, respectively. The effective tax rate on income from continuing operations was 61.8 percent and 17.4 percent for the nine months ended September 30, 2020 and 2019, respectively.

The negative effective rate for the three months ended September 30, 2020 and the unusual high effective rate for the nine months ended September 30, 2020 is due to the Mobile Bay Formosan termite settlement. A significant portion of the settlement is considered non-deductible for income tax purposes. The effective tax rate on income from continuing operations for the nine months ended September 30, 2019, was primarily affected by the disposition of the Frontdoor retained shares in a non-taxable debt-for-equity exchange that was recorded discretely in the three months ended March 31, 2019.

As of September 30, 2020 and December 31, 2019, we had $13 million and $14 million, respectively, of tax benefits primarily reflected in U.S. Federal and state tax returns that have not been recognized for financial reporting purposes (“unrecognized tax benefits”). Based on information currently available, it is reasonably possible that over the next 12 month period unrecognized tax benefits may decrease by $2 million as the result of settlements of ongoing audits, statute of limitation expirations or final settlements

of uncertain tax positions in multiple jurisdictions. Our policy is to recognize interest income, interest expense and penalties related to our tax positions within the tax provision.

Note 15. Business Segment Reporting

Through January 2020, when we announced were exploring strategic alternatives related to the ServiceMaster Brands business that resulted in it being classified as held for sale, we conducted business through 2 reportable segments: Terminix and ServiceMaster Brands. We now have 1 reportable segment, Terminix.

In accordance with accounting standards for segments, we identified Terminix as our reportable segment primarily based on the nature of the services it provides and the operating results that are regularly reviewed by our chief operating decision maker (the “CODM”) to evaluate performance and allocate resources. The Terminix segment provides termite and pest control services to residential and commercial customers and distributes pest control products, primarily under the Terminix, Terminix Commercial, Copesan, Assured Environments, Gregory Pest Solutions and McCloud Services brand names. 

European Pest Control and Other includes our European pest control operations, primarily under our Nomor, Pelias and Terminix UK brands, our captive insurance subsidiary, which provides automobile, workers' compensation and general liability coverage to our reportable segment, and our headquarters operations (substantially all of which costs are allocated to our reportable segment), which provides various technology, finance, legal and other support services to Terminix. Our European pest control operations meet the definition of an operating segment, but do not meet the quantitative thresholds to require them to be reported as a reportable segment.

Information regarding the accounting policies used by us are described in our 2019 Form 10-K. We derive substantially all of our revenue from customers and franchisees in the United States with approximately 5 percent generated in foreign markets as of September 30, 2020. Operating expenses of Terminix consist primarily of direct costs and indirect costs allocated from Corporate.

We use Reportable Segment Adjusted EBITDA as our measure of reportable segment profitability. Accordingly, the CODM evaluates performance and allocates resources based primarily on Reportable Segment Adjusted EBITDA. Reportable Segment Adjusted EBITDA is defined as net income before: unallocated corporate expenses; costs historically allocated to ServiceMaster Brands; European pest control; depreciation and amortization expense; acquisition-related costs; Mobile Bay Formosan termite settlement; non-cash stock-based compensation expense; restructuring and other charges; realized (gain) on investment in frontdoor, inc.; net earnings from discontinued operations; provision for income taxes; loss on extinguishment of debt; and interest expense. Our definition of Reportable Segment Adjusted EBITDA may not be calculated or comparable to similarly titled measures of other companies. We believe Reportable Segment Adjusted EBITDA enables management to better understand trends and financial performance related to operations and is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans.

Information for continuing operations for Terminix and European Pest Control and Other is presented below:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In millions)

2020

2019

2020

2019

Revenue:

Terminix

$

491

$

461

$

1,446

$

1,375

European Pest Control and Other

21

4

56

4

Total Revenue

$

512

$

465

$

1,502

$

1,378

Reportable Segment Adjusted EBITDA:(1)

Terminix

$

98

$

72

$

280

$

261

___________________________________

(1)

Presented below is a reconciliation of Net Income to Reportable Segment Adjusted EBITDA:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In millions)

2020

2019

2020

2019

Net (Loss) Income

$

(7)

$

25

$

61

$

154

Unallocated corporate expenses

(1)

(2)

(1)

(5)

Costs historically allocated to ServiceMaster Brands

3

3

9

9

Equity in earnings of joint ventures

1

2

European pest control

(3)

(1)

(6)

(1)

Depreciation and amortization expense

27

23

81

68

Acquisition-related costs

(1)

8

12

Mobile Bay Formosan termite settlement(a)

51

51

Non-cash stock-based compensation expense

3

3

13

10

Restructuring and other charges

2

4

14

12

Realized (gain) on investment in frontdoor, inc.

