TERMINIX GLOBAL HOLDINGS, INC. The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in "-Information Regarding Forward-Looking Statements."
Overview
Our core services include residential and commercial termite and pest management under the following brands: Terminix, Copesan,Assured Environments , Gregory, McCloud and Nomor. Our operations for the periods presented in this report are organized into one reportable segment, our pest management and termite business.
COVID-19
SinceMarch 11, 2020 , when theWorld Health Organization designated COVID-19 as a global pandemic, we have experienced increased demand in our residential pest management and termite and home services service lines as customers are spending more time at home. We have also experienced disruptions in our business, primarily in the commercial pest management service line, driven by temporary business closures and service postponements, and in our product sales and other service line. We expect the commercial pest market to continue to stabilize to more normalized growth levels into 2022. Over the course of 2021, we experienced an increase in medical expenses and short-term disability claims related to COVID-19 infections in our workforce, which we expect to continue in the short-term, and we have experienced increased turnover and labor shortages as a result of the pandemic. We continue to focus on initiatives to ensure the safety and productivity of our teammates, including personal protective equipment and safety policies and measures for field teammates, and technology to facilitate remote working, with most back-office and all customer care center teammates continuing to work remotely and field support teammates working remotely where possible. We 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.
Refer to Results of Operations below for further discussion of the impact of COVID-19 on our business.
Proposed Acquisition by Rentokil
OnDecember 13, 2021 , we entered into the Merger Agreement with Rentokil, Bidco, Merger Sub I and Merger Sub II. Under the Merger Agreement, at the Effective Time, each share of our common stock, par value$0.01 per share, issued and outstanding immediately prior to the Effective Time (other than certain excluded shares as described in the Merger Agreement) will be converted into the right to receive either: ?a number of American depositary shares of Rentokil (each representing a beneficial interest in five ordinary shares of Rentokil) equal to (A) 1.0619 plus (B) the quotient of$11.00 and the volume weighted average price (measured inU.S. dollars) of Rentokil American depositary shares (measured using the volume weighted average price of Rentokil ordinary shares as a proxy) for the trading day that is two trading days prior to the Effective Time (or such other date as may be mutually agreed to by Rentokil and the Company); or ?an amount in cash, without interest, and in USD equal to the sum of (A) the Per Share Cash Amount plus (B) the product of the Exchange Ratio and the Rentokil ADS Price, in each case at the election of the holder of such share of our common stock, subject to certain allocation and proration provisions of the Merger Agreement. Immediately following such conversion, our shares of common stock will be automatically cancelled and cease to exist. The aggregate Cash Consideration and the aggregate Stock Consideration that will be issued in the Mergers will not vary as a result of individual election preferences. The respective obligations of the Company and Rentokil to consummate the Mergers are subject to the satisfaction or waiver of a number of conditions, including, among others the adoption of the Merger Agreement by the Company's stockholders and the approval of the Mergers contemplated by the Merger Agreement and other related matters by Rentokil's shareholders. As announced onMarch 15, 2022 , the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired, thereby completing the necessary antitrust process in the US. A number of other conditions remain to be satisfied, including obtaining approval by the Company's and Rentokil's shareholders, and the registration of ADSs with theU.S. Securities and Exchange Commission and their listing on theNew York Stock Exchange . With good progress being made on satisfying the remaining conditions, both parties continue to be on track to complete the transaction in the second half of 2022, with a target completion date towards the end of the third quarter. 21
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In conjunction with the proposed Mergers, the parties have agreed that the Company may provide up to$20 million of cash retention awards (the "Retention Pool ") to Terminix teammates. The retention awards are designed to retain and incentivize the Terminix team as it executes the 2022 operating plan, achieves the consummation of the merger and assists with the integration of the combined company after closing of the transaction. Half of theRetention Pool has been allocated specifically to customer-facing, field operations teammates, and the remainder has been allocated to key back-office teammates. As the Company prepares for the proposed acquisition, it will incur additional expenses unrelated to ongoing operations, including professional fees for legal and banking services and retention awards among other items. These will be classified as restructuring expenses and excluded from ongoing operations in order to aid period to period comparability.
