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
OnMarch 11, 2020 , theWorld Health Organization designated COVID-19 as a global pandemic. Early in the pandemic we experienced increased demand in our residential pest management and termite and home services service lines as customers spent more time at home. We 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 ADSs 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 ADSs (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. 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 theU.S. As announced onJune 1, 2022 , the Company completed the divestment of its pest management businesses in theUK andNorway . Completion of the divestment and the completion of the antitrust review process in theU.S. satisfy two of the closing conditions. A number of other conditions remain to be satisfied, including obtaining approval by the Company's and Rentokil's shareholders, and the registration of the Rentokil ADSs with theU.S. Securities and Exchange Commission and their listing on theNew York Stock Exchange . The preliminary registration statement on Form F-4 with respect to the ordinary shares of Rentokil underlying the Rentokil ADSs to be issued to Terminix shareholders in connection with the Mergers was filed by Rentokil onJune 7, 2022 , and the first amendment thereto was filed by Rentokil onJuly 22, 2022 . Accordingly, the parties continue to be on track to complete the transaction in the second half of 2022, with a target completion date at or around the end of the third quarter. 23
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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. OnJune 1, 2022 , in order to satisfy closing conditions of the proposed acquisition by Rentokil, the Company divested its international pest management businesses in theUK andNorway . The Company recognized approximately$8 million and$13 million in commercial pest revenue in the second quarter of 2022 and 2021 and$21 million and$26 million in commercial pest revenue year to date 2022 and 2021 respectively related to these divested businesses.
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 ofJune 30, 2022 , approximately 95 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; acquisition-related costs (adjustments); fumigation related matters; Mobile Bay Formosan termite settlement; non-cash stock-based compensation expense; restructuring and other charges; loss on sale of international subsidiaries; amortization of cloud-based software; goodwill impairment charges; 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. 24
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A reconciliation of Net income to Adjusted EBITDA for the three and six months
ended
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2022 2021 2022 2021
Net Income $ 2 $ 54 $ 21 81
Depreciation and amortization expense 27 26 54 54
Acquisition-related costs 1 (1) - (1)
Mobile Bay Formosan termite settlement - 4 - 4
Non-cash stock-based compensation expense 5 5 11 11
Restructuring and other charges 15 2 33 9
Loss on sale of international subsidiaries 41 - 41 -
Amortization of cloud based software - - 1 -
Provision for income taxes 18 20 21 31
Interest expense 11 11 23 23
Adjusted EBITDA $ 120 $ 123 $ 206 $ 213
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 and six months endedJune 30, 2022 and 2021, which reflects the results of acquired businesses from the relevant acquisition dates. Three Months Ended Increase June 30, (Decrease) % of Revenue (In millions) 2022 2021 2022 vs. 2021 2022 2021 Revenue$ 585 $ 560 4 % 100 % 100 % Cost of services rendered and products sold 340 318 7 58 57 Selling and administrative expenses 148 143 3 25 26 Amortization expense 10 10 3 2 2 Acquisition-related costs 1 (1) * - - Mobile Bay Formosan termite settlement - 4 * - 1 Restructuring and other charges 15 2 * 2 - Loss on sale of international subsidiaries 41 - * 7 - Interest expense 11 11 2 2 2 Interest and net investment income 1 (1) * - - Income before Income Taxes 19 73 * 3 13 Provision for income taxes 18 20 * 3 4 Equity in earnings of joint ventures 2 1 * - - Net Income $ 2$ 54 * 0 % 10 %
________________________________
* not meaningful
Six Months Ended Increase
June 30, (Decrease) % of Revenue
(In millions) 2022 2021 2022 vs. 2021 2022 2021
Revenue $ 1,081 $ 1,032 5 % 100 % 100 %
Cost of services rendered
and products sold 636 588 8 59 57
Selling and administrative
expenses 287 280 2 27 27
Amortization expense 20 19 4 2 2
Acquisition-related costs - (1) * - -
Mobile Bay Formosan termite
settlement - 4 * - -
Restructuring and other
charges 33 9 * 3 1
Loss on sale of
international subsidiaries 41 - * 4 -
Interest expense 23 23 (1) 2 2
Interest and net investment
income 2 (1) * 0 -
Income from Continuing
Operations before Income
Taxes 39 110 * 4 11
Provision for income taxes 21 31 * 2 3
Equity in earnings of joint
venture 3 2 * - -
Income from Continuing
Operations $ 21 $ 81 * 2 % 8 %
?
