ServiceMaster Global Holdings, Inc. Reports Fourth-Quarter and Full Year 2015 Financial Results

Fourth-Quarter 2015

  • Revenue increased 4% to $601 million with 8% and 6% growth at
    AHS and Terminix, respectively
  • Net income of $17 million, or $0.12 per share, versus $20
    million, or $0.15 per share, a year ago
  • Adjusted net income(1) of
    $45 million, or $0.33 per share, versus $31 million, or $0.23 per
    share, a year ago
  • Adjusted EBITDA(2)
    increased 9% to $124 million from $114 million a year ago

Outlook Full-Year 2016

  • Revenue of more than $2,750 million or more than 6% over prior
    year
  • Adjusted EBITDA of more than $685 million or more than 10% over
    prior year

MEMPHIS, Tenn.–(BUSINESS WIRE)–ServiceMaster
Global Holdings, Inc
. (NYSE: SERV), a leading provider of
essential residential and commercial services, today announced unaudited
fourth-quarter and full year 2015 results. For the fourth quarter, the
company reported a year-over-year revenue increase of 4 percent, and,
for the full year, the company reported a year-over-year increase of 6
percent. Both the fourth quarter and full year increases in revenue were
driven by organic growth at American Home Shield (“AHS”), increased
sales of new services at Terminix and price increases.

Fourth-quarter 2015 net income was $17 million, or $0.12 per share,
versus $20 million, or $0.15 per share, in the same period in 2014. Full
year 2015 net income was $160 million, or $1.17 per share, versus a net
loss of $57 million, or $(0.50) per share, in the same period in 2014.
Fourth-quarter and full year 2015 include a $23 million charge for
voluntary corrective contributions to our 401(k) plan.

Fourth-quarter 2015 adjusted net income was $45 million, or $0.33 per
share, versus $31 million, or $0.23 per share, for the same period in
2014. Full year 2015 adjusted net income was $245 million, or $1.80 per
share, versus $166 million, or $1.46 per share, for the same period in
2014.

Fourth-quarter 2015 Adjusted EBITDA was $124 million, a year-over-year
increase of $10 million, or 9 percent, driven largely by an increase at
Terminix of $14 million. Full year 2015 Adjusted EBITDA was $622
million, a year-over-year increase of $65 million, or 12 percent, driven
largely by increases at Terminix and AHS of $38 million and $26 million,
respectively.

Rob Gillette, ServiceMaster’s chief executive officer, noted, “In 2015,
we exceeded our long-term goals by growing the top line six percent and
bottom line twelve percent. We look forward to a strong 2016 as we
continue to meet our financial commitments and deliver superior service,
achieve high customer retention and build on our trusted brand identity
by empowering our employees, contractors and franchisees through
customer centric technologies.”

           

Preliminary Consolidated Performance

 
Three Months Ended December 31, Year Ended December 31,
$ millions 2015 2014 B/(W) 2015 2014 B/(W)
Revenue $ 601 $ 577 $ 24 $ 2,594 $ 2,457 $ 137
YoY growth 4.2 % 5.6 %
Gross Profit 261 262 (1 ) 1,219 1,159 60
% of revenue 43.4 % 45.4 % (2.0 ) pts 47.0 % 47.2 % (0.2 ) pts
SG&A (154 ) (164 ) 10 (666 ) (669 ) 3
% of revenue 25.6 % 28.4 % 2.8 pts 25.7 % 27.2 % 1.5 pts
Income from Continuing Operations before Income Taxes 33 36 (3 ) 270 84 186
% of revenue 5.5 % 6.2 % (0.7 ) pts 10.4 % 3.4 % 7.0 pts
Income from Continuing Operations 17 22 (5 ) 162 43 119
% of revenue 2.8 % 3.8 % (1.0 ) pts 6.2 % 1.8 % 4.4 pts
Net Income (Loss) 17 20 (3 ) 160 (57 ) 217
% of revenue 2.8 % 3.5 % (0.7 ) pts 6.2 % (2.3 ) % 8.5 pts
Adjusted Net Income(1) 45 31 14 245 166 79
% of revenue 7.5 % 5.4 % 2.1 pts 9.4 % 6.8 % 2.6 pts
Adjusted EBITDA(2) 124 114 10 622 557 65
% of revenue 20.6 % 19.8 % 0.8 pts 24.0 % 22.7 % 1.3 pts
Free Cash Flow(3) 98 116 (18 ) 358 274 84
 
