TERMINIX GLOBAL HOLDINGS, INC. The following information should be read in conjunction with Item 6 "Selected Financial Data" and the consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in "-Information Regarding Forward-Looking Statements" and "Risk Factors." Overview Our core services include residential and commercial termite and pest management under the following brands: Terminix, Copesan,Assured Environments , Gregory, McCloud, Nomor and Pelias. Our operations for the periods presented in this report are organized into one reportable segment, our pest management and termite business. Executive Officer Changes New CEO Appointment
On
Incoming CFO
OnDecember 7, 2020 , we announced thatAnthony D. DiLucente , our Senior Vice President and Chief Financial Officer, will be retiring in early 2021. He will be succeeded byRobert J. Riesbeck , who joined Terminix onDecember 7, 2020 , as Executive Vice President.Mr. DiLucente will remain in his current role with Terminix during the transition and through the filing of this Annual Report on Form 10-K. After the filing of the Annual Report on Form 10-K,Mr. Riesbeck will assume the additional role of Chief Financial Officer at Terminix, whileMr. DiLucente will remain with the Company in an advisory capacity throughMarch 31, 2021 . New COO Appointment
On
Sale of ServiceMaster Brands
OnJanuary 21, 2020 , we announced we were exploring strategic alternatives related to ServiceMaster Brands, including the potential sale of the business. OnOctober 1, 2020 , we completed the sale of theServiceMaster Brands Divestiture Group for$1,541 million to Roark, resulting in a gain of$494 million , net of income taxes.The ServiceMaster Brands Divestiture Group is classified as discontinued operations for all periods presented. A portion of the proceeds was used to retire$750 million of our 5.125% Notes due 2024. We also entered into a transition services agreement and sublease agreement with Roark. See Note 7 to the Consolidated Financial Statements for further discussion of these agreements
COVID-19 and Outlook
OnMarch 11, 2020 , theWorld 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 theU.S. , includingTennessee , where we are headquartered, declared states of emergency, and countries around the world, including theU.S. , 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. These actions to attempt to control its spread impacted our business, primarily our commercial pest management service line, beginning in the first quarter. Within theU.S. , our business has been designated an essential business by theU.S. Department of Homeland Security , which has allowed us to continue to serve our customers. We implemented initiatives to ensure the safety and productivity of our workforce, including personal protective equipment and safety policies and measures for field personnel, and 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. We will continue to evaluate the benefits, opportunities and risks identified from our remote working experiences to sustain and identify ways to reduce ongoing operating costs while balancing operational performance. It is reasonably possible that we could recognize additional lease impairment charges within the next 12 months, which could be material, if, for example, any subleases entered into are for less than our fixed rent. 25
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Table of Contents Key Business Metrics We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of our business. These metrics include: ?revenue, ?operating expenses, ?net income (loss), ?earnings (loss) per share, ?Adjusted EBITDA, ?organic revenue growth, and ?customer retention. To the extent applicable, these measures are evaluated with and without impairment, acquisition-related costs, restructuring, foreign currency impacts and other charges that management believes are not indicative of the ongoing 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 across our business. The volume of our revenue is impacted by new unit sales, the retention of our existing customers and acquisitions. We serve both residential and commercial customers, principally in theU.S. We expect to continue our tuck-in acquisition program and to periodically evaluate other strategic acquisitions. In 2020, approximately 95 percent of our revenue was generated by sales in theU.S. Operating Expenses. In addition to the impact of changes in our revenue results, our profitability (Net Income (Loss) and Adjusted EBITDA) are affected by, among other things, the level of our operating expenses. A number of our operating expenses are subject to inflationary pressures, such as fuel, chemicals, wages and salaries, employee benefits and health care, vehicles, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs. Net Income (Loss) and Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and RSUs are reflected in diluted earnings per share by applying the treasury stock method. Adjusted EBITDA. We evaluate performance and allocate resources based primarily on Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before: depreciation and amortization expense; acquisition-related costs;Mobile Bay Formosan termite settlement; termite damage claims reserve adjustment; fumigation related matters; non-cash stock-based compensation expense; restructuring and other charges; non-cash impairment of software and other costs; realized (gain) loss on investment in frontdoor, inc.; net earnings from discontinued operations; provision (benefit) for income taxes; loss on extinguishment of debt; and interest expense. We believe Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, consulting agreements, acquisition activities and equity-based, long-term incentive plans. Organic Revenue Growth. We evaluate organic revenue growth to track performance, including the impacts of sales, pricing, new service offerings and other growth initiatives. Organic revenue growth excludes revenue from acquired customers for 12 months following the acquisition date. We believe organic revenue growth is useful for investors, analysts and other invested parties as it facilitates company-to-company performance comparisons by excluding the impact of acquisitions on our revenue growth. Customer Retention. Customer retention is used to track the retention of our renewable customers and is calculated on a rolling, 12-month basis in order to avoid seasonal anomalies. Seasonality We have seasonality in our business, which drives fluctuations in revenue and Adjusted EBITDA for interim periods. In 2020, revenue and Adjusted EBITDA by quarter was as follows: Q1 Q2 Q3 Q4 Revenue 23 % 27 % 26 % 23 % Adjusted EBITDA 17 % 34 % 28 % 20 %
Effect of Weather Conditions
The demand for our services and our results of operations are also affected by
weather conditions, including increasing pest populations driven by the
increasing temperatures of climate change and the seasonal nature of our termite
and pest management 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.
