Terminix Global 10Q 2022 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-36507

________________________________________________

Terminix Global Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware		20-8738320
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

150 Peabody Place, Memphis, Tennessee 38103

(Address of principal executive offices) (Zip Code)

901-597-1400

(Registrant’s telephone number, including area code)

________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common, par value $0.01	TMX	NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


	Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).


	Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer x	Accelerated Filer o	Non-Accelerated Filer o	Smaller Reporting Company o
			Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


	Yes o No x

The number of shares of the registrant’s common stock outstanding as of August 1, 2022: 121,544,698 shares of common stock, par value $0.01 per share.

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TABLE OF CONTENTS


	Page ‎No.
Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Statements of Operations and Comprehensive Income	3

Condensed Consolidated Statements of Financial Position	4

Condensed Consolidated Statements of Stockholders’ Equity	5

Condensed Consolidated Statements of Cash Flows	6

Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3. Quantitative and Qualitative Disclosures About Market Risk	38

Item 4. Controls and Procedures	38

Part II. Other Information	38

Item 1. Legal Proceedings	38

Item 1A. Risk Factors	38

Item 2. Unregistered Sales of Registered Securities and Use of Proceeds	39

Item 6. Exhibits	40

Signature	41

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In millions, except per share data)




	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2022		2021		2022		2021
Revenue	$	585	$	560	$	1,081		1,032
Cost of services rendered and products sold		340		318		636		588
Selling and administrative expenses		148		143		287		280
Amortization expense		10		10		20		19
Acquisition-related costs		1		(1)		—		(1)
Mobile Bay Formosan termite settlement		—		4		—		4
Restructuring and other charges		15		2		33		9
Loss on sale of international subsidiaries		41		0		41		—
Interest expense		11		11		23		23
Interest and net investment income		1		(1)		2		(1)
Income before Income Taxes		19		73		39		110
Provision for income taxes		18		20		21		31
Equity in earnings of joint ventures		2		1		3		2
Net Income	$	2	$	54	$	21		81
Other Comprehensive Income (Loss), Net of Income Taxes:
Net unrealized gains (losses) on derivative instruments		6		(3)		30		11
Foreign currency translation gain (loss)		(5)		(3)		—		5
Other Comprehensive Income (Loss), Net of Income Taxes		1		(5)		29		17
Total Comprehensive Income	$	3	$	48	$	50		97
Weighted-average common shares outstanding - Basic		121.5		127.4		121.5		129.3
Weighted-average common shares outstanding - Diluted		121.7		127.8		121.7		129.8
Basic Earnings Per Share:
Net Income		0.02		0.42		0.17		0.62
Diluted Earnings Per Share:
Net Income		0.02		0.42		0.17		0.62

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

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Condensed Consolidated Statements of Financial Position

(In millions, except share data)



	Unaudited
	As of		As of
	June 30,		December 31,
	2022		2021
Assets:
Current Assets:
Cash and cash equivalents	$	277	$	116
Receivables, less allowances of $29 and $32, respectively		213		206
Inventories		45		41
Prepaid expenses and other assets		163		151
Total Current Assets		698		514
Other Assets:
Property and equipment, net		183		196
Operating lease right-of-use assets		72		79
Goodwill		2,107		2,211
Intangible assets, primarily trade names, service marks and trademarks, net		1,051		1,097
Restricted cash		89		89
Notes receivable		38		36
Long-term marketable securities		12		15
Deferred customer acquisition costs		102		98
Other assets		134		77
Total Assets	$	4,486	$	4,410
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable	$	122	$	85
Accrued liabilities:
Payroll and related expenses		73		81
Self-insured claims and related expenses		73		72
Accrued interest payable		7		7
Other		107		95
Deferred revenue		99		103
Current portion of lease liability		17		18
Current portion of long-term debt		47		50
Total Current Liabilities		544		511
Long-Term Debt		846		849
Other Long-Term Liabilities:
Deferred taxes		396		387
Other long-term obligations, primarily self-insured claims		173		197
Long-term lease liability		91		92
Total Other Long-Term Liabilities		660		677