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Revenue
Three months ended
We reported revenue of$585 million and$560 million for the three months endedJune 30, 2022 and 2021, respectively. Revenue by service line was as follows: Three Months Ended June 30, (In millions) 2022 2021 Growth Organic Acquired Residential Pest Management$ 207 $ 192 $ 15 8 %$ 12 6 %$ 3 1 % Commercial Pest Management 141 141 - - % (5) (4) % 5 4 % Termite and Home Services 204 193 12 6 % 11 6 % 1 - % Sales of Products and Other 33 34 (2) (5) % (2) (5) % - - % Total revenue$ 585 $ 560 $ 25 4 %$ 16 3 %$ 9 2 %
Revenue growth was
Residential pest management revenue growth was eight percent, reflecting organic revenue growth of six percent. Organic revenue growth was driven by improved cross-selling of mosquito services, improved trailing 12-month customer retention rates, and strong price realization. Residential pest management revenue also increased one percent from acquisitions completed in the last 12 months. Commercial pest management revenue growth was flat. The organic revenue decline of four percent was mainly driven by the divestiture of theNorway andUK pest management businesses, which occurred in the quarter. International pest revenue was negatively impacted by approximately$3 million of foreign currency. Excluding the impact of foreign currency and the divestiture of theNorway andUK pest management businesses, 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 decreased two percent, driven by lower sales volume. 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 21 percent, primarily as a result of improved cross selling to existing customers. Termite renewals increased four percent, mainly due to improved price realization. In the three months endedJune 30, 2022 , termite renewal revenue comprised 41 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 decreased five percent primarily from an increase in order backlog due to supply chain challenges.
Six months ended
We reported revenue of$1,081 million and$1,032 million for the six months endedJune 30, 2022 and 2021, respectively. Revenue by service line was as follows: Six Months Ended June 30, (In millions) 2022 2021 Growth Organic Acquired Residential Pest Management$ 382 $ 358 $ 24 7 %$ 19 5 %$ 4 1 % Commercial Pest Management 273 270 4 1 % (6) (2) % 10 4 % Termite and Home Services 376 354 21 6 % 21 6 % 1 - % Sales of Products and Other 51 50 1 2 % 1 2 % - - % Total revenue$ 1,081 $ 1,032 $ 50 5 %$ 35 3 %$ 15 1 % 27
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Revenue growth was
Residential pest management revenue growth was seven percent, reflecting organic growth of five percent. Organic revenue growth was driven by higher mosquito and bedbug sales volume, improved trailing 12-month customer retention rates, and strong price realization. Residential pest management revenue also increased one percent from acquisitions completed in the last 12 months. Commercial pest management revenue growth was one percent. The organic revenue decline of two percent was mainly driven by the divestiture of theNorway andUK pest management businesses, which occurred in the second quarter. International pest revenue was negatively impacted by approximately$4 million of foreign currency. Excluding the impact of foreign currency andNorway andUK pest management businesses, commercial pest organic growth would have been approximately one 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 were flat. Home services, which are managed as a component of our termite line of business and include wildlife exclusion, crawl space encapsulation and attic insulation, growth was 20 percent, primarily as a result of improved cross selling to existing customers. Termite renewals increased two percent, mainly due to improved price realization.
Sales of Product and Other revenue growth was two percent, driven by higher sales volume.