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Table of Contents Repurchase of Notes OnSeptember 30, 2020 , we closed on an amendment to our Term Loan B credit agreement that permits proceeds from the sale of ServiceMaster Brands to be used to retire subordinated debt or pay shareholder returns. In conjunction with the amendment, we made an approximately$51 million advance amortization payment on the Term Loan B, set to mature in November of 2026, and terminated$4 million of the interest rate swap. In connection with the repayment, we recorded a loss on extinguishment of debt of$1 million which includes the write-off of debt issuance costs. OnNovember 16, 2020 , we used a portion of the proceeds from the sale of ServiceMaster Brands and retired all$750 million of our existing 5.125% Notes due 2024, plus applicable accrued interest. In connection with the retirement, we recorded a loss on extinguishment of debt of$25 million , which included a$19 million prepayment penalty and the write-off of debt issuance costs. As a result of this repurchase and Term Loan B advanced amortization payment, we anticipate interest expense will decrease approximately$40 million in 2021. Results of Operations The following table shows the results of operations for continuing operations for the years endedDecember 31, 2020 , 2019 and 2018, which reflects the results of acquired businesses from the relevant acquisition dates. Increase Year Ended December 31, (Decrease) % of Revenue 2020 vs. 2019 vs. (In millions) 2020 2019 2018 2019 2018 2020 2019 2018 Revenue$ 1,961 $ 1,819 $ 1,655 8 % 10 % 100 % 100 % 100 % Cost of services rendered and products sold 1,155 1,069 944 8 13 59 59 57 Selling and administrative expenses 559 527 500 6 5 28 29 30 Amortization expense 36 25 14 47 82 2 1 1 Acquisition-related costs - 16 4 * * - 1 - Mobile Bay Formosan termite settlement 49 - - * * 2 - - Termite damage claims reserve adjustment - 53 - * * - 3 - Fumigation related matters - - 3 * * - - - Realized (gain) loss on investment in frontdoor, inc. - (40) 249 * * - (2) 15 Restructuring and other charges 16 14 17 * * 1 1 1 Interest expense 83 87 133 (4) (35) 4 5 8 Interest and net investment income (4) (5) (6) (25) (14) - - - Loss on extinguishment of debt 26 8 10 * * 1 - 1 Income (Loss) from Continuing Operations before Income Taxes 41 64 (214) * * 2 4 (13) Provision for income taxes 24 5 14 * * 1 - 1 Equity in earnings of joint ventures 3 - - * * - - - Income (Loss) from Continuing Operations$ 20 $ 60 $ (227) * * 1 % 3 % (14) %
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*not meaningful
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Table of Contents Revenue We reported revenue of$1,961 million ,$1,819 million and$1,655 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Revenue by service line is as follows: Year Ended December 31, (In millions) 2020 2019 Growth Organic Acquired Residential Pest Management$ 706 $ 683 $ 22 3 %$ 15 2 %$ 8 1 % Commercial Pest Management 443 420 23 6 % (11) (3) % 35 8 % Termite and Home Services 633 607 27 4 % 22 4 % 4 1 % European Pest Management 79 21 57 267 % 5 24 % 52 244 % Sales of Products and Other 100 88 13 14 % (8) (9) % 20 23 % Total Revenue$ 1,961 $ 1,819 $ 142 8 %$ 23 1 %$ 119 7 % Year Ended December 31, (In millions) 2019 2018 Growth Organic Acquired Residential Pest Management$ 683 $ 633 $ 50 8 %$ 24 4 %$ 27 4 % Commercial Pest Management 420 339 81 24 % 7 2 % 74 22 % Termite and Home Services 607 599 8 1 % - - % 8 1 % European Pest Management 21 - 21 * - - % 21 100 % Sales of Products and Other 88 84 4 5 % 2 2 % 2 3 % Total Revenue$ 1,819 $ 1,655 $ 165 10 %$ 32 2 %$ 133 8 %
___________________________________
*not meaningful
OnApril 1, 2019 , we divested the assets associated with our fumigation service line and now provide fumigation services to our customers through arrangements with independent third parties. Revenue related to the Fumigation Services, previously presented separately, is now included in Termite and Home Services. Additionally, prior period revenue for Residential Pest Management and Commercial Pest Management has been reclassified to conform to the current period presentation.
Year Ended
Residential pest management revenue growth was three percent. The organic residential pest management growth of two percent was driven by strong customer demand, retention gains and increased price realization, offset by the impact of temporary service postponements in recurring pest services driven by COVID-19, lower new summer sales units, which were initially suspended at the outset of the COVID-19 pandemic, bed bug and other one-time sales. Residential pest management revenue also increased one percent from acquisitions completed during the year. Commercial pest management revenue growth was six percent, reflecting growth from acquisitions of eight percent, offset by organic revenue declines of three percent. The commercial pest management organic revenue decline was driven by service postponements and cancellations due to business closures from COVID-19 and lower sales of non-recurring services, partially offset by price increases. Gregory and McCloud, which were acquired during the fourth quarter of 2019, contributed to organic revenue growth beginning in the fourth quarter of 2020. Termite revenue, including wildlife exclusion, crawl space encapsulation and attic insulation, which are managed as a component of our termite line of business, growth was four percent, primarily reflecting retention gains, an increase in both core termite and home services new unit sales and improved price realization. In the year endedDecember 31, 2020 , we recorded a reduction of termite revenue of$4 million related to the Mobile Bay Formosan termite settlement. In the year endedDecember 31, 2020 , termite renewal revenue comprised 45 percent of total termite revenue, while the remainder consisted of termite new unit revenue. Termite activity is unpredictable in its nature. Factors that can impact termite activity include conducive weather conditions and consumer awareness of termite swarms. Termite renewal revenue will be reduced by between$8 million and$10 million in 2021 due to a change in the timing of revenue recognition from our move to a monthly subscription-based model. We acquired Nomor and Pelias, which comprise the majority of European Pest Management, onSeptember 6, 2019 . Beginning in September of 2020 their results contributed to organic revenue growth. Foreign currency fluctuations contributed$3 million to organic revenue growth. 28
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Year Ended
Residential pest management revenue growth was eight percent. Residential pest management organic revenue growth was four percent, primarily reflecting improved price realization as well as unit growth in mosquito and non-recurring services. Residential pest management revenue also increased four percent from acquisitions completed during the year. Commercial pest management revenue growth was 24 percent. Commercial organic pest management revenue growth was two percent, primarily reflecting improved price realization and improved retention. Commercial pest management revenue also increased 22 percent from acquisitions completed during the last 12 months, including the impact of our acquisition of Copesan for the three months endedMarch 31, 2019 . Termite revenue, including the wildlife exclusion, crawl space encapsulation and attic insulation products that are managed as a component of our termite line of business, increased one percent, primarily reflecting new unit growth in home services and improved price realization, offset in part by a reduction in termite renewals driven by price increases in the MobileBay Area . In 2019, termite renewal revenue comprised 48 percent of total termite revenue, while the remainder consisted of termite new unit revenue. During the first half of 2019, revenue growth was negatively impacted by approximately$6 million due to wet weather conditions and flooding that affected low margin product sales and branch operations and lead flow, primarily in termite completion revenue. Fourth quarter 2019 termite revenue growth was negatively impacted by approximately$2 million from a one-time acceleration of revenue in the fourth quarter of 2018 to conform our accounting method for a small sub-set of our customers to those adopted under ASC 606.