 
Preliminary Segment Performance
 

Revenue and Adjusted EBITDA for each reportable segment and
Corporate were as follows:

               
Three Months Ended December 31, 2014 Year Ended December 31, 2015
B/(W) Adjusted B/(W) B/(W) Adjusted B/(W)
$ millions Revenue vs. PY EBITDA vs. PY Revenue vs. PY EBITDA vs. PY
Terminix $ 340 $ 19 $ 76 $ 14 $ 1,444 $ 74 $ 347 $ 38
YoY growth / % of revenue 5.9 % 22.4 % 3.0 pts 5.4 % 24.0 % 1.5 pts
American Home Shield 206 15 32 (3 ) 917 89 205 26
YoY growth / % of revenue 7.9 % 15.5 % (2.8 ) pts 10.7 % 22.4 % 0.7 pts
Franchise Services Group 54 (10 ) 19 (1 ) 232 (21 ) 77 (1 )
YoY growth / % of revenue (15.6 ) % 35.2 % 3.9 pts (8.3 ) % 33.2 % 2.4 pts
Corporate(4)   1   (1 )     (3 )     (1 )     2   (5 )     (9 )        
Total $ 601 $ 24 $ 124 $ 10 $ 2,594 $ 137 $ 622 $ 65
YoY growth / % of revenue 4.2 % 20.6 % 0.8 pts 5.6 % 24.0 % 1.3 pts
 

A reconciliation of income from continuing operations to both adjusted
net income and Adjusted EBITDA, as well as a reconciliation of net cash
provided from operating activities from continuing operations to free
cash flow, are set forth below in this press release.

Terminix

Terminix reported a 6 percent year-over-year revenue increase in the
fourth-quarter of 2015, driven by product mix, improved pricing, the
impact of acquiring Alterra Pest Control, LLC (“Alterra”) on November
10, 2015 and increased sales of new services. Adjusted EBITDA increased
23 percent, or $14 million, versus prior year, primarily driven by the
flow-through effect of higher revenue and cost reduction initiatives.

For the year, Terminix reported a 5 percent year-over-year revenue
increase, primarily driven by increased sales of new services, improved
pricing, product mix and the impact of the Alterra acquisition,
partially offset by lower demand for traditional termite services.
Adjusted EBITDA increased 12 percent, or $38 million, versus prior year,
primarily driven by the flow-through effect of higher revenue and cost
reduction initiatives, partially offset by higher selling costs.

American Home Shield

American Home Shield reported an 8 percent year-over-year revenue
increase in the fourth-quarter of 2015 driven by organic growth and
price increases. Adjusted EBITDA decreased 9 percent or $3 million
versus prior year, primarily reflecting an increase in contract claims
costs, partially offset by the flow-through effect of higher revenue and
lower sales and marketing costs.

The increase in contract claims costs in the fourth quarter was largely
driven by an increase in the average cost per service request associated
with appliance repairs due to greater use of more expensive
out-of-network contractors. Contract claims costs were also impacted by
out of period air conditioning claims and general inflation.

For the year, American Home Shield reported an 11 percent year-over-year
revenue increase driven by organic growth, price increases and the
impact of the acquisition of Home Security of America, Inc. (“HSA”) in
February 2014. Adjusted EBITDA increased 15 percent or $26 million
versus prior year, primarily reflecting the flow-through effect of
higher revenue, partially offset by an increase in contract claim costs.

The increase in contract claims costs for the year was driven by an
increase in the average cost per service request associated with
appliance repairs due to greater use of more expensive out-of-network
contractors, and to a lesser extent, by warmer summer temperatures in
2015 and general inflation.