Key Business Metrics
We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include: ?revenue, ?operating expenses, ?net income, ?earnings per share, ?Adjusted EBITDA, ?free cash flow ?organic revenue growth, and ?customer retention.
To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges that management believes are not indicative of the earnings capabilities of our business. We also focus on measures designed to monitor cash flow, including net cash provided from operating activities from continuing operations and free cash flow.
Revenue. Our revenue results are primarily a function of the volume and pricing of the services and products provided to our customers by our business as well as the mix of services and products provided 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. As ofMarch 31, 2022 , approximately 94 percent of our revenue was generated by sales inthe United States . Operating Expenses. In addition to the impact of changes in our revenue results, our operating results are affected by, among other things, the level of our operating expenses. A number of our operating expenses are subject to inflationary pressures, such as fuel, chemicals, wages and salaries, teammate benefits and health care, vehicles, personal protective equipment, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs. Net Income and Earnings Per Share. Basic earnings (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 based primarily on Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before: depreciation and amortization expense; amortization of cloud-based software, acquisition-related costs (adjustments); Mobile Bay Formosan termite settlement; termite damage claims reserve adjustment; non-cash stock-based compensation expense; restructuring and other charges; goodwill impairment charges; fumigation related matters; realized (gain) loss on investment in frontdoor, inc.; net earnings (loss) 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. Our definition of Adjusted EBITDA may not be calculated or comparable to similarly titled measures of other companies. 22
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A reconciliation of Net income to Adjusted EBITDA for the three months ended
Three Months Ended
March 31,
(In millions) 2022 2021
Net Income $ 19 $ 27
Depreciation and amortization expense 28 28
Acquisition-related costs - 1
Non-cash stock-based compensation expense 6 6
Restructuring and other charges 19 6
Provision for income taxes 3 11
Interest expense 11 12
Adjusted EBITDA $ 86 $ 90
Free Cash Flow. Free Cash Flow means net cash provided from operating activities
from continuing operations, less property additions. We believe Free Cash Flow
is useful as a supplemental measure of our liquidity. We use Free Cash Flow to
facilitate company-to-company cash flow comparisons by removing payments for
property additions, which may vary from company-to-company for reasons unrelated
to operating performance.
Organic Revenue Growth. We use organic revenue growth to track performance,
including the impacts of sales, pricing, new service offerings, customer
retention and other growth initiatives. Organic revenue growth excludes revenue
from acquired customers for 12 months following the acquisition date. 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 revenue growth. See Revenue below for a
reconciliation of revenue growth to organic 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 2021, revenue and Adjusted EBITDA by
quarter was recognized as follows:
Q1 Q2 Q3 Q4
Revenue 23 % 27 % 26 % 24 %
Adjusted EBITDA 23 % 32 % 26 % 19 %
Effect of Weather Conditions
The demand for our services and our results of operations are also affected by
weather conditions, including the seasonal nature of our termite and pest
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. Weather conditions which have a potentially favorable impact
to our business include mild winters which can lead to higher demand for termite
and pest management services.
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Results of Operations
The following tables shows the results of operations from continuing operations for the three months endedMarch 31, 2022 and 2021, which reflects the results of acquired businesses from the relevant acquisition dates. Three Months Ended Increase March 31, (Decrease) % of Revenue (In millions) 2022 2021 2022 vs. 2021 2022 2021 Revenue$ 496 $ 471 5 % 100 % 100 % Cost of services rendered and products sold 296 270 10 60 57 Selling and administrative expenses 138 137 1 28 29 Amortization expense 10 10 5 2 2 Acquisition-related costs - 1 * - - Restructuring and other charges 19 6 * 4 1 Interest expense 11 12 (3) 2 2 Interest and net investment income 1 (1) * 0 - Income before Income Taxes 21 37 * 4 8 Provision for income taxes 3 11 * 1 2 Equity in earnings of joint ventures 1 - * - - Net Income$ 19 $ 27 * 4 % 6 %
________________________________
* not meaningful
?