We acquired Nomor and Pelias, which comprise the majority of European Pest
Management, on
Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of
(In millions) Year Ended December 31, 2018$ 944 Impact of change in revenue(1) 91 Production labor 5 Chemicals and materials (5) Damage claims 7 Fumigation services 10 European Pest Management 16 Insurance program 3 Other (2) Year Ended December 31, 2019$ 1,069 Impact of change in revenue(1) 51 Production labor (14) Vehicle and fuel (9) Damage claims 21 Bad debt (3) Travel (2) Insurance program 5 European Pest Management 33 Other 3 Year Ended December 31, 2020$ 1,155
___________________________________
(1)Includes approximately
Year Ended
The decrease in production labor was driven, in part, by improved employee retention and labor management, partially offset by labor inefficiencies incurred in the first quarter of 2020 due to the impact of COVID-19. The 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 MobileBay Area , as well as the costs of the termite damage claim mitigation program in the MobileBay Area . The decrease in travel was driven by the impact of COVID-19 and limited travel in 2020. The decrease in insurance program is driven by favorable adjustments in our automobile, general liability and workers' compensation program of$1 million in the year endedDecember 31, 2020 as compared to favorable adjustments of$6 million in the year endedDecember 31, 2019 . 29
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Year Ended
The increase in production labor was driven by accelerated hiring in the fourth quarter of 2019 in advance of the 2020 peak season. The decrease in chemicals and materials was driven by sourcing productivity. The increase in damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the MobileBay Area . Fumigation services represents the reduced fumigation margin driven by the outsourcing of fumigation completion services. In addition, we realized favorable claims results in our automobile, general liability and workers' compensation program of$6 million in the year endedDecember 31, 2019 as compared to favorable adjustments of$10 million in the year endedDecember 31, 2018 .
Selling and Administrative Expenses
For the years ended
Year Ended December 31,
(In millions) 2020 2019 2018
Selling and marketing expenses$ 265 $ 255 $
242
General and administrative expenses 294 273
258
Total Selling and administrative expenses$ 559 $ 527 $
500
The following table provides a summary of changes in selling and administrative expenses:
(In millions) Year EndedDecember 31, 2018 $ 500 Sales and marketing costs 11 Executive recruiting 2 Incentive compensation (7) Investments in growth 17 Investments in training 2 Stock-based compensation expense (1) Depreciation (4)
Domestic acquisition selling and administrative expenses 18 European Pest Management
7
Spin-off dis-synergies 12
Costs historically allocated to American Home Shield (33)
Other 3
Year Ended December 31, 2019 $ 527
Sales and marketing costs (2)
Incentive compensation 19
Travel (6)
Corporate administrative expenses (5)
Domestic acquisition selling and administrative expenses 12 European Pest Management
13
Year Ended December 31, 2020 $ 559 Year Ended
The increase in incentive compensation is driven by 2020 financial performance. The decrease in travel was driven by the impact of COVID-19 and limited travel in 2020. The decrease in corporate administrative expenses was driven by actions taken to reduce the cost of our corporate headquarters operations. We also incurred incremental selling and administrative expenses as a result of domestic acquisitions completed in the last 12 months.
Year Ended
The increase in sales and marketing reflects higher marketing spend to drive sales growth and higher sales commissions related to our summer sales program. Executive recruiting includes onboarding and relocation costs related to the hiring of members of Terminix's executive leadership team. The reduction in incentive compensation payments reflects lower charges related to our annual incentive plans driven by 2019 financial performance. The increase in investments in growth primarily includes costs to implement our new customer experience platform to replace legacy operating systems, investments to optimize our commercial pest business and investments to transform our operating model. We also incurred incremental selling and administrative expenses as a result of domestic acquisitions completed in the last 12 months, and to support optimization expenses incurred byTerminix UK as part of our efforts to separate it from its former owner's operations and systems. 30
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Table of Contents Amortization Expense
Amortization expense was
Acquisition-Related Costs
In the year endedDecember 31, 2020 , we reversed previously accrued contingent consideration for several acquisitions as the contingencies were not met which offset acquisition-related costs incurred in 2020. We recognized$16 million and$4 million of acquisition-related costs in the years endedDecember 31, 2019 and 2018, respectively. The change in acquisition-related costs primarily reflects the effect of decreased acquisition activity in 2020 compared to 2019, and increased acquisition activity in 2019 compared to 2018.
Mobile Bay Formosan Termite Settlement
We recorded a charge of$49 million in the year endedDecember 31, 2020 for the Mobile Bay Formosan termite settlement. See Note 9 to the consolidated financial statements for more details.
Termite Damage Claims Reserve Adjustment
We recorded a charge of$53 million in the year endedDecember 31, 2019 for an adjustment of our reserves for termite damage claims. The adjustment is the result of a change in our estimation technique based on a detailed statistical assessment of claims history and case results. See Note 9 to the consolidated financial statements for more details.
Fumigation Related Matters
We recorded charges of$3 million in the year endedDecember 31, 2018 , for fumigation related matters. No similar charge was recorded in the years endedDecember 31, 2020 or 2019. See Note 9 to the consolidated financial statements for more details.
Realized (Gain) Loss on Investment in frontdoor, inc.
We recorded a realized gain of
Restructuring and Other Charges
We incurred restructuring charges of
Restructuring charges are comprised of the following:
Year Ended December 31,
(In millions) 2020 2019 2018
Field Operations(1) $ 6 $ 5 $ 2
Headquarter operations(2) 9 5 6
Global Service Center relocation(3) - 1 8
Total restructuring and other charges $ 16 $ 12 $ 17
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(1)For the years endedDecember 31, 2020 , 2019 and 2018, these charges included$6 million ,$5 million and$2 million , respectively of lease termination and severance costs. For the year endedDecember 31, 2020 , lease termination costs included$3 million of impairment charges related to our former call center right of use assets and rent expense on leases we exited before the end of the lease term. (2)For the year endedDecember 31, 2020 , includes severance and charges to enhance capabilities and reduce costs in our corporate functions that provide administrative services to support operations and other costs to enhance capabilities and align functions after the sale of theServiceMaster Brands Divestiture Group of$8 million and retention bonuses to employees key to effecting the sale of theServiceMaster Brands Divestiture Group of$1 million . For the year endedDecember 31, 2019 , these charges included$3 million of accelerated depreciation on systems we are replacing with the implementation of our customer experience platform,$2 million of professional fees and other costs to enhance capabilities and align corporate functions after theAmerican Home Shield spin-off and$1 million of severance and other costs. For the year endedDecember 31, 2018 , includes$3 million of severance and other costs and$4 million of costs to facilitate theAmerican Home Shield spin-off that were not included in discontinued operations.
(3)For the year ended
Other charges represent professional fees incurred that are not closely associated with our ongoing operations. Other charges were$2 million for the year endedDecember 31, 2019 . We incurred no other charges for the years endedDecember 31, 2020 or 2018. 31
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Table of Contents Interest Expense Interest expense was$83 million ,$87 million and$133 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The decrease in interest expense in 2020 was principally driven by the retirement of all$750 million of our existing 5.125% Notes onNovember 15, 2020 . The decrease in interest expense in 2019 was driven by the repayment of approximately$1 billion of our senior secured term loan facility in connection with the spin-off ofAmerican Home Shield , as well as the repayment of approximately$484 million in debt in connection with the monetization of our shares of Frontdoor. See Note 11 to the consolidated financial statements for more details.