Franchise Services Group

The Franchise Services Group reported a 16 percent year-over-year
revenue decrease in the fourth-quarter of 2015 primarily reflecting the
conversion of certain company-owned Merry Maids branches to franchises
(“branch conversions”). Adjusted EBITDA decreased 5 percent or $1
million versus prior year, primarily reflecting the flow-through effect
of lower revenue and the branch conversions, largely offset by cost
reduction initiatives.

For the year, the Franchise Services Group reported an 8 percent
year-over-year revenue decrease primarily reflecting the branch
conversions. Adjusted EBITDA decreased 1 percent or $1 million versus
prior year, primarily reflecting the flow-through effect of lower
revenue and branch conversions, largely offset by cost reduction
initiatives.

Cash Flow

For the year ended December 31, 2015, net cash provided from operating
activities from continuing operations increased to $336 million from
$253 million for the year ended December 31, 2014.

Net cash used for investing activities from continuing operations was
$98 million for the year ended December 31, 2015 compared to $56 million
for the year ended December 31, 2014.

Net cash used for financing activities from continuing operations was
$319 million for the year ended December 31, 2015 compared to $277
million for the year ended December 31, 2014.

Free cash flow(3) was $358 million for the year ended
December 31, 2015 compared to $274 million for the year ended December
31, 2014.

Other Matters

Capital Allocation Strategy

On February 23, 2016, the company’s Board of Directors authorized a
three-year share repurchase program, under which it may repurchase up to
$300 million of outstanding common stock. The company expects to fund
the share repurchases from operating cash flow. The share repurchase
program is part of the company’s capital allocation strategy that
focuses on sustainable growth and maximizing shareholder value. As part
of the strategy, the company has set a target Net Debt(5) to
Adjusted EBITDA ratio range of 2.5x to 3.0x.

U.S. Virgin Islands

As previously disclosed, the company has been fully cooperating with the
United States Department of Justice (the “DOJ”) with respect to the
incident in St. John, U.S. Virgin Islands. The company has had
discussions with the DOJ concerning potential resolution of the criminal
investigation. The company has recorded a charge of $8 million in
connection with potential fines and other costs. This matter is ongoing,
and its status may change at any time.

401(k) Plan

In 2008, the company amended its Profit Sharing and Retirement Plan, a
tax qualified 401(k) defined contribution plan available to
substantially all of its employees (the “401(k) Plan”), to implement a
qualified automatic contribution arrangement (“QACA”) under the safe
harbor provisions of the Internal Revenue Code of 1986, as amended (the
“Code”). QACA plans, in general, require automatic enrollment of
employees into the retirement plan absent an affirmative election that
such employees do not wish to participate.

Although the company implemented processes to auto-enroll new hires
after adopting the QACA plan in 2008, it discovered that it did not
auto-enroll then existing employees who were not participating in the
401(k) Plan. In response, the company implemented an auto-enrollment
process for affected active employees, and it is preparing to submit to
the IRS a voluntary correction proposal to remedy the issue for prior
years. The company recorded a charge in the consolidated statement of
operations and comprehensive income (loss) for the three months and year
ended December 31, 2015 of $23 million.

Full-Year 2016 Outlook

For the full year 2016, the company anticipates that revenue will be
more than $2,750 million or an increase of more than six percent
compared to 2015. Adjusted EBITDA is anticipated to be more than $685
million or an increase of more than 10 percent compared to 2015.

Fourth-Quarter and Full Year 2015 Earnings Conference Call

The company will discuss its fourth-quarter and full year 2015 operating
results during a conference call at 8 a.m. central time (9 a.m. eastern
time) today, February 25, 2016. To participate on the conference call,
interested parties should call 888.225.2695 (or international
participants, 303.223.4364). Additionally, the conference call will be
available via webcast. A slide presentation highlighting the company’s
results and key performance indicators will also be available. To
participate via webcast and view the slide presentation, visit the
company’s investor
relations home page
.

The call will be available for replay until March 26, 2016. To access
the replay of this call, please call 800.633.8284 and enter reservation
number 21803579 (international participants: 402.977.9140, reservation
number 21803579). You may also review the webcast on the company’s investor
relations home page
.