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Revenue
Three months ended
We reported revenue of$496 million and$471 million for the three months endedMarch 31, 2022 and 2021, respectively. Revenue by service line was as follows: Three Months Ended March 31, (In millions) 2022 2021 Growth Organic Acquired Residential Pest Management$ 175 $ 166 $ 9 5 %$ 7 4 %$ 2 1 % Commercial Pest Management 132 129 3 2 % (1) (1) % 5 4 % Termite and Home Services 171 162 10 6 % 9 6 % - - % Sales of Products and Other 18 15 3 18 % 3 18 % - - % Total revenue$ 496 $ 471 $ 25 5 %$ 18 4 %$ 6 1 %
Revenue growth was
Residential pest management revenue growth was five percent, reflecting organic revenue growth of four percent. Organic revenue growth was driven by higher mosquito and bedbug sales volume, improved trailing 12-month customer retention rates and improved price realization. Residential pest management revenue also increased one percent from acquisitions completed in the last 12 months. Commercial pest management revenue growth was two percent. The organic revenue decline of one percent was driven by a reduction in one-time services driven by lapping more than$1 million of disinfection revenue in the prior year, partially offset by improved price realization. International pest revenue was negatively impacted by over$1 million of foreign currency. Excluding the impact of foreign currency and disinfection revenue, commercial pest organic growth would have been approximately two percent. Commercial pest management revenue also increased four percent from acquisitions completed in the last 12 months. Termite organic revenue growth was six percent. Termite completions increased 13 percent, driven by sales of our new monthly pay tiered termite product. Home services, which are managed as a component of our termite line of business and include wildlife exclusion, crawl space encapsulation and attic insulation, revenue growth was 19 percent, primarily as a result of improved cross selling to existing customers. Termite renewals decreased one percent, due to lower volume, partially offset by improved price realization. In the three months endedMarch 31, 2022 , termite renewal revenue comprised 48 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.
Sales of products and other revenue growth was 18 percent due to increased
chemical demand as we lap the impacts of COVID-19 on three months ended
Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of
For the three months endedMarch 31, 2022 compared toMarch 31, 2021 , cost of services rendered and products sold increased ten percent. The increase is largely attributable to the flow through from$25 million of higher revenue. Investments in labor increased$4 million , primarily due to higher trainee costs as we increase our workforce for peak season. Vehicle fuel increased$2 million year over year, driven by higher fuel prices. Termite damage claims expenses increased$3 million due to higher litigated claims counts in theMobile Bay Area as well as higher cost per Non-Litigated Claims due, in part, to inflationary pressure on building materials and contractor costs. Investments in service staffing levels and training in the call center also increased.
Selling and Administrative Expenses
The following table provides a summary of selling and administrative expenses
for the three months ended
Three Months Ended
March 31,
(In millions) 2022 2021
Selling and marketing expenses $ 58 $ 59
General and administrative expenses 80 78
Total Selling and administrative expenses $ 138 $ 137 Selling and marketing expenses were relatively flat in the three months ended
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General and administrative costs were up$2 million in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , due to increased travel costs due to the easing of COVID-19 travel restrictions as well as investments in sales staffing levels and training in the call center.
Amortization Expense
Amortization expense was
Acquisition-Related Costs
Acquisition-related costs were
Restructuring and Other Charges
We incurred restructuring and other charges of approximately$19 million and$6 million in the three months endedMarch 31, 2022 and 2021, respectively. Restructuring Charges for the three months endedMarch 31, 2022 primarily included costs related to our proposed acquisition by Rentokil and a$9 million impairment of ourMemphis headquarters lease. Restructuring charges for the three months endedMarch 31, 2021 included severance and costs to simplify our back-office and align administrative functions as a singularly focused pest management company following the sale of theServiceMaster Brands Divestiture Group . Interest Expense
Interest expense was
Interest and Net Investment Income
Interest and net investment income is comprised primarily of net investment
gains from equity investments and interest income on other cash balances.
Interest and net investment income was
Income before Income Taxes Income before income taxes was$21 million for the three months endedMarch 31, 2022 compared to income before income taxes of$37 million for the three months endedMarch 31, 2021 . The change in income before income taxes primarily reflects increased Restructuring and Other Charges.