Interest and Net Investment Income
Interest and net investment income was$4 million ,$5 million and$6 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively, and comprised interest income on cash balances.
Loss on Extinguishment of Debt
A loss on extinguishment of debt of$26 million was recorded in the year endedDecember 31, 2020 . We recorded a$1 million loss on extinguishment of debt related to an advanced amortization payment made on our Term Loan Facility, and a prepayment penalty of$19 million and write-off of debt issuance costs of$7 million on the retirement and repayment of our$750 million 5.125% Notes due 2024. A loss on extinguishment of debt of$8 million was recorded in the year endedDecember 31, 2019 , related to the refinancing of our old Term Loan Facility onNovember 5, 2019 . A loss of extinguishment of debt of$10 million was recorded in the year endedDecember 31, 2018 , related to the prepayment of the$982 million aggregate principal amount of term loans outstanding under our then existing senior secured term loan facility onAugust 1, 2018 . See Note 11 to the consolidated financial statements for more details.
Income (Loss) from Continuing Operations before Income Taxes
Income (loss) from continuing operations before income taxes was$41 million ,$64 million and$(214) million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The decrease for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was primarily driven by theMobile Bay Formosan termite settlement and a loss on the extinguishment of debt. The year endedDecember 31, 2019 also included a termite damage claims reserve adjustment and a realized gain on our investment in Frontdoor. There were no similar items in 2020. The increase for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 was primarily driven by a reduction in interest expense and a realized loss on our investment in Frontdoor in 2018 offset, in part, by a termite damage claims reserve adjustment.
Provision for Income Taxes
The effective tax rate on income from continuing operations was 58.1 percent, 7.3 percent and (6.3) percent for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The effective tax rate on income from continuing operations for the year endedDecember 31, 2020 was primarily unfavorably impacted by the Mobile Bay Formosan termite settlement as described in Note 9 to the Consolidated Financial Statements, the majority of which is not deductible for income tax purposes. The effective tax rate on income from continuing operations for the year endedDecember 31, 2019 was primarily favorably impacted by the gain recognized on our retained investment in Frontdoor, which is not taxable for income tax purposes. Additional information on income taxes, including our effective tax rate reconciliation and liabilities for uncertain tax positions, can be found in Note 5 to the Consolidated Financial Statements.
Equity in Earnings of Joint Ventures
Equity in earnings of joint ventures was$3 million in the year endedDecember 31, 2020 , primarily reflecting earnings from joint ventures entered into in 2019. Earnings from joint ventures in the year endedDecember 31, 2019 and 2018 were less than$1 million .
Income (Loss) from Continuing Operations
Income (loss) from continuing operations was$20 million ,$60 million and$(227) million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The decrease for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was primarily driven by a$24 million decrease in income from continuing operations before income taxes, resulting from the$49 million Mobile Bay Formosan termite settlement and a$26 million loss on extinguishment of debt, both in 2020, offset in part by the$53 million termite damage claims reserve adjustment and$40 million realized gain on our investment in frontdoor inc., both from 2019. The$287 million increase from the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 was primarily driven by a$278 million increase in loss from continuing operations before income taxes driven by the mark-to-market loss on our retained investment in frontdoor, inc.
Net Earnings from Discontinued Operations
Net earnings from discontinued operations was$531 million ,$69 million and$186 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively, reflecting the operations of theServiceMaster Brands Divestiture Group for each year, through 32
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September 30, 2020 , and the operations of theAmerican Home Shield business throughSeptember 30, 2018 . The year endedDecember 31, 2020 includes the gain on the sale of theServiceMaster Brands Divestiture Group of$494 million , net of income taxes. Net Income (Loss) Net income (loss) was$551 million ,$128 million and$(41) million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The increase for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 was primarily driven by the gain recognized on theServiceMaster Brands Divestiture Group , offset by a decrease in income from continuing operations of$40 million , driven by the Mobile Bay Formosan termite settlement and higher debt extinguishment costs. The increase for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 was primarily driven by an increase in income from continuing operations of$287 million , offset by a decrease in net earnings from discontinued operations of$118 million .
Adjusted EBITDA
The following table provides a summary of changes in Adjusted EBITDA from
(In millions) Year EndedDecember 31, 2018 $ 298 Impact of organic revenue growth 18 Production labor (5) Chemicals and materials 5 Damage claims (7) Sales and marketing costs (11) Executive recruiting (2) Incentive compensation 7 Investments in growth (17) Investments in training (2) Fumigation services (10) Insurance program (3) Impact of domestic acquisitions 20 European Pest Management 1 Spin-off dis-synergies (12)
Costs historically allocated to
$ 313 Impact of organic revenue growth 14 Production labor 14 Vehicle and fuel 9 Damage claims (21) Bad debt 3 Travel 8 Sales and marketing costs 2 Incentive compensation (19) Corporate administrative expenses 5 Insurance program (5) Impact of domestic acquisitions 10 European Pest Management 11 Other 4 Year EndedDecember 31, 2020 $ 345
Year Ended
The decrease in production labor was driven, in part, by improved employee retention and labor management, partially offset by labor inefficiencies incurred in the first quarter of 2020 due to the impact of COVID-19. The 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 MobileBay Area , as well as the costs of the termite damage claim mitigation program in the MobileBay Area . The increase in incentive compensation is driven by 2020 financial performance. The decrease in travel was driven by the impact of COVID-19 and limited travel in 2020. The decrease in corporate administrative expenses was driven by actions taken to reduce the cost of our corporate headquarters operations. The decrease in insurance program is driven by fewer favorable adjustments in our automobile, general liability and workers' compensation program. 33
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Year Ended
The increase in production labor was driven by accelerated hiring in the fourth quarter of 2019 in advance of the 2020 peak season. The decrease in chemicals and materials was driven by sourcing productivity. The increase in damage claims was driven by increased Non-Litigated Claims and Litigated Claims, primarily in the MobileBay Area . Fumigation services represents the reduced fumigation margin driven by the outsourcing of fumigation completion services. In addition, we realized favorable claims results in our automobile, general liability and workers' compensation program at a lesser extent than generated in the prior year. The increase in sales and marketing reflects higher marketing spend to drive sales growth and higher sales commissions related to our summer sales program. Executive recruiting includes onboarding and relocation costs related to the hiring of members of Terminix's executive leadership team. The reduction in incentive compensation payments reflects lower charges related to our annual incentive plans driven by 2019 financial performance. The increase in investments in growth primarily includes our investment in our new customer experience platform to replace legacy operating systems, investments to optimize our commercial pest business and investments to transform our operating model. We also incurred incremental selling and administrative expenses as a result of domestic acquisitions completed in the last 12 months, and to support optimization expenses incurred byTerminix UK as part of our efforts to separate it from its former owner's operations and systems.
