ServiceMaster Announces Full-Year and Fourth-Quarter 2019 Results

 

For the full year 2019, the company reported a year-over-year revenue increase of nine percent to $2,077 million with net income of $128 million, or $0.94 per share. Adjusted EBITDA(1) for the year was $417 million. Adjusted net income(2) improved 41 percent in 2019 to $184 million, or $1.35 per share, versus $130 million, or $0.95 per share in the 2018.

 

For the quarter ended December 31, 2019, the Company reported a year-over-year revenue increase of 11 percent to $507 million with a net loss of $26 million, or $0.19 per share. Net income was negatively impacted by an increase in our reserves of $40 million, net of tax, for termite damage claims expense for Litigated(3) and Non-Litigated(4) Claims in the quarter. Adjusted EBITDA for the quarter of $80 million was approximately flat with prior year. Adjusted net income improved 12 percent to $30 million, or $0.22 per share.

 

“Both the Terminix and ServiceMaster Brands segments delivered strong progress against our 2019 strategic initiatives,” said ServiceMaster Chairman and interim CEO Naren Gursahaney. “As we announced in January, we are conducting a strategic review of our ServiceMaster Brands business, including a possible sale of the business. This decision reflects our emphasis on driving long-term shareholder value.”

 

“At Terminix, solid full-year gains in net promoter scores and retention led to 2.6 percent organic revenue growth, meeting increased guidance estimates. We are continuing our progress transforming the Terminix business, and improved prioritization and alignment across the business on our key strategic priorities will drive continued retention improvements and margin expansion in 2020. We remain laser-focused on the termite business, including the execution of our termite damage claims mitigation program that will better protect our customers and manage our risks. I am encouraged by our progress and remain convinced we are on the right path towards delivering sustainable, profitable growth at or above industry levels.”

 

As further described in the “Termite Damage Claims” section below, the company has completed a detailed statistical analysis of historical termite damage claims activity and potential future exposure. Between 2020 and 2024 the Company expects total termite damage claims expense of approximately $230 million, compared to actual expense of $230 million incurred between 2015 and 2019. Beginning in 2025 the Company expects termite damage claim expense to return to historical levels of four to five percent of termite and home service revenue.

 

TERMINIX RESULTS. Terminix reported eight percent year-over-year total revenue growth and one percent organic revenue growth in the fourth quarter of 2019, excluding the impact of our divested fumigation channel. Organic revenue growth of four percent in residential pest control was driven by strong pricing realization and volume growth in mosquito services. Organic revenue growth of two percent in commercial pest control was driven by year-over-year gains in retention, partially offset by lower one-time sales. Organic revenue decline of two percent in termite and home services was driven by the year-over-year impact of 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. Acquisition revenue growth of seven percent, primarily in the commercial pest service line, was principally driven by the October 2019 McCloud Services and Gregory Pest Solutions acquisitions.

 

Terminix Adjusted EBITDA was $58 million for the fourth quarter, a year-over-year increase of $2 million. Higher organic revenue contributed $1 million while higher revenue from inorganic growth contributed $5 million. Terminix had year-over-year cost increases of $4 million for termite damage claims, $4 million in technician labor driven by accelerated hiring in advance of the 2020 peak season, $4 million of additional sales and marketing to drive growth, $3 million of other investments in growth, and $2 million from outsourcing fumigation services. These costs were offset by savings of $5 million in sourcing productivity, and a $9 million reduction in incentive compensation driven by our 2019 financial performance.

 

TERMIITE DAMAGE CLAIMS. ServiceMaster also announced on Thursday the acceleration of its comprehensive termite damage claims mitigation program designed to increase protection for customers in high risk areas and limit our future exposure to termite damage claims. The $10 million investment will include enhanced reinspection, leverage advanced tools and procedures, increase the size of our quality assurance teams and target a full supplemental treatment program, focusing on the approximately 15,000 customers in the Mobile Bay Area(7) during 2020. The company has completed approximately 2,500 supplemental treatments and is currently staffing and training additional treatment technicians to support the acceleration of supplemental treatments throughout the remainder of the year.

 

During the fourth quarter, the company retained a third-party actuarial and economic advisor to examine the previous 10 years of damage claims history in order to assist the Company in estimating potential future exposure. The third-party used specific attributes of our termite customer base and historical claims data, in order to build a model to estimate total potential exposure. During the five-year period from 2015-2019, the Company incurred approximately $230 million in total termite damage claims expense. The results of this study established an expectation of $230 million in total termite damage claims expense for the years 2020 to 2024, before returning to historical levels of approximately four to five percent of termite and home services revenue.

 

Servicemaster says it has historically determined that it had adequate information to assess probability of loss and a reasonable estimate of the range of loss for Litigated Claims only after the completion of discovery for each individual case, which is often more than a year after the case is filed. "In 2019, we experienced an increase in the numbers of Litigated Claims and in early 2020, we completed a detailed statistical analysis of our recent termite damage claims history and case results. As a result, we have concluded that, given a statistically meaningful population of outstanding Litigated Claims and sufficient history of resolving claims with similar attributes, we are able to calculate an initial “best” estimate of the outcome for most of our Litigated Claims based on variables known at the time each case is filed. For the pending Litigated Claims for which we were previously not able to estimate a range of loss under our prior estimation technique, we have recorded a change in estimate of our reserve in the amount of $45 million in the year ended December 31, 2019," ServiceMaster stated in the press release.

 

Servicemaster also utilized this statistical analysis to evaluate warranty reserves for Non-Litigated Claims. The resulting estimation technique projects the cost to settle Non-Litigated Claims considering both the expected geographic distribution of current and future claims and their relative cost to settle. Based on this review they have recorded a change in estimate related to our reserve for Non-Litigated Claims in the amount of $8 million in the year ended December 31, 2019.