Stockholders' Equity:
Common stock $0.01 par value (authorized 2,000,000,000 shares with 149,359,858 shares issued and 121,523,419 outstanding at June 30, 2022 and 149,095,168 shares issued and 121,258,729 outstanding shares outstanding at December 31, 2021)		2		2
Additional paid-in capital		2,403		2,391
Retained Earnings		988		967
Accumulated other comprehensive income (loss)		8		(22)
Less common stock held in treasury, at cost (27,836,439 shares at June 30, 2022 and December 31, 2021)		(964)		(964)
Total Stockholders' Equity		2,436		2,375
Total Liabilities and Stockholders' Equity	$	4,486	$	4,410

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

‎

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Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(In millions)


							Retained		Accumulated
					Additional		Earnings		Other
			Common		Paid-in		(Accumulated		Comprehensive		Treasury				Total
	Shares		Stock		Capital		Deficit)		(Loss) Income		Shares		Amount		Equity
Balance December 31, 2020		148	$	2	$	2,359	$	841	$	(39)		(16)	$	(423)	$	2,741
Net income		—		—		—		27		—		—		—		27
Other comprehensive income, net of tax		—		—		—		—		22		—		—		22
Total comprehensive income		—		—		—		27		22		—		—		49
Issuance of common stock		—		—		1		—		—		—		—		1
Exercise of stock options		—		—		4		—		—		—		—		4
Stock-based employee compensation		—		—		6		—		—		—		—		6
Repurchase of common stock		—		—		—		—		—		(4)		(169)		(169)
Balance March 31, 2021		149	$	2	$	2,370	$	868	$	(17)		(20)	$	(592)	$	2,631
Net income		—		—		—		54		—		—		—		54
Other comprehensive loss, net of tax		—		—		—		—		(5)		—		—		(5)
Total comprehensive income		—		—		—		54		(5)		—		—		48
Issuance of common stock		—		—		1		—		—		—		—		1
Exercise of stock options		—		—		3		—		—		—		—		3
Stock-based employee compensation		—		—		5		—		—		—		—		5
Repurchase of common stock		—		—		—		—		—		(4)		(181)		(181)
Balance June 30, 2021		149	$	2	$	2,379	$	922	$	(22)		(24)	$	(773)	$	2,508

Balance December 31, 2021		149	$	2	$	2,391	$	967	$	(22)		(28)	$	(964)	$	2,375
Net income		—		—		—		19		—		—		—		19
Other comprehensive income, net of tax		—		—		—		—		28		—		—		28
Total comprehensive income		—		—		—		19		28		—		—		47
Exercise of stock options		—		—		1		—		—		—		—		1
Stock-based employee compensation		—		—		6		—		—		—		—		6
Balance March 31, 2022		149	$	2	$	2,398	$	986	$	6		(28)	$	(964)	$	2,428
Net income		—		—		—		2		—		—		—		2
Other comprehensive income, net of tax		—		—		—		—		1		—		—		1
Total comprehensive income		—		—		—		2		1		—		—		3
Stock-based employee compensation		—		—		5		—		—		—		—		5
Balance June 30, 2022		149	$	2	$	2,403	$	988	$	8		(28)	$	(964)	$	2,436

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

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Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)