Liquidity and Capital
Liquidity
As ofDecember 31, 2020 , we had$704 million of cash on the Consolidated Statement of Financial Position. OnOctober 1, 2020 , we completed the sale of theServiceMaster Brands Divestiture Group for$1,541 million . See Note 7 to the Consolidated Financial Statements for further discussion. During 2020, we made a$51 million advance amortization payment on our Term Loan B and retired all$750 million of our 5.125% Notes. In connection with the retirement we paid a prepayment penalty of$19 million . In addition, we made$66 million of other debt payments and paid$3 million of debt issuance costs. We also repurchased$110 million of common stock. Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as required, borrowings under the Credit Facilities. We expect that cash provided from operations and available capacity under the Revolving Credit Facility will provide sufficient funds to operate our business, make expected capital expenditures and meet our liquidity requirements for the following 12 months, including payment of interest and principal on our debt. Cash and long-term marketable securities totaled$629 million as ofDecember 31, 2020 , compared with$292 million as ofDecember 31, 2019 . As ofDecember 31, 2020 , there were$23 million of letters of credit outstanding and$377 million of available borrowing capacity under the Revolving Credit Facility. The letters of credit are posted to satisfy collateral requirements under our automobile, general liability and workers' compensation insurance program and fuel swap contracts. OnFebruary 19, 2019 , our board of directors approved a three-year extension of a previously authorized share repurchase plan allowing for$150 million of repurchases of our common stock throughFebruary 19, 2022 . We utilized all remaining authority under this program and repurchased$103 million of shares in the first quarter of 2020, at an average share price of$27.64 , using cash from operations. OnSeptember 25, 2020 , our board of directors approved a three-year share repurchase program allowing for$400 million of repurchases of our common stock throughSeptember 25, 2023 . The extent to which we repurchase our shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by us. The repurchase program may be suspended or discontinued at any time. We expect to fund the share repurchases from cash on hand and net cash provided from operating activities. The share repurchase program is part of our capital allocation strategy that focuses on sustainable growth and maximizing stockholder value. We repurchased$6 million of shares in the fourth quarter of 2020, at an average price of$50.24 , using cash from operations. As ofDecember 31, 2020 , we had$394 million of authority remaining under this program. OnNovember 4, 2020 , we reached a Settlement with theAL AG in connection with our Formosan termite business practices in the MobileBay Area ofAlabama pursuant to which we recorded a charge of$49 million and a reduction of revenue of$4 million in the year endedDecember 31, 2020 . We funded this settlement through the establishment of a$25 million consumer fund and direct payments primarily to theState of Alabama of$25 million in the fourth quarter of 2020, for total payments of$50 million . The remaining$2 million has not been paid and is included in Accrued liabilities - Other on theDecember 31, 2020 Consolidated Statements of Financial Position. See Note 9 to the consolidated financial statements for more details. As ofDecember 31, 2020 , we had posted$21 million in letters of credit, which were issued under the Revolving Credit Facility, and$89 million of cash, which is included in Restricted cash on the Consolidated Statements of Financial Position, as collateral under our automobile, general liability and workers' compensation insurance program. We may from time to time change the amount of cash or marketable securities used to satisfy collateral requirements under our automobile, general liability and workers' compensation insurance program. The amount of cash or marketable securities utilized to satisfy these collateral requirements will depend on the relative cost of the issuance of letters of credit under the Revolving Credit Facility and our cash position. Any change in cash or marketable securities used as collateral would result in a corresponding change in our available borrowing capacity under the Revolving Credit Facility. 34
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Additionally, under the terms of our fuel swap contracts, we are required to post collateral in the event the fair value of the contracts exceeds a certain agreed upon liability level and in other circumstances required by the agreement with the counterparty. As ofDecember 31, 2020 , the estimated fair value of our fuel swap contracts was a net asset of$3 million , and we had posted$2 million in letters of credit as collateral under our fuel hedging program, which were also issued under the Revolving Credit Facility. The continued use of letters of credit for this purpose in the future could limit our ability to post letters of credit for other purposes and could limit our borrowing availability under the Revolving Credit Facility. However, we do not expect the fair value of the outstanding fuel swap contracts to materially impact our financial position or liquidity. A portion of our liquidity needs are due to service requirements on our indebtedness. The Credit Facilities contain covenants that limit or restrict our ability, including the ability of certain of our subsidiaries, to incur additional indebtedness, repurchase debt, incur liens, sell assets, make certain payments (including dividends) and enter into transactions with affiliates. As ofDecember 31, 2020 , we were in compliance with the covenants under the agreements that were in effect on such date. We may from time to time repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position, results of operations or cash flows. These actions may include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations.
Long-Term Debt
Using proceeds from the sale of theServiceMaster Brands Divestiture Group , we retired all$750 million of our existing 5.125% Notes onNovember 15, 2020 . In conjunction with the retirement, we paid a prepayment penalty of 2.563%, or$19 million , and wrote off unamortized debt issuance costs of$7 million . OnNovember 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. Concurrently with the refinancing, we entered into a seven year interest rate swap agreement with a notional amount of$550 million , of which$546 million remains in effect as ofDecember 31, 2020 . During the remaining term on the agreement, the effective interest rate on$546 million of the new Term Loan B is fixed at a rate of 1.615 percent, plus the incremental borrowing margin of 1.75 percent, or 3.365 percent. OnSeptember 30, 2020 , we closed on an amendment to our Term Loan B credit agreement that permits proceeds from the sale of ServiceMaster Brands to be used to retire subordinated debt or pay shareholder returns. In conjunction with the amendment, we made an approximately$51 million advance amortization payment on the Term Loan B, set to mature in November of 2026, and terminated$4 million of our interest rate swap. In connection with the repayment, we recorded a loss on extinguishment of debt of$1 million which includes the write-off of debt issuance costs
Long term debt is summarized in the following table:
As of December 31 ,
(In millions) 2020 2019
Senior secured term loan facility maturing in 2026 539 593 5.125% notes maturing in 2024 - 742 7.45% notes maturing in 2027 169 167 7.25% notes maturing in 2038 41 40 Vehicle finance leases 95 99 Other 77 94 Less current portion (94) (69) Total long-term debt$ 826 $ 1,666 The amounts above are net of unamortized debt issuance costs and unamortized original issue discounts. For further information on our indebtedness, see Note 11 to the Consolidated Financial Statements.