(40)

Net earnings from discontinued operations

(14)

(17)

(40)

(51)

Provision for income taxes

15

4

31

22

Loss on extinguishment of debt

1

1

6

Interest expense

22

19

67

64

Reportable Segment Adjusted EBITDA

$

98

$

72

$

280

$

261

 ___________________________________

(a)Represents a charge of $49 million and the prior period portion of a reduction of revenue of $3 million and $2 million in the three and nine months ended September 30, 2020, respectively, related to the Mobile Bay Formosan termite settlement described in Note 6 to the condensed consolidated financial statements. We exclude these charges from Adjusted EBITDA because we believe they do not reflect our on-going operations and because we believe doing so is useful to investors in aiding period-to-period comparability. 

Note 16. Fair Value Measurements

The period-end carrying amounts of cash and cash equivalents, receivables, restricted cash, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The period-end carrying amounts of long-term notes receivable approximate fair value as the effective interest rates for these instruments are comparable to period-end market rates. The period-end carrying amounts of short- and long-term marketable securities also approximate fair value, with unrealized gains and losses reported in interest and net investment income in the Condensed Consolidated Statements of Operations and Comprehensive Income. The carrying amount of total debt was $1,665 million and $1,735 million, and the estimated fair value was $1,739 million and $1,839 million as of September 30, 2020 and December 31, 2019, respectively. The fair value of our debt is estimated based on available market prices for the same or similar instruments which are considered significant other observable inputs (Level 2) within the fair value hierarchy. The fair values presented reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to us as of September 30, 2020 and December 31, 2019.

We have estimated the fair value of our financial instruments measured at fair value on a recurring basis using the market and income approaches. For deferred compensation trust assets and derivative contracts, which are carried at their fair values, our fair value estimates incorporate quoted market prices, other observable inputs (for example, forward interest rates) and unobservable inputs (for example, forward commodity prices) at the balance sheet date.

Interest rate swap contracts are valued using forward interest rate curves obtained from third-party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contracts.

Fuel swap contracts are valued using forward fuel price curves obtained from third-party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract fuel price to the expected forward fuel price as of each settlement date and applying the difference between the contract and expected prices to the notional gallons in the fuel swap contracts. We regularly review the forward price curves obtained from third-party market data providers and related changes in fair value for reasonableness utilizing information available to us from other published sources.

Effective March 3, 2020, we entered into a fixed-to-fixed cross-currency interest rate swap to hedge foreign currency risk associated with the fixed-rate Swedish krona denominated intercompany debt at Nomor. The five year interest rate swap matures

March 31, 2025 and has a notional amount of 725 million Swedish krona, or approximately $74 million, and swaps interest payments of 3.5 percent Swedish krona for interest receipts of 4.147 percent U.S. dollar. This hedge was entered into to mitigate foreign currency risk inherent in Swedish krona denominated debt and is not for speculative trading purposes. This contract has been designated as a cash flow hedge of a fixed rate borrowing and is recorded at fair value.

We also entered into a cross-currency swap agreement to hedge a portion of our net investment in Nomor against future volatility in the exchange rates between the Swedish krona and the U.S. dollar. The five year cross-currency swap has a fixed notional amount of 1.275 billion Swedish krona, or approximately $131 million, at an annual rate of 0 percent and a maturity date of March 31, 2025. At inception, the cross-currency swap was designated as a net investment hedge and is recorded at fair value.

Changes in the fair value of these contracts are recorded within Other comprehensive (loss) income on the Condensed Consolidated Statements of Financial Position. Interest accruals and coupon payments are recognized directly in interest expense, thus reflecting a Swedish krona fixed rate. Upon discontinuation of the net investment hedge, the changes in spot value and any amounts excluded from the assessment of hedge effectiveness that have not been recognized in earnings will remain within CTA until the hedged net investment is sold, diluted, or liquidated.