Provision for Income Taxes
The effective tax rate on net income was 14.2 percent and 28.5 percent for the three months endedMarch 31, 2022 and 2021, respectively. The effective tax rate net income for the three months endedMarch 31, 2022 , was favorably impacted by the release of a state reserve that was recorded discretely in the quarter.
Net Income
Net income was$19 million for the three months endedMarch 31, 2022 , compared to a net income of$27 million for the three months endedMarch 31, 2021 , which was primarily driven by a$16 million decrease in Income before Income Taxes offset by a decrease in Provision for Income Taxes of$8 million .
Adjusted EBITDA
The following table provides a summary of changes in Adjusted EBITDA for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 : (In millions) Three Months EndedMarch 31, 2021 $ 90 Revenue conversion 13 Investments in labor (6) Vehicle fuel (2) Termite damage claims (3)Terminix Way investments (1) Investments in call center/sales/service (3) Travel (1) Other (1)
Three Months Ended
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Investments in labor increased$6 million , primarily due to higher trainee headcount and talent acquisition expense as we increase our workforce for peak season. Vehicle fuel increased$2 million year over year, driven by higher fuel prices. Termite damage claims expenses increased$3 million due to higher litigated claims counts in the MobileBay Area as well as higher cost per Non-Litigated Claim due, in part, to inflationary pressure on building materials and contractor costs. Investments inTerminix Way increased$1 million as we continue to roll-out enhanced onboarding, training and technology to our technicians. Investments in staffing levels and training in both sales and service in our call center increased. Travel expenses increased$1 million due to the easing of COVID-19 travel restrictions.
Termite Damage Claims
A summary of Litigated Claims and Non-Litigated Claims for the three months
ended
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, 2020 49 16 65 258 846 1,104
New claims filed 7 5 12 89 529 618
Claims resolved (9) (2) (11) (144) (630) (774)
Outstanding claims as of March 31, 2021 47 19 66 203 745 948
Outstanding claims as of December 31, 2021 58 26 84 169 737 906
New claims filed 10 5 15 80 436 516
Claims resolved (7) (3) (10) (120) (551) (671)
Outstanding claims as of March 31, 2022 61 28 89 129 622 751
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 financial impacts of these
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 for the
three months ended
Litigated Claims Non-Litigated Claims
Mobile Bay All Other Mobile Bay All Other
(In millions) Area Regions Total Area Regions Total
Reserve as of December 31, 2020 $ 35 $ 13 $ 47 $ 14 $ 11 $ 25
Expense 3 2 5 3 6 10
Payments (6) (1) (7) (5) (6) (11)
Reserves as of March 31, 2021 32 13 45 12 11 24
Reserve as of December 31, 2021 $ 36 $ 14 $ 50 $ 8 $ 14 $ 22
Expense 5 3 8 3 7 10
Payments (4) (2) (6) (4) (7) (11)
Reserves as of March 31, 2022 36 16 52 8 13 21
In addition, our results of operations for the three months ended March 31, 2022
and 2021 include charges for legal fees associated with Litigated Claims of $1
million and $1 million , respectively.
Free Cash Flow
Free Cash Flow is not a measurement of our financial performance or liquidity
under GAAP and does not purport to be an alternative to net cash provided from
operating activities from continuing operations or any other performance or
liquidity measures derived in accordance with GAAP. Free Cash Flow means net
cash provided from operating activities, less property additions. Free Cash Flow
has limitations as an analytical tool and should not be considered in isolation
or as a substitute for analyzing our results as reported under GAAP. Other
companies in our industries may calculate Free Cash Flow or similarly titled
non-GAAP financial measures differently, limiting its usefulness as a
comparative measure.
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We believe Free Cash Flow is useful as a supplemental measure of our liquidity. We use Free Cash Flow to facilitate company-to-company cash flow comparisons by removing payments for property additions, which may vary from company-to-company for reasons unrelated to operating performance.