About ServiceMaster

ServiceMaster Global Holdings, Inc. is a leading provider of essential
residential and commercial services, operating through an extensive
service network of more than 8,000 company-owned locations and franchise
and license agreements. The company’s portfolio of well-recognized
brands includes American Home Shield (home warranties), AmeriSpec (home
inspections), Furniture Medic (furniture repair), Merry Maids
(residential cleaning), ServiceMaster Clean (janitorial), ServiceMaster
Restore (disaster restoration) and Terminix (termite and pest control).
The company is headquartered in Memphis, Tenn. Go to www.servicemaster.com
for more information about ServiceMaster or follow the company at twitter.com/ServiceMaster
or Facebook.com/ServiceMaster.

Information Regarding Forward-Looking Statements

This press release contains forward-looking statements and cautionary
statements, including 2016 revenue and Adjusted EBITDA outlook and the
company’s expectations regarding its share repurchase program. Some of
the forward-looking statements can be identified by the use of
forward-looking terms such as “believes,” “expects,” “may,” “will,”
“shall,” “should,” “would,” “could,” “seeks,” “aims,” “projects,” “is
optimistic,” “intends,” “plans,” “estimates,” “anticipates” or other
comparable terms. Forward-looking statements are subject to known and
unknown risks and uncertainties, many of which may be beyond our
control, including, without limitation, the risks and uncertainties
discussed in the “Risk Factors” and “Information Regarding
Forward-Looking Statements” sections in the company’s reports filed with
the U.S. Securities and Exchange Commission. We caution you that
forward-looking statements are not guarantees of future performance or
outcomes and that actual performance and outcomes, including, without
limitation, our actual results of operations, financial condition and
liquidity, and the development of the market segments in which we
operate, may differ materially from those made in or suggested by the
forward-looking statements contained in this press release.

Additional factors that could cause actual results and outcomes to
differ from those reflected in forward-looking statements include,
without limitation, lawsuits, enforcement actions and other claims by
third parties or governmental authorities; compliance with, or violation
of environmental health and safety laws and regulations; 401(k) Plan
corrective contribution; the effects of our substantial indebtedness;
changes in interest rates, because a significant portion of our
indebtedness bears interest at variable rates; weakening general
economic conditions; weather conditions and seasonality; the success of
our business strategies, and costs associated with restructuring
initiatives. The company assumes no obligation to update the information
contained herein, which speaks only as of the date hereof.

Non-GAAP Financial Measures

This press release contains certain non-GAAP financial measures.
Non-GAAP measures should not be considered as an alternative to GAAP
financial measures. Non-GAAP measures may not be calculated or
comparable to similarly titled measures used by other companies. See
non-GAAP reconciliations below in this press release for a
reconciliation of these measures to the most directly comparable GAAP
financial measures. Adjusted EBITDA, adjusted net income and free cash
flow are not measurements of the company’s financial performance under
GAAP and should not be considered as an alternative to net income or any
other performance measures derived in accordance with GAAP or as an
alternative to net cash provided by operating activities or any other
measures of the company’s cash flow or liquidity. We believe these
non-GAAP financial measures are useful for investors, analysts and other
interested parties as it facilitates company-to-company operating and
financial condition performance comparisons by excluding potential
differences caused by variations in capital structures, taxation, the
age and book depreciation of facilities and equipment, restructuring
initiatives, consulting agreements and equity-based, long-term incentive
plans.

_________________________________________________

(1) Adjusted net income is defined by the company as income (loss) from
continuing operations before: amortization expense; 401(k) Plan
corrective contribution; impairment of software and other related costs;
consulting agreement termination fees; restructuring charges; gain on
sale of Merry Maids branches; management and consulting fees; loss on
extinguishment of debt; other expenses; and the tax impact of all of the
aforementioned adjustments. The company’s definition of adjusted net
income may not be comparable to similarly titled measures of other
companies.