We have not changed our valuation techniques for measuring the fair value of any financial assets and liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period. There were no significant transfers between levels during each of the nine month periods ended September 30, 2020 and 2019.

The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis for the periods presented were as follows:

Estimated Fair Value Measurements

Quoted

Significant

Prices In

Other

Significant

Active

Observable

Unobservable

Statement of Financial

Carrying

Markets

Inputs

Inputs

(In millions)

Position Location

Value

(Level 1)

(Level 2)

(Level 3)

As of September 30, 2020:

Financial Assets:

Deferred compensation trust

Long-term marketable securities

$

13

$

13

$

$

Fuel swap contracts

Prepaid expenses and other assets and Other assets

2

2

Total financial assets

$

15

$

13

$

$

2

Financial Liabilities:

Cross-currency interest rate swap

Other long-term obligations

$

7

$

$

7

$

Net investment hedge

Other long-term obligations

10

10

Fuel swap contracts

Accrued liabilities—Other and Other long-term obligations

2

2

Interest rate swap contract

Accrued liabilities—Other and Other long-term obligations

38

38

Total financial liabilities

$

57

$

$

55

$

2

As of December 31, 2019:

Financial Assets:

Deferred compensation trust assets

Long-term marketable securities

$

13

$

13

$

$

Fuel swap contracts

Prepaid expenses and other assets and Other assets

1

1

Interest rate swap contracts

Other assets

5

5

Total financial assets

$

19

$

13

$

5

$

1

Financial Liabilities:

Interest rate swap contracts

Accrued liabilities—Other and Other long-term obligations

$

1

$

$

1

$

Total financial liabilities

$

1

$

$

1

$

A reconciliation of the beginning and ending fair values of financial instruments valued using significant unobservable inputs (Level 3) on a recurring basis is presented as follows:

Fuel Swap

Contract

Assets

(In millions)

(Liabilities)

Location of Gain (Loss) included in Earnings

Balance as of December 31, 2019

$

1

Total gains (losses) (realized and unrealized)

Included in earnings

2

Cost of services rendered and products sold

Included in other comprehensive income

(2)

Settlements

Balance as of September 30, 2020

$

Balance as of December 31, 2018

$

(4)

Total gains (losses) (realized and unrealized)

Included in earnings

Cost of services rendered and products sold

Included in other comprehensive income

2

Settlements

Balance as of September 30, 2019

$

(1)

The following tables present information relating to the significant unobservable inputs of our Level 3 financial instruments:

Fair Value

Valuation

Weighted

(in millions)

Technique

Unobservable Input

Range

Average

As of September 30, 2020:

Fuel swap contracts

$

Discounted Cash Flows

Forward Unleaded Price per Gallon(1)

$2.10 - $2.32

$

2.20

As of December 31, 2019:

Fuel swap contracts

$

1

Discounted Cash Flows

Forward Unleaded Price per Gallon(1)

$2.37 - $2.80

$

2.61

___________________________________

(1)Forward prices per gallon were derived from third-party market data providers. A decrease in the forward price would result in a decrease in the fair value of the fuel swap contracts.

As of September 30, 2020, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $28 million, maturing through 2021. Under the terms of our fuel swap contracts, we are required to post collateral in the event that the fair value of the contracts exceeds a certain agreed upon liability level and in other circumstances required by the counterparty. As of September 30, 2020, we had posted $2 million in letters of credit as collateral under our fuel hedging program, which were issued under the Revolving Credit Facility.

The effective portion of the gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments is recorded in accumulated other comprehensive income. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement or the fuel settlement affects earnings. See Note 9 to the condensed consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in accumulated other comprehensive income and for the amounts reclassified out of accumulated other comprehensive income and into earnings. The amount expected to be reclassified into earnings during the next 12 months includes unrealized gains and losses related to open fuel hedges and interest rate swaps. Specifically, as the underlying forecasted transactions occur during the next 12 months, the hedging gains and losses in accumulated other comprehensive income expected to be recognized in earnings is a loss of $5 million, net of tax, as of September 30, 2020. The amounts that are ultimately reclassified into earnings will be based on actual fuel prices and interest rates at the time the positions are settled and may differ materially from the amount noted above.

Note 17. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options, RSUs and performance share units are reflected in diluted earnings per share by applying the treasury stock method.