Fleet and Equipment Financing Arrangements
We have entered into a fleet management services agreement (the "Fleet Agreement") which, among other things, allows us to obtain fleet vehicles through a leasing program. We expect to fulfill substantially all of our vehicle fleet needs through the leasing program under the Fleet Agreement. For the year endedDecember 31, 2020 , we acquired approximately$35 million of vehicles through the leasing program under the Fleet Agreement. All leases under the Fleet Agreement are finance leases for accounting purposes. The lease rental payments include an interest component calculated using a variable rate based on one-month LIBOR plus other contractual adjustments and a borrowing margin of 1.41% to 2.45%. We have no minimum commitment for the number of vehicles to be obtained under the Fleet Agreement. We anticipate new lease financings for the full year 2021 will range from approximately$60 million to$70 million . 35
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Limitations on Distributions and Dividends by Subsidiaries
We are a holding company, and as such have no independent operations or material assets other than ownership of equity interests in our subsidiaries. We depend on our subsidiaries to distribute funds to us so that we may pay obligations and expenses, including satisfying obligations with respect to indebtedness. The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements and financial condition and general business conditions, as well as restrictions under the laws of our subsidiaries' jurisdictions. The agreements governing the Credit Facilities may restrict the ability of our subsidiaries to pay dividends, make loans or otherwise transfer assets to us. Further, our subsidiaries are permitted under the terms of the Credit Facilities and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us. We consider the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. The amount of cash associated with indefinitely reinvested foreign earnings was approximately$41 million and$35 million as ofDecember 31, 2020 and 2019, respectively.
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in
the accompanying Consolidated Statements of Cash Flows, are summarized in the
following table.
Year Ended December 31,
(In millions) 2020 2019 2018
Net cash provided from (used for):
Operating activities $ 198 $ 164 $ 155
Investing activities (47) (519) (248)
Financing activities (992) 328 (349)
Discontinued operations 1,176 81 193
Effect of exchange rate changes on cash 1 1 (1)
Cash increase (decrease) during the period
Operating Activities Net cash provided from operating activities from continuing operations increased$33 million to$198 million for the year endedDecember 31, 2020 compared to$164 million for the year endedDecember 31, 2019 and$155 million for the year endedDecember 31, 2018 . Net cash provided from operating activities in 2020 comprised$242 million in earnings adjusted for non-cash charges, offset, in part, by$49 million in payments on the Mobile Bay Formosan termite settlement,$12 million in payments related to restructuring and other charges,$5 million in payments related to acquisition-related costs and a$22 million decrease in cash required for working capital (a$3 million decrease excluding the working capital impact of accrued interest and taxes). For the year endedDecember 31, 2020 , working capital requirements were favorably impacted by the deferral of payroll and income tax payments under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and the collection of a federal income tax refund. Net cash provided from operating activities in 2019 comprised$227 million in earnings adjusted for non-cash charges, offset, in part, by$2 million in payments related to fumigation matters,$17 million in payments related to restructuring and other charges,$14 million in payments related to acquisition-related charges and a$29 million increase in cash required for working capital (a$25 million increase excluding the working capital impact of accrued interest and taxes). For the year endedDecember 31, 2019 , working capital requirements were unfavorably impacted by the timing of income tax payments. Net cash provided from operating activities in 2018 comprised$159 million in earnings adjusted for non-cash charges, offset, in part, by$14 million in payments related to restructuring and other charges,$3 million in payments related to acquisition-related costs and a$14 million decrease in cash required for working capital (a$3 million increase excluding the working capital impact of accrued interest and taxes). For the year endedDecember 31, 2018 , working capital requirements were favorably impacted by the timing of income tax payments.
Investing Activities
Net cash used for investing activities from continuing operations was$47 million for the year endedDecember 31, 2020 compared to$519 million for the year endedDecember 31, 2019 and$248 million for the year endedDecember 31, 2018 . Capital expenditures, which included recurring capital needs, and information technology projects, increased to$26 million in 2020 from$25 million in 2019 and$39 million , net of government grant fundings for property additions, in 2018. We anticipate capital expenditures for the full year 2021 will range from$30 million to$40 million , reflecting recurring capital needs and information technology projects. We expect to fulfill our ongoing vehicle fleet needs through vehicle finance leases. We have no additional material capital commitments at this time. 36
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Proceeds from the sale of equipment and other assets was
Cash payments for acquisitions totaled$36 million in 2020 compared with$506 million in 2019 and$187 million in 2018. In 2020, we completed 12 tuck-in acquisitions. In 2019, we completed 39 acquisitions, including Nomor, Pelias,Assured Environments , Gregory, McCloud andTerminix UK . In 2018, we completed 20 acquisitions, including Copesan. We expect to continue our tuck-in acquisition program and to periodically evaluate other strategic acquisitions in theU.S. and internationally. Cash flows received for notes receivable, net, for the year endedDecember 31, 2020 totaled$9 million , reflecting the collection of other long-term financing arrangements. Cash flows received for notes receivable, net, for the year endedDecember 31, 2019 totaled$11 million , and cash flows used for notes receivable, net, for the year endedDecember 31, 2018 totaled$23 million .
Financing Activities
Net cash used for financing activities from continuing operations was$992 million for the year endedDecember 31, 2020 compared to net cash provided from financing activities of$328 million for the year endedDecember 31, 2019 and net cash used for financing activities from continuing operations of$349 for the year endedDecember 31, 2018 . During 2020 we made a$51 million advance amortization payment on our Term Loan B and retired all$750 million of our 5.125% Notes. In connection with the retirement we paid a prepayment penalty of$19 million . In addition, we made$66 million of other debt payments and paid$3 million of debt issuance costs. We also repurchased$110 million of common stock and received$8 million from the issuance of common stock upon the exercise of stock options. During the first quarter of 2019, we completed a debt-for-equity exchange which resulted in$600 million of borrowings of debt under a short-term credit facility,$472 million of repayments of our senior secured term loan facility and$114 million of repayments under a short-term credit facility.