	Six Months Ended
	June 30,

	2022		2021
Cash and Cash Equivalents and Restricted Cash at Beginning of Period	$	205	$	704
Cash Flows from Operating Activities
Net Income		21		81
Adjustments to reconcile net income to net cash provided from operating activities:
Equity in earnings of joint venture		(3)		(2)
Depreciation expense		34		35
Amortization expense		20		19
Amortization of debt issuance costs		1		1
Amortization of lease right-of-use assets		8		8
Payments on fumigation related matters		(3)		—
Mobile Bay Formosan termite settlement		—		4
Loss on sale of international subsidiaries		41		—
Deferred income tax provision		5		13
Stock-based compensation expense		11		11
Restructuring and other charges		33		9
Payments for restructuring and other charges		(15)		(5)
Acquisition-related costs		—		(1)
Payments for acquisition-related costs		(1)		(1)
Other		(17)		(12)
Change in working capital, net of acquisitions:
Receivables		(13)		(7)
Inventories and other current assets		(22)		(25)
Accounts payable		38		23
Deferred revenue		5		8
Accrued liabilities		3		(12)
Accrued interest payable		1		—
Current income taxes		11		2
Net Cash Provided from Operating Activities		159		151
Cash Flows from Investing Activities
Property additions		(12)		(12)
Proceeds from sale of international subsidiaries, net of cash sold		73		—
Sale of equipment and other assets		1		1
Business acquisitions, net of cash acquired		(3)		(45)
Origination of notes receivable		(45)		(34)
Collections on notes receivable		37		33
Other investing (note 12)		(31)		—
Net Cash Used for Investing Activities		20		(56)
Cash Flows from Financing Activities
Borrowings of debt		80		—
Payments of debt		(107)		(67)
Repurchase of common stock		—		(350)
Issuance of common stock and exercise of stock options		1		8
Net Cash Provided from (Used for) Financing Activities		(26)		(409)
Cash Flows from Discontinued Operations:
Cash provided from operating activities		13		12
Net Cash Provided from Discontinued Operations		13		12
Effect of Exchange Rate Changes on Cash		(4)		—
Cash (Decrease) Increase During the Period		161		(302)
Cash and Cash Equivalents and Restricted Cash at End of Period	$	366	$	402

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements

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TERMINIX GLOBAL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

Terminix Global Holdings, Inc. and its majority-owned subsidiary partnerships, limited liability companies and corporations (collectively, “Terminix,” the “Company,” “we,” “us” and “our”) is a leading provider of essential services to residential and commercial customers in the termite and pest management markets. Our portfolio of well‑recognized brands includes Terminix, Copesan, Assured Environments, Gregory Pest Solutions, McCloud Services and Nomor. All consolidated Company subsidiaries are wholly-owned. Intercompany transactions and balances have been eliminated. Our operations are organized into 1 reportable segment, our pest management and termite business.

The unaudited Condensed Consolidated Financial Statements have been prepared by us in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). We recommend that the quarterly unaudited Condensed Consolidated Financial Statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC (the “2021 Form 10-K”). The unaudited Condensed Consolidated Financial Statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results that might be achieved for any other interim period or for the full year due to the seasonality of our business, the impact of the COVID-19 pandemic (“COVID-19”) and the possibility of changes in general economic conditions.

COVID-19

On March 11, 2020, the World 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 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 call center teammates working remotely and field support teammates working remotely where possible.

Proposed Acquisition by Rentokil

On December 13, 2021, we entered into an Agreement and Plan of Merger (as subsequently amended, the “Merger Agreement”) with Rentokil Initial plc, a public limited company incorporated under the laws of England and Wales (“Rentokil”), Rentokil Initial US Holdings, Inc., a Delaware corporation and a wholly owned subsidiary of Rentokil (“Bidco”), Leto Holdings I, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Bidco (“Merger Sub I”), and Leto Holdings II, LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of Bidco (“Merger Sub II”), pursuant to which, and subject to the satisfaction or waiver of the conditions set forth therein, (1) Merger Sub I will merge with and into the Company (the “First Merger”), with the Company surviving the First Merger as a wholly owned subsidiary of Bidco, and (2) immediately following the effective time of the First Merger (the “Effective Time”), the Company, as the surviving corporation in the First Merger, will merge with and into Merger Sub II (the “Second Merger” and, together with the First Merger, the “Mergers”), with Merger Sub II surviving the Second Merger as a wholly owned direct subsidiary of Bidco and an indirect wholly owned subsidiary of Rentokil.