A reconciliation of the amounts included in the computation of basic earnings per share from continuing operations and diluted earnings per share from continuing operations is as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In millions, except per share data)

2020

2019

2020

2019

(Loss) income from continuing operations

$

(21)

$

8

$

20

$

103

Weighted-average common shares outstanding

132.0

135.8

132.9

135.9

Effect of dilutive securities:

RSUs(1)

0.3

0.1

0.3

Stock options(1),(2)

0.3

0.3

Weighted-average common shares outstanding—assuming dilution

132.0

136.5

133.1

136.5

Basic (loss) earnings per share from continuing operations

$

(0.17)

$

0.06

$

0.14

$

0.76

Diluted (loss) earnings per share from continuing operations

$

(0.17)

$

0.06

$

0.14

$

0.75

___________________________________

(1)Securities are not included in the table in periods when antidilutive. For the three months ended September 30, 2020, weighted average potentially dilutive shares from RSUs of 0.2 million and weighted average potentially dilutive shares from stock options of 0.1 million 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.

(2)Options to purchase 1.4 million shares for the three months ended September 30, 2020, and 1.4 million and 0.5 million shares for the nine months ended September 30, 2020, and 2019, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. There were an insignificant amount of options that would have been anti-dilutive in the three months ended September 30, 2019.

   


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “—Information Regarding Forward-Looking Statements.”

On January 21, 2020, we announced we were exploring strategic alternatives relating to ServiceMaster Brands, including the potential sale of the business. As a result of this plan, the ServiceMaster Brands Divestiture Group was classified as held for sale and the financial results of the ServiceMaster Brands Divestiture Group as of and for the period ended September 30, 2020, and for all periods prior to September 30, 2020, have been reflected within the disclosures of this Management’s Discussion and Analysis of Financial Condition and Results of Operations as discontinued operations. On October 1, 2020, we completed the sale of the ServiceMaster Brands Divestiture Group. See Note 5 to the condensed consolidated financial statements for further information.

Overview

Our reportable segment, Terminix, provides residential and commercial termite and pest control in North America under the following leading brands: Terminix, Terminix Commercial, Copesan, Assured Environments, Gregory Pest Solutions and McCloud Services. Our European pest control operations, primarily operating under our Nomor, Pelias and Terminix UK brands, are reported in European Pest Control and Other, in addition to our captive insurance subsidiary which provides automobile, workers’ compensation and general liability coverage to Terminix and our headquarters operations (substantially all of which costs are allocated to Terminix), which provide various technology, finance, legal and other support services to Terminix.

Our financial statements include non-recurring costs incurred to evaluate, plan and execute the sale of ServiceMaster Brands. Costs are primarily related to third-party consulting and other incremental costs directly associated with sale. Net earnings from discontinued operations for the three months and nine months ended September 30, 2020 included charges of $9 million and $18 million, respectively, related to the initiative and ultimate sale.

New CEO Appointment

On August 6, 2020, we announced the appointment of Brett T. Ponton as Chief Executive Officer of the Company and as a member of the board of directors of the Company, in each case, effective as of September 15, 2020.

Recent Events and 2020 Outlook

During the three and nine months ended September 30, 2020, the effects of COVID-19 and related actions to attempt to control its spread negatively impacted our business, beginning in the last few weeks of March. On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic, and governments around the world mandated orders to slow the transmission of the virus. States in the United States, including Tennessee, where we are headquartered, declared states of emergency, and countries around the world, including the United States, took steps to restrict travel, instituted work from home policies, enacted temporary closures of businesses, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. Uncertainty with respect to the economic effects of the pandemic and the restrictive policies to mitigate its spread have introduced significant volatility in the financial markets. The exact timing and pace of the recovery are uncertain as certain markets have reopened, while others remain closed or have closed again in an effort to control the spread of the virus. Although demand for our services continued to improve through the third quarter, it remains marginally below prior year, particularly in our Terminix Commercial service line.

Within the United States, our residential and commercial pest control businesses have been designated an essential business by the U.S. Department of Homeland Security, has allowed us to continue to serve our customers while ensuring the health and safety of our employees and our customers. As the States re-opened for business beginning in the second quarter, all of our brands have been fully operational. We have also continued serving our customers in all of the international markets in which we operate.