(2) Adjusted EBITDA is defined as income (loss) from continuing
operations before: depreciation and amortization expense; 401(k) Plan
corrective contribution; non-cash stock-based compensation expense;
restructuring charges; gain on sale of Merry Maids branches; non-cash
impairment of software and other related costs; management and
consulting fees; consulting agreement termination fees; provision
(benefit) for income taxes; loss on extinguishment of debt; interest
expense; and other non-operating expenses. The company’s definition of
Adjusted EBITDA may not be comparable to similarly titled measures of
other companies.

(3) Free cash flow is defined by the company as (i) Net Cash Provided
from Operating Activities from Continuing Operations before: call
premium paid for retirement of debt; cash paid for consulting agreement
termination fees; and excess tax benefits from stock-based compensation;
(ii) less property additions.

(4) Corporate includes The ServiceMaster Acceptance Company Limited
Partnership (SMAC) and the unallocated expenses of our headquarters
function.

(5) Net Debt is defined as face value of debt less unrestricted cash and
marketable securities.

 
SERVICEMASTER GLOBAL HOLDINGS, INC.
Consolidated Statements of Operations and Comprehensive Income
(Loss)
(In millions, except per share data)
       
Three Months Ended Year Ended
December 31, December 31,
2015 2014 2015 2014
Revenue $ 601 $ 577 $ 2,594 $ 2,457
Cost of services rendered and products sold 340 315 1,375 1,298
Selling and administrative expenses 154 164 666 669
Amortization expense 6 13 38 52
401(k) Plan corrective contribution 23 23
Impairment of software and other related costs 47
Consulting agreement termination fees 21
Restructuring charges 1 4 5 11
Gain on sale of Merry Maids branches (2 ) (1 ) (7 ) (1 )
Interest expense 38 48 167 219
Interest and net investment income (1 ) (1 ) (9 ) (7 )
Loss on extinguishment of debt 58 65
Other expense   9         9      
Income from Continuing Operations before Income Taxes 33 36 270 84
Provision for income taxes   16     14     107     40  
Income from Continuing Operations 17 22 162 43
Loss from discontinued operations, net of income taxes       (2 )   (2 )   (100 )
Net Income (Loss) $ 17   $ 20   $ 160   $ (57 )
Total Comprehensive Income (Loss) $ 17   $ 13   $ 147   $ (70 )
Weighted-average common shares outstanding – Basic 135.4 133.6 135.0 112.8
Weighted-average common shares outstanding – Diluted 136.9 135.3 136.6 113.8
Basic Earnings (Loss) Per Share:
Income from Continuing Operations $ 0.13 $ 0.16 $ 1.20 $ 0.38
Loss from discontinued operations, net of income taxes (0.00 ) (0.01 ) (0.01 ) (0.88 )
Net Income (Loss) 0.12 0.15 1.19 (0.50 )
Diluted Earnings (Loss) Per Share:
Income from Continuing Operations $ 0.12 $ 0.16 $ 1.19 $ 0.38
Loss from discontinued operations, net of income taxes (0.00 ) (0.01 ) (0.01 ) (0.88 )
Net Income (Loss) 0.12 0.15 1.17 (0.50 )
 
 
SERVICEMASTER GLOBAL HOLDINGS, INC.
Consolidated Statements of Financial Position
(In millions, except share data)
   