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 (“ADSs”) of Rentokil (each representing a beneficial interest in 5 ordinary shares of Rentokil) equal to (A) 1.0619 (the “Exchange Ratio”) plus (B) the quotient of $11.00 (the “Per Share Cash Amount”) and the volume weighted average price (measured in U.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) (such price, the “Rentokil ADS Price,” and such number of Rentokil American depositary shares, the “Stock Consideration”); 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 (the “Cash Consideration,” and together with the “Stock Consideration,” the “Merger Consideration”),

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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 on March 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 U.S. As announced on June 1, 2022, the Company completed the divestment of its pest management businesses in the UK and Norway. Completion of the divestment and the completion of the antitrust review process in the U.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 the U.S. Securities and Exchange Commission and their listing on the New 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 on June 7, 2022, and the first amendment thereto was filed by Rentokil on July 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.

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 the Retention Pool has been allocated specifically to customer-facing, field operations teammates, and the remainder has been allocated to key back-office teammates.

Note 2. Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2021 Form 10-K. There have been no material changes to the significant accounting policies for the six months ended June 30, 2022, other than those described below.

Accounting Standards Issued But Not Yet Effective

In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. We will adopt this ASU effective January 1, 2023. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The ASU is effective for fiscal years beginning after December 15, 2021 and only impacts annual financial statement footnote disclosures. We do not expect the adoption to have a material effect on our consolidated financial statements.

We have reviewed all other recently issued, but not yet effective, accounting pronouncements and do not expect the future adoption of any such pronouncements will have a material impact on our financial condition or the results of our operations.

Note 3. Revenues

The following tables present our reportable segment revenues, disaggregated by revenue source and geographic area. We disaggregate revenue from contracts with customers into major product lines. We determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Revenue by major service line was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2022		2021		2022		2021
Major service line
Residential Pest Management	$	207	$	192	$	382		358
Commercial Pest Management		141		141		273		270
Termite and Home Services		204		193		376		354
Sales of Products and Other		33		34		51		50
Total	$	585	$	560	$	1,081	$	1,032

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Revenue by geographic area was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2022		2021		2022		2021
United States	$	555	$	526	$	1,019	$	967
International		31		34		62		64
Total	$	585	$	560	$	1,081	$	1,032

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. Contracts with customers are generally for a period of one year or less and are generally renewable. We record a receivable related to revenue recognized on services once we have an unconditional right to invoice and receive payment in the future related to the services provided. All accounts receivables are recorded within Receivables, less allowances, on the unaudited Condensed Consolidated Statements of Financial Position. The current portion of Notes receivable, which represents amounts financed for customers, are included within Receivables, less allowances, on the unaudited Condensed Consolidated Statement of Financial Position and totaled $31 million and $26 million as of June 30, 2022 and December 31, 2021, respectively.

At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good or service (or a bundle of goods and services) that is distinct. To identify the performance obligation, we consider all of the goods and services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services. Amounts are recognized as revenue upon completion of services.

Changes in deferred revenue for the six months ended June 30, 2022 and 2021 were as follows:


(In millions)	Deferred revenue
Balance as of December 31, 2021	$	103
Deferral of revenue		86
Recognition of deferred revenue⁽¹⁾		(90)
Balance as of June 30, 2022	$	99

Balance as of December 31, 2020	$	102
Deferral of revenue		82
Recognition of deferred revenue		(75)
Balance as of June 30, 2021	$	110

(1)Includes a $7 million decrease to deferred revenue related to the divestiture of the Company’s international pest management businesses as discussed in Note 12.

There was approximately $21 million and $51 million of revenue recognized in the three and six months ended June 30, 2022, that was included in the deferred revenue balance as of December 31, 2021. There was approximately $18 million and $49 million of revenue recognized in the three and six months ended June 30, 2021, respectively, that was included in the deferred revenue balance as of December 31, 2020.