In response to these developments, beginning in March and continuing through the third quarter of 2020, we implemented contingency planning designed to ensure the safety and productivity of our workforce. We have implemented technology to facilitate remote working, with most back-office and all call center employees working remotely and field support personnel working remotely where possible. We plan to leverage these new remote working capabilities to reduce ongoing operating costs once we emerge from this event. We have global and regional crisis teams in place monitoring the rapidly evolving situation and recommending risk mitigation actions that we have already implemented, including instituting travel restrictions as well as visitor protocols and developing and maintaining social distancing practices. We have assessed and are implementing continuity plans to provide customers with continued service, including procuring and providing personal protective equipment to all front-line personnel. There has been no material impact on supply for most of our sourced materials and for those sourced materials that have been impacted to any degree, continuity plans have been activated. Additionally, we are taking additional actions to improve our liquidity, including capital expenditure and operating expense reductions.

In reaction to customer demands, Terminix launched one-time and recurring sanitization and disinfection services, which will help all businesses, including those deemed essential, maintain clean work areas while staying in compliance with federal, state, and local public health protocols.

Key Business Metrics

We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include:

revenue,

operating expenses,

net income,

earnings per share,

Adjusted EBITDA, and

organic revenue growth.

To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges that management believes are not indicative of the earnings capabilities of our business. We also focus on measures designed to monitor cash flow, including net cash provided from operating activities from continuing operations and free cash flow.

Revenue. Our revenue results are primarily a function of the volume and pricing of the services and products provided to our customers by our business as well as the mix of services and products provided. The volume of our revenue in Terminix is impacted by new unit sales, the retention of our existing customers and acquisitions. Revenue results presented in European Pest Control and Other are primarily comprised of our pest control operations in Europe. We serve both residential and commercial customers, principally in the United States. As of September 30, 2020, approximately 95 percent of our revenue was generated by sales in the United States. Franchise fees from our Terminix franchisees represented less than one percent of revenue for the three and nine months ended September 30, 2020.

Operating Expenses. In addition to the impact of changes in our revenue results, our operating results are affected by, among other things, the level of our operating expenses. A number of our operating expenses are subject to inflationary pressures, such as fuel, chemicals, wages and salaries, employee benefits and health care, vehicles, personal protective equipment, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs.

Net Income and Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and RSUs are reflected in diluted net income per share by applying the treasury stock method. The presentation of basic and diluted earnings per share provides GAAP measures of performance which are useful for investors, analysts and other interested parties in company-to-company operating performance comparisons.

Adjusted EBITDA. We evaluate performance and allocate resources based primarily on Adjusted EBITDA. We define Adjusted EBITDA as net income before: net earnings from discontinued operations; provision for income taxes; interest expense; depreciation and amortization expense; acquisition-related costs; Mobile Bay Formosan termite settlement; non-cash stock-based compensation expense; restructuring and other charges; loss on extinguishment of debt; and realized (gain) on investment in frontdoor, inc. We believe Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans.

Organic Revenue Growth. We evaluate organic revenue growth to track the performance of Terminix, including the impacts of sales, pricing, new service offerings, customer retention and other growth initiatives. Organic revenue growth excludes revenue from acquired customers for 12 months following the acquisition date.

Seasonality

We have seasonality in our business, which drives fluctuations in revenue and Adjusted EBITDA for interim periods. In 2019, approximately 23 percent, 27 percent, 26 percent and 24 percent of our revenue and approximately 26 percent, 32 percent, 23 percent and 19 percent of our Adjusted EBITDA was recognized in the first, second, third and fourth quarters, respectively.

Effect of Weather Conditions

The demand for our services and our results of operations are also affected by weather conditions, including the seasonal nature of our termite and pest control services. Weather conditions which have a potentially unfavorable impact to our business include cooler temperatures or droughts which can impede the development of termite swarms and lead to lower demand for our termite control services. Weather conditions which have a potentially favorable impact to our business include mild winters which can lead to higher demand for termite and pest control services.

Results of Operations

The following table shows the results of operations from continuing operations for the three and nine months ended September 30, 2020 and 2019, which reflects the results of acquired businesses from the relevant acquisition dates. Results of the ServiceMaster Brands Divestiture Group are presented in “—Discontinued Operations – ServiceMaster Brands Divestiture Group.”

