MEMPHIS, Tenn. — ServiceMaster announced preliminary revenue, net income, adjusted net income and adjusted EBITDA for the second-quarter 2018 financial results and provided an update to full-year 2018 outlook. The company plans to release its full second-quarter 2018 financial results, as previously scheduled, on Tuesday, July 31.
The company expects to report revenue of $874 million for the second quarter, a year-over-year increase of eight percent driven primarily by nine percent organic growth at American Home Shield (AHS) and six percent growth at Terminix, largely due to the Copesan Services acquisition in March 2018.
The company expects to report second-quarter 2018 net income of $96 million, or $0.71 per share, versus $85 million, or $0.63 per share, in the same period in 2017. Second-quarter 2018 adjusted net income is expected to be $108 million, or $0.79 per share, versus $93 million, or $0.69 per share, for the same period in 2017.
The company expects to report adjusted EBITDA of $208 million for the quarter, versus $210 million for the same period prior year. Reconciliations of both adjusted net income and adjusted EBITDA to net income are set forth below in this press release.
The company’s net income, adjusted net income and adjusted EBITDA for the quarter were negatively impacted by an increase in contract claims costs at AHS of $22 million ($16 million, net of tax), principally driven by a higher mix of appliance replacements versus repairs. Due to the adverse impact of the higher contract claims costs on the company’s operating performance, the company is providing preliminary second-quarter results and updated 2018 outlook in advance of its scheduled earnings call.
The increase in contract claims costs includes an adjustment of $12 million related to the first quarter of 2018 and the second half of 2017. This adjustment recorded in the second quarter represents a change in estimate as a result of adverse development of contract claims costs from previous quarters.
Accruals for home service plan claims are made based on our claims experience and actuarial projections. Our actuary performs a reserve analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs and adjust the estimates as needed.
The increase in contract claims costs in the second quarter, and the change in our previous contract claims costs reserve estimates, were principally driven by the appliance mix described above. We believe the impact of higher appliance replacements in the second quarter increased claims costs by $4 million. The increase in contract claims costs in the second quarter also includes normal inflationary pressure on the underlying costs of repairs totaling $3 million and a higher number of work orders driven by significantly warmer summer temperatures in 2018, which increased claims costs by $3 million.
“Despite the recent spike in contract claims costs we have experienced at AHS, I am pleased to report that the performance at Terminix and Franchise Services Group continues to fully meet our expectations driven by our business transformation initiatives, and we look forward to updating the financial community on our progress during our second quarter earnings conference call on July 31,” said Chief Executive Officer Nik Varty. “We continue to drive strong revenue growth at AHS focusing on improving service levels and are taking a series of appropriate actions at AHS to address the contract claims costs, including renegotiating appliance repair costs, increasing pricing to properly reflect the rise in replacements of appliances and implementing processes to more dynamically price home service contracts. We strongly believe that these actions, combined with new leadership and upgrades to processes that we’re making in connection with the late third quarter spin of AHS, fully support the long-term attractiveness of the business and positions it for continued strong revenue and earnings growth in the future.”