The following table reconciles net cash provided from operating activities, which we consider to be the most directly comparable GAAP measure, to Free Cash Flow using data derived from our unaudited condensed consolidated financial statements for the periods indicated:
Three Months Ended
March 31,
(In millions) 2022 2021
Net Cash Provided from Operating Activities from Continuing
Operations $ 69 $ 75
Property additions (7) (6)
Free Cash Flow $ 62 $ 69
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Liquidity and Capital Resources
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 ofMarch 31, 2022 , we were in compliance with the covenants under the agreements that were in effect on such date. 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. As ofMarch 31, 2022 , we had$518 million of immediate liquidity, which consisted of available cash and cash equivalents and available borrowings under our Existing Revolving Credit Facility. AtMarch 31, 2022 , there were$22 million of letters of credit outstanding and$348 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. We also have$89 million of cash collateral under our automobile, general liability and workers' compensation insurance program that is included as Restricted cash on the unaudited Condensed Consolidated Statements of Financial Position as ofMarch 31, 2022 . 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 new 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 new Revolving Credit Facility. OnSeptember 25, 2020 , our board of directors approved a three-year$400 million share repurchase program, which funds were exhausted in the third quarter of 2021. OnSeptember 21, 2021 , our board of directors approved a new three-year$400 million share repurchase program. Under the share repurchase program, the Company may repurchase shares in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. As ofMarch 31, 2022 , we had$253 million of authority remaining under this program. Given the proposed acquisition by Rentokil, we do not intend to repurchase any shares of our common stock for the foreseeable future. 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 ofMarch 31, 2022 the estimated fair value of our fuel swap contracts was a net asset of$6 million , and we had posted$2 million in letters of credit as collateral under our fuel hedging program. 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. 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.
Capital Resources
Fleet and Equipment Financing Arrangements
Our Fleet Agreement allows us to obtain fleet vehicles through a leasing program, among other things. We expect to fulfill substantially all of our vehicle fleet needs through the leasing program under the Fleet Agreement. For the three months endedMarch 31, 2022 , we acquired$10 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 ranging from 1.25 percent to 2.45 percent. We have no minimum commitment for the number of vehicles to be obtained under the Fleet Agreement. We anticipate new lease financings, including the Fleet Agreement and incremental leasing programs, for the full year 2022 will range from$70 million to$80 million . We expect to fulfill all our ongoing vehicle fleet needs through vehicle finance leases. Other Capital Requirements We anticipate capital expenditures for the full year 2022 will range from$30 million to$40 million , reflecting ongoing technology projects and recurring capital needs. We incurred$7 million of such costs in the three months endedMarch 31, 2022 . 29
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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. While undistributed foreign earnings are no longer taxable underU.S. tax principles, actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes andU.S. state taxes.
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in
the accompanying unaudited Condensed Consolidated Statements of Cash Flows, are
summarized in the following table.
Three Months Ended
March 31,
(In millions) 2022 2021
Net cash provided from (used for):
Operating activities $ 69 $ 75
Investing activities (40) (26)
Financing activities 16 (180)
Discontinued operations 9 -
Cash increase (decrease) during the period
Operating Activities
Net cash provided from operating activities decreased$6 million to$69 million for the three months endedMarch 31, 2022 compared to$75 million for the three months endedMarch 31, 2021 . Net cash provided from operating activities for the three months endedMarch 31, 2022 comprised$75 million in earnings adjusted for non-cash charges and a$7 million decrease in cash required for working capital (an$11 million decrease excluding the working capital impact of accrued interest and taxes), offset, in part, by$14 million in payments related to restructuring and other charges and fumigation related matters. For the three months endedMarch 31, 2022 , working capital requirements were favorably impacted by seasonal activity and the timing of interest and income tax payments. Net cash provided from operating activities for the three months endedMarch 31, 2021 comprised$81 million in earnings adjusted for non-cash charges offset, in part, by a$3 million increase in cash required for working capital (a$4 million increase excluding the working capital impact of accrued interest and taxes and$3 million in payments related to restructuring and other charges and acquisition-related costs. For the three months endedMarch 31, 2021 , working capital requirements were unfavorably impacted by the deferral of payroll and income tax payments under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act in 2020 and an increase in prepaid and other current assets. We deferred approximately$30 million of payroll taxes under the CARES Act in 2020 and paid 50 percent of the payroll deferral in 2021.