Three Months Ended

Increase

September 30,

(Decrease)

% of Revenue

(In millions)

2020

2019

2020 vs. 2019

2020

2019

Revenue

$

512

$

465

10

%

100

%

100

%

Cost of services rendered and products sold

299

278

8

58

60

Selling and administrative expenses

140

137

2

27

30

Amortization expense

9

6

50

2

1

Acquisition-related costs

(1)

8

*

2

Mobile Bay Formosan termite settlement

49

*

10

Restructuring and other charges

2

4

*

1

Interest expense

22

19

13

4

4

Interest and net investment income

(1)

(1)

*

Loss on extinguishment of debt

1

*

(Loss) Income from Continuing Operations before Income Taxes

(7)

13

*

(1)

3

Provision for income taxes

15

4

*

3

1

Equity in earnings of joint venture

1

*

(Loss) Income from Continuing Operations

$

(21)

$

8

*

(4)

%

2

%

________________________________

* not meaningful

Nine Months Ended

Increase

September 30,

(Decrease)

% of Revenue

(In millions)

2020

2019

2020 vs. 2019

2020

2019

Revenue

1,502

1,378

9

%

100

%

100

%

Cost of services rendered and products sold

876

790

11

58

57

Selling and administrative expenses

423

398

6

28

29

Amortization expense

26

16

71

2

1

Acquisition-related costs

12

*

1

Mobile Bay Formosan termite settlement

49

*

3

Realized (gain) on investment in frontdoor, inc.

(40)

*

(3)

Restructuring and other charges

14

12

*

1

1

Interest expense

67

64

3

4

5

Interest and net investment income

(2)

(4)

*

Loss on extinguishment of debt

1

6

*

Income from Continuing Operations before Income Taxes

50

124

*

3

9

Provision for income taxes

31

22

*

2

2

Equity in earnings of joint venture

2

*

Income from Continuing Operations

20

103

*

1

%

7

%

________________________________

* not meaningful


Revenue

We reported revenue of $512 million and $465 million for the three months ended September 30, 2020 and 2019, respectively and revenue of $1,502 million and $1,378 million for the nine months ended September 30, 2020 and 2019, respectively. A summary of changes in revenue is included in the tables below. See “—Segment Review” for a discussion of the drivers of the year-over-year changes.

European Pest

(In millions)

Terminix

Control and Other

Total

Three Months Ended September 30, 2019

$

461

$

4

$

465

Residential Pest Control(1)

9

9

Commercial Pest Control(2)

9

9

Termite and Home Services(3)

7

7

Sale of Products and Other(4)

4

4

European Pest Control(5)

17

17

Three Months Ended September 30, 2020

$

491

$

21

$

512

_________________________________

(1)Includes growth from acquisitions of approximately $2 million for the three months ended September 30, 2020.

(2)Includes growth from acquisitions of approximately $12 million for the three months ended September 30, 2020.

(3)Includes growth from acquisitions of approximately $1 million for the three months ended September 30, 2020.

(4)Includes growth from acquisitions of approximately $8 million for the three months ended September 30, 2020.

(5)Includes growth from acquisitions of approximately $17 million for the three months ended September 30, 2020.

European Pest

(In millions)

Terminix

Control and Other

Total

Nine Months Ended September 30, 2019

$

1,375

$

3

$

1,378

Residential Pest Control (1)

15

15

Commercial Pest Control (2)

23

23

Termite and Home Services(3)

19

19

Sale of Products and Other(4)

14

14

European Pest Control(5)

54

54

Nine Months Ended September 30, 2020

$

1,446

$

56

$

1,502

(1)Includes growth from acquisitions of approximately $6 million for the nine months ended September 30, 2020.

(2)Includes growth from acquisitions of approximately $33 million for the nine months ended September 30, 2020.

(3)Includes growth from acquisitions of approximately $4 million for the nine months ended September 30, 2020.

(4)Includes growth from acquisitions of approximately $20 million for the nine months ended September 30, 2020.

(5)Includes growth from acquisitions of approximately $54 million for the nine months ended September 30, 2020.