Cost of Services Rendered and Products Sold
We reported cost of services rendered and products sold of$340 million and$318 million for the three months endedJune 30, 2022 and 2021, respectively and$636 million and$588 million for the six months endedJune 20, 2022 and 2021, respectively. For the three months endedJune 30, 2022 compared toJune 30, 2021 , cost of services rendered and products sold as a percentage of revenue increased one percent. The increase is largely attributable to the flow through from$25 million of higher revenue. Investments in labor increased$7 million , primarily due to higher trainee headcount as we right-size our technician headcount in order to drive growth in future periods. Vehicle fuel increased$3 million year-over-year, driven by higher fuel hedge prices year-over-year. Termite damage claims expenses were flat year-over-year with reduced litigated claims counts offset by 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 to drive improved customer satisfaction and retention also increased. For the six months endedJune 30, 2022 compared toJune 30, 2021 , cost of services rendered and products sold as a percentage of revenue increased two percent. The increase is largely attributable to the flow through from$50 million of higher revenue. Investments in labor increased$12 million , primarily due to higher trainee costs as we right size our workforce to drive growth in future periods. Vehicle fuel increased$5 million year-over-year, driven by higher fuel hedge prices year-over-year. Termite damage claims expenses increased$3 million with reduced litigated claims counts partially offset by higher cost per claim due to reduced litigated claims counts in theMobile Bay Areas 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 to drive improved customer satisfaction and retention 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 Six Months Ended
June 30, June 30,
(In millions) 2022 2021 2022 2021
Selling and marketing expenses $ 74 $ 72 $ 132 131
General and administrative expenses 75 71
154 149
Total Selling and administrative expenses
Selling and marketing expenses increased$2 million and$1 million , respectively in the three months and six months endedJune 30, 2022 compared to the three months and six months endedJune 30, 2021 , due to higher sales labor investments. General and administrative costs were up$4 million and$5 million , respectively in the three months and six months endedJune 30, 2022 compared to the three months and six months endedJune 30, 2021 , due to increased travel costs due to the implementation ofTerminix Way across the branch network as well as investments in sales headcount in both the field and call center to drive customer penetration and growth.
Amortization Expense
Amortization expense was$10 million for the three months endedJune 30, 2022 and 2021, and$20 million and$19 million for the six months endedJune 30, 2022 and 2021, respectively. Acquisition-Related Costs
For the three months ended
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contingency was not met. This offset approximately
Restructuring and Other Charges
We incurred restructuring and other charges of approximately$15 million and$2 million in the three months endedJune 30, 2022 and 2021, respectively and$33 million and$9 million in the six months endedJune 30, 2022 and 2021, respectively. Restructuring Charges for the three and six months endedJune 30, 2022 primarily included costs related to our proposed acquisition by Rentokil. Restructuring Charges for the six months endedJune 30, 2022 , also included a$9 million impairment of ourMemphis headquarters lease. Restructuring charges for the three and six months endedJune 30, 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 .
Loss on sale of international subsidiaries
We recognized a loss on sale of our international pest management businesses in theUK andNorway subsidiaries of$41 million for the three and six months endedJune 30, 2022 , including a$3 million foreign currency loss related to the termination of the cross-currency swap and repayment of note receivable related to theNorway business. 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 expense was$1 million for the three months endedJune 30, 2022 and Interest and net investment income was$1 million for the three months endedJune 30, 2021 . Interest and net investment expense was$2 million for the six months endedJune 30, 2022 , and Interest and net investment income was$1 million for the six months endedJune 30, 2021 .
Income before Income Taxes
Income before income taxes was$19 million for the three months endedJune 30, 2022 compared to$73 million for the three months ended June, 30, 2021. Income before income taxes was$39 million for the six months endedJune 30, 2022 as compared to income before income taxes of$110 million for the six months endedJune 30, 2021 . The change in income before income taxes primarily reflects increased Restructuring and Other Charges and loss on sale of international subsidiaries.
Provision for Income Taxes
The effective tax rate on net income was 97.9 percent and 27.9 percent for the three months endedJune 30, 2022 and 2021, respectively and 53.8 percent and 28.1 percent for the six months endedJune 30, 2022 and 2021, respectively. The effective tax rate on net income for the three months endedJune 30, 2022 was unfavorably impacted by the non-deductibility of the loss on sale of foreign subsidiaries, as well as a portion of the restructuring and other charges.