Investing Activities
Net cash used for investing activities was
No cash was paid for business acquisitions for the three months endedMarch 31, 2022 , compared to$22 million in cash paid for business acquisitions for the three months endedMarch 31, 2021 . We expect to continue our tuck-in acquisition program and to periodically evaluate other strategic acquisitions. In the three months endedMarch 31, 2022 , the Company initiated a series of transactions to restructure its joint ventures inChina . The Company contributed$31 million of cash to effect the restructuring during the three months endedMarch 31, 2022 , which is reflected in other investing in the Condensed Consolidated Statements of Cash Flows. Upon completion of subsequent transactions in 2022, the Company expects to record a gain on sale of a portion of its interest in the joint ventures. Capital expenditures were$7 million and$6 million for the three months endedMarch 31, 2022 and 2021, respectively, and included recurring capital needs, and information technology projects. 30
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Cash flows used for notes receivable, net, for the three months endedMarch 31, 2022 were$3 million . Cash flows received for notes receivable, net, for the three months endedMarch 31, 2021 totaled$2 million .
Financing Activities
Net cash provided by financing activities was$16 million for the three months endedMarch 31, 2022 compared to net cash used for financing activities of$180 million for the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2022 , we received$1 million from the issuance of common stock through the exercise of stock options. In addition, we borrowed$80 million on our Revolving Credit Facility and repaid$65 million of debt. During the three months endedMarch 31, 2021 , we repurchased$169 million of common stock and received$4 million from the issuance of common stock through the exercise of stock options. In addition, we repaid$15 million of debt.
Mobile Bay Formosan Termite Settlement
InNovember 2020 , the Company entered into the Settlement with theOffice of the AL AG and otherAlabama state regulators, primarily related to our termite renewal pricing changes we made in our branches in the MobileBay Area in 2019 and certain other termite inspection and treatment practices regarding the control of Formosan termites in that area that allegedly violated the ADTPA. The Settlement provides for: immediate remediation measures to be provided directly to current and former customers in the MobileBay Area , including refunds of certain price increases, rebates to certain former customers, the establishment of a$25 million consumer fund and a related receiver to oversee our compliance with these commitments and to act as an arbitrator for certain Non-litigated Claims; the reimbursement of certain investigative and monitoring costs incurred by theAL AG's office and theDepartment of Agriculture and Industries ; and a university endowment intended to support termite and pest management research with an emphasis on Formosan termite research. The Company has also agreed to pay the state ofAlabama $19 million . Pursuant to the Settlement, we have also agreed to provide the opportunity to reinstate service for certain customerswho canceled their services during specified timeframes as well as the retreatment of certain customer premises and a commitment to certain specified response and remediation timeframes for future termite damage claims. We do not expect the financial impact of these remedies to have a material impact on our prospective results of operations or cash flows. In the fourth quarter of 2020, the Company funded the$25 million consumer fund, from which certain monetary liabilities from settlements of, or judgments in, the covered Settlement are paid by the fund's receiver. The amount in the consumer fund is held in escrow by the receiver and is classified as a deposit within Prepaid expenses and other assets and with an offsetting liability recorded within Accrued liabilities - Other on the Consolidated Statements of Financial Position. In the second quarter of 2021, the Company recorded an increase in expense related to the settlement of$4 million due to a higher than anticipated customer participation rate. No adjustments were made in the first quarter of 2022. The fund's receiver paid a total of$ 10 million from escrow through the first quarter of 2022.
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. Forward-looking statements
are subject to known and unknown risks and uncertainties. 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; impact
from COVID-19; the proposed acquisition by Rentokil; 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 teammates; 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.
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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 market 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 market 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" in our 2021 Form 10-K and in "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:
?risks and uncertainties related to the proposed acquisition of the Company by Rentokil, including stockholder approvals, challenges to the proposed acquisition, business operational uncertainties and potential loss of key teammates;
?implementation of
?the validity of theMobile Bay termite Settlement's preclusivity provision related to future litigated termite damage 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 ; ?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 teammates or the health and operations of 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, including the lawsuit brought by theState of Mississippi related to our termite inspection and treatment practices;
?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 teammates;
?our ability to attract and retain key teammates, 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 in our segments;
?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 substantial 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.
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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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