Cost of Services Rendered and Products Sold

We reported cost of services rendered and products sold of $299 million and $278 million for the three months ended September 30, 2020 and 2019, respectively, and $876 million and $790 million for the nine months ended September 30, 2020 and 2019, respectively. The following tables provide a summary of changes in cost of services rendered and products sold:

European Pest

(In millions)

Terminix

Control and Other

Total

Three Months Ended September 30, 2019

$

278

$

$

278

Impact of change in revenue(1)

18

11

29

Production labor

(7)

(7)

Vehicle and fuel

(3)

(3)

Damage claims

4

4

Bad debt

(1)

(1)

Travel

(1)

(1)

Insurance program

3

3

Other

(3)

1

(2)

Three Months Ended September 30, 2020

$

285

$

14

$

299

_________________________________

(1)For Terminix, includes approximately $16 million for the three months ended September 30, 2020 from acquisitions. For European Pest Control and Other, includes approximately $11 million for the three months ended September 30, 2020 from acquisitions.

For Terminix, the decrease in production labor was driven by improved employee retention and labor management. The decrease in vehicle and fuel was driven by improvements in fleet management and lower fuel prices. The increase in termite damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the Mobile Bay Area, as well as the costs of the termite damage claim mitigation program in the Mobile Bay Area. The decrease in travel was driven by the impact of COVID-19 and limited travel in 2020.

For European Pest Control and Other, we realized favorable claims results in our automobile, general liability and workers’ compensation program at a lesser extent than generated in the three months ended September 30, 2019.

European Pest

(In millions)

Terminix

Control and Other

Total

Nine Months Ended September 30, 2019

$

794

$

(4)

$

790

Impact of change in revenue(1)

44

36

80

Production labor

(7)

(7)

Vehicle and fuel

(6)

(6)

Damage claims

19

19

Bad debt

(3)

(3)

Travel

(2)

(2)

Insurance program

7

7

Other

(3)

1

(2)

Nine Months Ended September 30, 2020

$

836

$

40

$

876

_________________________________

(1)For Terminix, includes approximately $44 million for the nine months ended September 30, 2020 from acquisitions. For European Pest Control and Other, includes approximately $36 million for the nine months ended September 30, 2020 from acquisitions.

For Terminix, the increase in damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the Mobile Bay Area, as well as the costs related to mitigation efforts in the Mobile Bay Area intended to reduce future damage claims. The decrease in production labor was driven, in part, by improved employee retention and labor management. The decrease in vehicle and fuel was driven by improvements in fleet management and lower fuel prices. The decrease in travel was driven by the impact of COVID-19 and limited travel in 2020.

For European Pest Control and Other, the nine months ended September 30, 2020 were unfavorably impacted by $1 million of adjustments in our automobile, general liability and workers’ compensation program, as compared to favorable adjustments of $6 million in the nine months ended September 30, 2019.

Selling and Administrative Expenses

We reported selling and administrative expenses of $140 million and $137 million for the three months ended September 30, 2020 and 2019, respectively, and $423 million and $398 million for the nine months ended September 30, 2020, and 2019, respectively. The following table provides a summary of selling and administrative expenses:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In millions)

2020

2019

2020

2019

Selling and marketing expenses

$

70

$

71

$

200

$

193

General and administrative expenses

70

66

223

205

Total Selling and administrative expenses

$

140

$

137

$

423

$

398

The following tables provide a summary of changes in selling and administrative expenses:

European Pest

(In millions)

Terminix

Control and Other

Total

Three Months Ended September 30, 2019

$

124

$

13

$

137

Sales and marketing

(2)

(2)

Incentive compensation

5

5

Corporate administrative expenses

(5)

(5)

Acquisition selling and administrative expenses

4

3

7

Other

(2)

(1)

(3)

Three Months Ended September 30, 2020

$

124

$

16

$

140

For Terminix, the increase in incentive compensation is the result of better year over year operating performance. The decrease in corporate administrative expenses was driven by actions taken to reduce the cost of our corporate headquarters operations.

Terminix and European Pest Control and Other reflect higher selling and administrative expenses as a result of acquisitions.

European Pest

(In millions)

Terminix

Control and Other

Total

Nine Months Ended September 30, 2019

$

358

$

40

$

398

Sales and marketing costs

(1)

(1)

Incentive compensation

9

9

Corporate administrative expenses

(5)

(5)

Acquisition selling and administrative expenses

11

13

24

Other

(2)

(2)

Nine Months Ended September 30, 2020