During the second quarter of 2019 we repurchased an aggregate of
During the third quarter of 2019, we borrowed an aggregate principal amount of$120 million under our revolving credit facility to finance our acquisition ofNomor Holding AB . This short term borrowing was repaid in the fourth quarter of 2019. During the fourth quarter of 2019, we completed an amended$600 million Term Loan B due 2026, as well as a$400 million revolving credit agreement due 2024. The proceeds of the transaction were used to repay approximately$171 million of debt outstanding under our previous Term Loan B due 2023 well as$150 million from a recent short-term borrowing entered onOctober 4, 2019 . In addition, during 2019 we repaid$56 million of other debt and paid$11 million of discounts and debt issuance costs. We also repurchased$47 million of common stock and received$10 million from the issuance of common stock upon the exercise of stock options. During 2018, we completed a debt-for-debt exchange with Frontdoor which resulted in$1 billion of borrowings and$1 billion of repayments of long-term debt. In addition, we repaid$113 million of other debt, including$79 million to repay our 2018 Notes upon their maturity. In completing the spin-off, we contributed$242 million to Frontdoor. We also received$7 million from the issuance of common stock upon the exercise of stock options.
Financial Position-Continuing Operations
The following discussion describes material changes in our financial position
from
Cash increases were primarily driven by the proceeds from the sale of theServiceMaster Brands Divestiture Group . After applicable taxes and fees, we received net proceeds of approximately$1,149 million . A portion of the proceeds was used to retire$750 million of our 5.125% Notes due 2024, for which we paid a prepayment penalty of approximately$19 million .
Receivables and Deferred customer acquisition costs increased from prior year levels driven by revenue growth and acquisitions.
The increase in Prepaid expenses and other assets was driven by amounts capitalized related to our implementation of our customer experience platform and an income tax receivable.
Property and equipment decreased from prior year levels, primarily reflecting depreciation expense, offset by purchases for recurring capital needs and information technology projects.
Operating lease right-of-use assets, Current portion of lease liability and Long-term lease liability decreased from prior year primarily due to our termination of our customer care center leases and normal amortization from passage of time on our leases.
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Accrued liabilities-Payroll and related expenses increased due to a one-time deferral of approximately$30 million payroll tax payments under the CARES Act. We expect to pay 50 percent of the payroll deferral in 2021 and the remainder in 2022. Long-term debt decreased primarily due to the retirement and repayment of all$750 million of our 5.125% Notes. Current portion of long-term debt increased primarily due to deferred payments on acquisitions due in the next 12 months. Deferred taxes decreased from prior year levels, primarily due to the use or expiration of deferred taxes in connection with the sale of theServiceMaster Brands Divestiture Group . See Notes 5 and 7 to the Consolidated Financial Statements for more details.
Total stockholders' equity increases were primarily driven by the impact of the
gain on the sale of the
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires management to make certain estimates and assumptions required under GAAP which may differ from actual results. The following are our most critical accounting policies, which are those that involve a significant level of estimation uncertainty and require management's most difficult, subjective and complex judgments. These estimates are inherently uncertain and may change in subsequent periods. The following discussion is not intended to represent a comprehensive list of our accounting policies. For a detailed description of the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Self-insurance Accruals
We carry insurance policies on insurable risks at levels which we believe to be appropriate, including workers' compensation, auto and general liability risks. We purchase insurance from third-party insurance carriers. These policies typically incorporate significant deductibles or self-insured retentions. We are responsible for all claims that fall within the retention limits. In determining our accrual for self-insured claims, we use historical claims experience to establish both the current year accrual and the underlying provision for future losses. This actuarially determined provision and related accrual include both known claims, as well as incurred but not reported claims. We adjust our estimate of accrued self-insured claims when required to reflect changes based on factors such as changes in health care costs, accident frequency and claim severity. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation technique in this area is inherently sensitive given the magnitude of claims involved and the length of time until the ultimate cost is known. We believe our recorded obligations for these expenses are consistently measured. Nevertheless, changes in healthcare costs, accident frequency and claim severity can materially affect the estimates for these liabilities. Income Taxes We record deferred income tax balances based on the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and income tax purposes. Based on the evaluation of all available information, the Company recognizes future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is considered more likely than not. We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date income before income taxes, excluding infrequently occurring or unusual items, to determine the year-to-date income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs. Our current and deferred tax provisions are based on estimates and assumptions that could differ from the final positions reflected in our income tax returns. We adjust our current and deferred tax provisions based on our income tax returns which are generally filed in the third or fourth quarters of the subsequent year. Our income tax returns are audited byU.S. state,U.S. federal and foreign tax authorities, and we are typically engaged in various tax examinations at any given time. Uncertain tax positions often arise due to uncertainty or differing interpretations of the application of tax rules throughout the various jurisdictions in which we operate. On a quarterly basis, we evaluate the probability that a tax position will be effectively sustained, and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. While management believes that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts. We recognize interest and penalties related to income tax matters in income tax expense. 38
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Table of Contents Acquisitions Acquisitions have been accounted for as business combinations using the acquisition method in accordance with ASC 805, "Business Combinations," and, accordingly, the purchase price has been allocated to the acquired assets and liabilities assumed at their estimated fair values as of the acquisition dates. The fair value of customer relationships is identified using an income approach. The fair value of trade names acquired is identified using the relief from royalty method. Determining the fair value of intangible assets required the use of significant judgment, including the discount rates and the long-term plans about future revenues and expenses, capital expenditures and changes in working capital, which are dependent on information provided by the company acquired. After the purchase price is allocated, goodwill is recorded to the extent the total consideration paid for the acquisition exceeds the sum of the fair value of all assets and liabilities acquired. Asset acquisitions have been accounted for under ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business." Determining the useful life of an intangible asset also requires judgment as different intangible assets will have different useful lives. The results of operations of the acquired businesses have been included in the consolidated financial statements since their dates of acquisition.
As required under accounting standards, goodwill is not subject to amortization, and intangible assets with indefinite useful lives are not amortized until their useful lives are determined to no longer be indefinite.Goodwill and intangible assets that are not subject to amortization are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment.Goodwill and indefinite-lived intangible assets, primarily our trade names, are assessed annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. Most of our goodwill is assigned to three reporting units, Terminix, Nomor and Pelias. Our 2020, 2019 and 2018 annual impairment analyses, which were performed as ofOctober 1 of each year, did not result in any goodwill or trade name impairments. Determining the fair value of our reporting units and trade names required the use of significant judgment, including the discount rates, the long-term business plan about future revenues and expenses, capital expenditures and changes in working capital, which are dependent on internal forecasts, estimation of long-term growth for each reporting unit, and determination of the weighted average cost of capital. Additionally, for our remaining reporting units with goodwill, we performed a qualitative impairment analysis during the fourth quarter of 2020 and determined that it was more likely than not that these assets were not impaired.
Contingent Liabilities
We have certain liabilities with respect to existing or potential claims, lawsuits and other proceedings, including litigated termite damage claims. Accruals for contingent liabilities, including legal and environmental matters, are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters, including termite damage claims reserves for asserted Litigated Claims, require judgments regarding projected outcomes and range of loss based on historical experience and recommendations of legal counsel. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. Termite damage claim accruals for Non-Litigated Claims in the Terminix business are recorded based on a statistical analysis which projects the costs to settle using the expected geographic distribution of current and future claims and their relative costs to settle. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified. See Note 9 to the Consolidated Financial Statements for further discussion.