Net Income
Net income was$2 million for the three months endedJune 30, 2022 , compared to net income of$54 million for the three months endedJune 30, 2021 , which was primarily driven by a$55 million decrease in Income before Income Taxes offset by a decrease in Provision for Income Taxes of$2 million . Net income was$21 million for the six months endedJune 30, 2022 as compared to$81 million for the six months endedJune 30, 2021 , primarily driven by the$71 million decrease in Income before Income Taxes, offset by a$10 million decrease in Income Taxes. 29
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Adjusted EBITDA
Three Months Ended
The following table provides a summary of changes in Adjusted EBITDA for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 : (In millions) Three Months EndedJune 30, 2021 $ 123 Revenue conversion 12 Investments in labor (7) Vehicle fuel (3) Termite damage claims - Sales and Marketing (2)Terminix Way investments - Investments in call center/sales/service (2) Travel (1) Other 1
Three Months Ended
Investments in labor increased$7 million , primarily due to higher trainee headcount as we right-size our technician headcount in order to drive growth in future periods. Vehicle fuel increased$3 million year-over-year, driven by higher fuel hedge prices. Termite damage claims expenses were flat year-over-year with reduced litigated claims offset by higher cost per Non-Litigated Claims due, in part, to inflationary pressure on building materials and contractor costs. Investments in staffing levels and training in both sales and service in our call center increased$2 million . Sales and marketing expense increased$2 million due to investments in sales headcount in both the field and call center to drive customer penetration and growth. Travel expenses increased$1 million due to the implementation ofTerminix Way across the branch network.
Six Months Ended
The following table provides a summary of changes in Adjusted EBITDA for the six
months ended
(In millions) Six Months EndedJune 30, 2021 $ 213 Revenue conversion 24 Investments in labor (12) Termite damage claims (3)Terminix Way Investment (1) Vehicle fuel (5) Investments in call center/sales/service (5) Sales and marketing (2) Travel (2) Other (1) Six Months EndedJune 30, 2022 $ 206 Investments in labor increased$12 million , primarily due to higher trainee headcount and talent acquisition expense. Vehicle fuel increased$5 million year-over-year, driven by higher fuel hedge prices. Termite damage claims expenses increased$3 million with reduced litigated claims counts partially offset by higher cost per claim due to reduced litigated claims counts in the Mobile Bay Areas as well as higher cost per Non-Litigated Claims 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$5 million . Sales and marketing expense increased$2 million driven by higher sales labor investment. Travel expenses increased$2 million due to the implementation of Terminix Way across the branch network. 30
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Termite Damage Claims
A summary of Litigated Claims and Non-Litigated Claims for the three and six
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
New claims filed 12 7 19 112 687 799
Claims resolved (11) - (11) (131) (560) (691)
Outstanding claims as of
June 30, 2021 48 26 74 184 872 1,056
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
New claims filed 8 4 12 100 513 613
Claims resolved (4) (3) (7) (84) (544) (628)
Outstanding claims as of
June 30, 2022 65 29 94 145 591 736
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 and six 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
Expense 4 4 8 4 8 12
Payments (6) - (6) (5) (6) (11)
Reserve as of June 30,
2021 $ 30 $ 17 $ 47 $ 11 $ 13 $ 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
Expense 4 2 6 4 8 12
Payments (1) (2) (2) (3) (8) (11)Reserve as of June 30, 2022 $ 39$ 17 $ 56 $ 9$ 14 $ 22 31
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In addition, our results of operations for the three and six months endedJune 30, 2022 include charges for legal fees associated with Litigated Claims of$1 million and$3 million , respectively. Our results of operations for the three and six months endedJune 30, 2021 include charges for legal fees associated with Litigated Claims of$1 million and$3 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. 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 Six Months Ended
June 30, June 30,
(In millions) 2022 2021 2022 2021
Net Cash Provided from Operating
Activities from Continuing Operations $ 90 $ 76 $ 159 151
Property additions (5) (6) (12) (12)
Free Cash Flow $ 85 $ 71 $ 147 $ 139
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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 ofJune 30, 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 ofJune 30, 2022 , we had$656 million of immediate liquidity, which consisted of available cash and cash equivalents and available borrowings under our Existing Revolving Credit Facility. AtJune 30, 2022 , there were$22 million of letters of credit outstanding and$378 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 ofJune 30, 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 ofJune 30, 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 ofJune 30, 2022 the estimated fair value of our fuel swap contracts was a net asset of$5 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 six months endedJune 30, 2022 , we acquired$20 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. Given the increased lead times and other impacts in the new vehicle supply chain delaying delivery of ordered vehicles, it is difficult to predict the amount of new lease financings in the year. We expect to fulfill all our ongoing vehicle fleet needs through vehicle finance leases.