As of As of
December 31, December 31,
2015 2014
Assets:
Current Assets:
Cash and cash equivalents $ 296 $ 389
Marketable securities 24 19
Receivables, less allowances of $23 and $25, respectively 487 441
Inventories 40 42
Prepaid expenses and other assets 54 44
Deferred customer acquisition costs   32     35  
Total Current Assets 933 969
Other Assets:
Property and equipment, net 160 136
Goodwill 2,129 2,069
Intangible assets, primarily trade names, service marks and
trademarks, net
1,704 1,696
Notes receivable 32 26
Long-term marketable securities 57 88
Other assets   83     44  
Total Assets $ 5,098   $ 5,028  
Liabilities and Shareholders’ Equity:
Current Liabilities:
Accounts payable $ 110 $ 84
Accrued liabilities:
Payroll and related expenses 64 82
Self-insured claims and related expenses 106 92
Accrued interest payable 10 34
Other 59 51
Deferred revenue 552 514
Liabilities of discontinued operations 9
Current portion of long-term debt   54     39  
Total Current Liabilities   955     905  
Long-Term Debt 2,698 2,987
Other Long-Term Liabilities:
Deferred taxes 687 640
Other long-term obligations, primarily self-insured claims   213     138  
Total Other Long-Term Liabilities   901     778  
Commitments and Contingencies (Note 9)
Shareholders’ Equity:
Common stock $0.01 par value (authorized 2,000,000,000 shares with
143,170,897 shares issued and 135,511,176 outstanding at December
31, 2015 and 141,731,682 shares issued and 134,092,335 outstanding
at December 31, 2014)
2 2
Additional paid-in capital 2,245 2,207
Accumulated deficit (1,560 ) (1,720 )
Accumulated other comprehensive loss (21 ) (8 )
Less common stock held in treasury, at cost (7,659,721 shares at
December 31, 2015 and 7,639,347 shares at December 31, 2014)
  (122 )   (122 )
Total Shareholders’ Equity   545     359  
Total Liabilities and Shareholders’ Equity $ 5,098   $ 5,028  
 
 
SERVICEMASTER GLOBAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In millions)
 
Year Ended December 31,
2015 2014
Cash and Cash Equivalents at Beginning of Period $ 389 $ 484
Cash Flows from Operating Activities from Continuing Operations:
Net Income (Loss) 160 (57 )
Adjustments to reconcile net loss to net cash provided from
operating activities:
Loss from discontinued operations, net of income taxes 2 100
Depreciation expense 47 48
Amortization expense 38 52
Amortization of debt issuance costs 5 8
401(k) Plan corrective contribution 23
Impairment of software and other related costs 47
Gain on sale of Merry Maids branches (7 ) (1 )
Loss on extinguishment of debt 58 65
Call premium paid on retirement of debt (49 ) (35 )
Deferred income tax provision 60 29
Stock-based compensation expense 10 8
Excess tax benefits from stock-based compensation (13 )
Gain on sales of marketable securities (6 ) (4 )
Other 16 7
Change in working capital, net of acquisitions:
Receivables (44 ) (34 )
Inventories and other current assets 5 (1 )
Accounts payable 18 (1 )
Deferred revenue 38 39
Accrued liabilities 1 1
Accrued interest payable (24 ) (17 )
Accrued restructuring charges (2 ) 3
Current income taxes   2     (3 )
Net Cash Provided from Operating Activities from Continuing
Operations
  336     253  
Cash Flows from Investing Activities from Continuing Operations:
Property additions (40 ) (35 )
Sale of equipment and other assets 14 2
Other business acquisitions, net of cash acquired (92 ) (58 )
Purchases of available-for-sale securities (6 ) (11 )
Sales and maturities of available-for-sale securities 32 51
Origination of notes receivables (98 ) (85 )
Collections on notes receivables   92     79  
Net Cash Used for Investing Activities from Continuing Operations   (98 )   (56 )
Cash Flows from Financing Activities from Continuing Operations:
Borrowings of debt 583 1,825
Payments of debt (923 ) (2,698 )
Discount paid on issuance of debt (2 ) (18 )
Debt issuance costs paid (5 ) (24 )
Contribution to TruGreen Holding Corporation (35 )
Repurchase of common stock and RSU vesting (6 )
Issuance of common stock 16 679
Excess tax benefits from stock-based compensation   13      
Net Cash Used for Financing Activities from Continuing Operations   (319 )   (277 )
Cash Flows from Discontinued Operations:
Cash used for operating activities (11 ) (11 )
Cash used for investing activities (2 )
Cash used for financing activities       (3 )
Net Cash Used for Discontinued Operations   (11 )   (15 )
Effect of Exchange Rate Changes on Cash   (2 )    
Cash Decrease During the Period   (92 )   (95 )
Cash and Cash Equivalents at End of Period $ 296   $ 389  
 

Contacts

ServiceMaster Global Holdings, Inc.
Investor Relations:
James
Shields, 901-597-6839
James.Shields@servicemaster.com
or
Media:
Peter
Tosches, 901-597-8449
Peter.Tosches@servicemaster.com

Read full story here