A summary of Litigated Claims and Non-Litigated Claims activity over the last three years is as follows:
Litigated Claims Non-Litigated Claims
Mobile Bay All Other Mobile Bay All Other
Area Regions Total Area Regions Total
Outstanding claims as of December 31, 2017 22 15 37 156 666 822
New claims filed 18 9 27 556 2,547 3,103
Claims resolved (9) (7) (16) (448) (2,611) (3,059)
Outstanding claims as of December 31, 2018 31 17 48 264 602 866
New claims filed 40 1 41 735 2,652 3,387
Claims resolved (15) (7) (22) (623) (2,636) (3,259)
Outstanding claims as of December 31, 2019 56 11 67 376 618 994
New claims filed 25 14 39 482 2,353 2,835
Claims resolved (32) (9) (41) (600) (2,125) (2,725)
Outstanding claims as of December 31, 2020 49 16 65 258 846 1,104
Litigated claims exclude a number of claims in which the only material issue in
dispute is the actual amount of repair costs, which are simpler to resolve and
less volatile ("Non-Complex Litigated Claims"). The table excludes 1 and 4
Non-Complex Litigated Claims filed in the years ended December 31, 2020 and 2018
in the Mobile Bay Area , and 10, 8 and 19 in the years ended December 31, 2020 ,
2019 and 2018, respectively, in our branches outside of the Mobile Bay Area
("All Other Regions"). There were no new Non-Complex Litigated Claims filed in
the Mobile Bay Area in the year ended December 31, 2019 . The financial impacts
of these
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Non-Complex Litigated Claims are included in the Summary of Litigated and Non-Litigated Reserve Activity below and are not material to our financial condition or the results of our operations.
A summary of Litigated Claims and Non-Litigated Claims reserve activity over the last three years is as follows:
Litigated Claims Non-Litigated Claims
Mobile Bay All Other Mobile Bay All Other
(In millions) Area Regions Total Area Regions Total
Reserves as of
$ 7 $ 12 $ 19 Expense 10 4 14 8 17 25 Payments (7) (2) (9) (8) (16) (24) Reserves as of December 31, 2018 4 4 8 7 13 20 Expense 8 3 11 11 20 31 Change in reserve estimate 34 11 45 8 - 8 Payments (6) (6) (12) (11) (20) (31) Reserves as of December 31, 2019 40 12 52 15 13 28 Expense 18 7 25 12 17 29 Payments (23) (6) (30) (13) (19) (32)
Reserves as of
Our results of operations for the years endedDecember 31, 2020 , 2019 and 2018 included charges for legal fees associated with Litigated Claims of$8 million ,$7 million and$3 million , respectively. In addition, our results of operations for the year endedDecember 31, 2020 included costs related to mitigation efforts in the MobileBay Area of$9 million . Termite damage claims payments are expected to increase in 2021 as we proceed through the litigation process and reduce the number of litigated cases open.
Newly Issued Accounting Standards
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of our financial statements. See Note 2 to the consolidated financial statements for further information on newly issued accounting standards.
Information Regarding Forward-Looking Statements
This report contains forward-looking statements and cautionary statements. Forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "shall," "should," "would," "could," "seeks," "aims," "projects," "is optimistic," "intends," "plans," "estimates," "anticipates" or other comparable terms. These forward-looking statements also include, but are not limited to statements regarding our intentions, beliefs, assumptions or current expectations concerning, among other things, financial position; results of operations; cash flows; prospects; growth strategies or expectations; the continuation of acquisitions, including the integration of any acquired company and risks relating to any such acquired company; fuel prices; attraction and retention of key personnel; the impact of fuel swaps; the valuation of marketable securities; estimates of accruals for self-insured claims related to workers' compensation, auto and general liability risks; expected termite damage claims costs; estimates of future payments under operating and finance leases; estimates on current and deferred tax provisions; the outcome (by judgment or settlement) and costs of legal or administrative proceedings, including, without limitation, collective, representative or class action litigation; and the impact of prevailing economic conditions. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the segments in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and cash flows, and the development of the segments in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. A number of important factors, including, without limitation, the risks and uncertainties discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" above, could cause actual results and outcomes to differ from those reflected in the forward-looking statements. Additional factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation: ?Implementation of Mobile Bay Formosan termite settlement remediation measures to current and former customers, including refunds of certain price increases and the establishment of the consumer fund intended to settle future non-litigated termite damage claims disputes; ?The validity of the preclusivity of claims of fraud, misrepresentation, deceit, suppression of material facts or fraudulent concealment arising out of any act, occurrence or transaction related to our Formosan termite business practices in the MobileBay Area arising out of the consent decree; 40
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?Any financial impact from the COVID-19 pandemic, including a global recession or a recession in theU.S. , credit and capital markets volatility and an economic or financial crisis, or otherwise, which could affect our financial performance or operations, the health of our employees or the health and operations and our customers;
?Weakening general economic conditions, especially as they may affect unemployment and consumer confidence or discretionary spending levels, all of which could impact the demand for our services;
?the impact of reserves attributable to pending Litigated Claims and Non-Litigated Claims for termite damages;
?lawsuits, enforcement actions and other claims by third parties or governmental authorities;
?compliance with, or violation of, environmental, health and safety laws and regulations;
?cyber security breaches, disruptions or failures in our information technology systems and our failure to protect the security of personal information about our customers and employees;
?our ability to attract and retain key personnel, including our ability to attract, retain and maintain positive relations with trained workers and third-party contractors;
?adverse weather conditions;
?our ability to generate the significant amount of cash needed to fund our operations and service our debt obligations;
?our ability to successfully implement our business strategies;
?increase in prices for fuel and raw materials, and in minimum wage levels;
?changes in the source and intensity of competition;
?our franchisees, subcontractors, third-party distributors and vendors taking actions that harm our business;
?changes in our services or products;
?our ability to protect our intellectual property and other material proprietary rights;
?negative reputational and financial impacts resulting from future acquisitions or strategic transactions;
?laws and governmental regulations increasing our legal and regulatory expenses;
?increases in interest rates increasing the cost of servicing our indebtedness;
?increased borrowing costs due to lowering or withdrawal of the ratings, outlook or watch assigned to our debt securities;
?restrictions contained in our debt agreements;
?the effects of our indebtedness and the limitations contained in the agreements governing such indebtedness; and
?other factors described in this report and from time to time in documents that
we file with the
You should read this report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this report, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
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