Other Capital Requirements
We incurred
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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.
Six Months Ended
June 30,
(In millions) 2022 2021
Net cash provided from (used for):
Operating activities $ 159 $ 151
Investing activities 20 (56)
Financing activities (26) (409)
Discontinued operations 13 12
Cash increase (decrease) during the period
Operating Activities
Net cash provided from operating activities increased
Net cash provided from operating activities for the six months endedJune 30, 2022 comprised$155 million in earnings adjusted for non-cash charges and a$23 million decrease in cash required for working capital (a$12 million decrease excluding the working capital impact of accrued interest and taxes), offset, in part, by$19 million in payments related to restructuring and other charges, fumigation related matters, and acquisition related costs. For the six months endedJune 30, 2022 , working capital requirements were favorably impacted by seasonal activity and the timing of interest payments. Additionally, we incurred$10 million of costs to implement our new customer experience platform in the six months endedJune 30, 2022 , which are included within Prepaid expenses and other assets on the unaudited Condensed Consolidated Statements of Financial Position and Inventories and other current assets on the unaudited Condensed Consolidated Statements of Cash Flows. Net cash provided from operating activities for the six months endedJune 30, 2021 comprised$168 million in earnings adjusted for non-cash charges and$21 million increase in cash required for working capital (a$23 million increase excluding the working capital impact of accrued interest and taxes), offset, in part, by$7 million in payments related to restructuring and other charges and acquisition-related costs. For the six months endedJune 30, 2021 , working capital requirements were favorably impacted by seasonal activity and the timing of interest and income tax payments. We deferred approximately$30 million of payroll taxes under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act in 2020. We paid 50 percent of the payroll deferral in the fourth quarter of 2021 and expect to pay the remainder in the fourth quarter of 2022. Additionally, we incurred$9 million of costs to implement our new customer experience platform in the six months endedJune 30, 2021 , which are included within Prepaid expenses and other assets on the unaudited Condensed Consolidated Statements of Financial Position and Inventories and other current assets on the unaudited Condensed Consolidated Statements of Cash Flows.
Investing Activities
Net cash provided by investing activities was
Proceeds from sale of international subsidiaries, net of cash disposed was
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$3 million was paid for business acquisitions for the six months endedJune 30, 2022 , compared to$45 million in cash paid for business acquisitions for the six months endedJune 30, 2021 . We expect to continue our tuck-in acquisition program and to periodically evaluate other strategic acquisitions. In the six months endedJune 30, 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 six months endedJune 30, 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$12 million for both the six months endedJune 30, 2022 and 2021, and included recurring capital needs, and information technology projects.
Cash flows used for notes receivable, net, for the six months ended
Financing Activities
Net cash used for financing activities was
During the six months endedJune 30, 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$107 million of debt. During the six months endedJune 30, 2021 , we repurchased$350 million of common stock and received$8 million from the issuance of common stock through the exercise of stock options. In addition, we repaid$67 million of debt, which included approximately$40 million , net of accreted interest, primarily related to deferred purchase price and an earnout on the 2018 purchase of Copesan.
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 second quarter of 2022. The fund's receiver paid a total of$11 million from escrow through the second 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, potential loss of key teammates, and litigation;
?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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