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Note 4. Restructuring and Other Charges

We incurred restructuring and other charges of $15 million ($13 million, net of tax) and $2 million ($2 million, net of tax) in the three months ended June 30, 2022 and 2021, respectively. We incurred restructuring and other charges of $33 million ($28 million, net of tax) and $9 million ($7 million, net of tax) in the six months ended June 30, 2022 and 2021, respectively. Restructuring and other charges were comprised of the following:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2022		2021		2022		2021
Severance⁽¹⁾	$	1	$	2	$	1		5
Costs related to our proposed acquisition by Rentokil⁽²⁾		13		—		22		—
Other⁽³⁾		1		1		10		3
Total restructuring charges	$	15	$	2	$	33	$	9

___________________________________

(1)Includes severance and related charges to align functions after the sale of the ServiceMaster Brands Divestiture Group, enhance field operations and corporate capabilities, and reduce costs in our corporate functions that provide administrative services to support operations.

(2)Primarily professional and consultant fees and accrual of employee retention bonuses.

(3)Primarily owned building and operating lease right-of-use asset impairment charges, costs to simplify our back-office and align as a singularly focused pest management company and other exit costs. Charges for the six months ended June 30, 2022, include a $9 million impairment of the Memphis headquarters building operating lease right-of-use asset and leasehold improvements. The impairment was the result of the sublease of approximately 24% of the building.

A reconciliation of the beginning and ending balances of accrued restructuring charges by major cost type, which are included in Accrued liabilities—Payroll and related expenses and Other on the unaudited Condensed Consolidated Statements of Financial Position, is presented as follows:



	Accrued		Accrued		Accrued		Total Accrued
	Severance		Merger Related		Other		Restructuring
(In millions)	Charges		Charges		Charges		Charges
Balance as of December 31, 2021	$	2	$	7	$	—	$	9
Costs incurred		1		22		10		33
Costs paid or otherwise settled		(3)		(12)		(10)		(24)
Balance as of June 30, 2022	$	—	$	18	$	—	$	18

Balance as of December 31, 2020	$	2	$	—	$	—	$	2
Costs incurred		5		—		3		9
Costs paid or otherwise settled		(3)		—		(3)		(7)
Balance as of June 30, 2021	$	4	$	—	$	—	$	4

We expect substantially all of our accrued restructuring charges to be paid within one year.

Note 5. Commitments and Contingencies

In the normal course of business, we periodically enter into agreements that incorporate indemnification provisions. While the maximum amount to which we may be exposed under such agreements cannot be estimated, we do not expect these guarantees and indemnifications to have a material effect on our business, financial condition, results of operations or cash flows.

We carry insurance policies on insurable risks at levels that we believe to be appropriate, including workers’ compensation, automobile and general liability risks. We purchase insurance policies from third-party insurance carriers, which typically incorporate significant deductibles or self-insured retentions. We are responsible for all claims that fall below the retention limits, exceed our coverage limits or are otherwise not covered by our insurance policies. In determining our accrual for self-insured claims, we use historical claims experience to establish both the current year accrual and the underlying provision for future losses. This actuarially determined provision and related accrual include known claims, as well as incurred but not reported claims. We adjust our estimate of accrued self-insured claims when required to reflect changes based on factors such as changes in health care costs, accident frequency and claim severity.

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A reconciliation of beginning and ending accrued self-insured claims, which are included in Accrued liabilities—Self-insured claims and related expenses and Other long-term obligations, primarily self-insured claims on the unaudited Condensed Consolidated Statements of Financial Position, net of insurance recoverables, which are included in Prepaid expenses and other assets and Other assets on the unaudited Condensed Consolidated Statements of Financial Position, is presented as follows:



	Accrued
	Self-insured
(In millions)	Claims, Net
Balance as of December 31, 2021	$	130
Provision for self-insured claims		20
Cash payments		(21)
Balance as of June 30, 2022	$	129

Balance as of December 31, 2020	$	126
Provision for self-insured claims		18
Cash payments		(15)
Balance as of June 30, 2021	$	129

Our business is subject to a significant number of damage claims related to termite activity in homes for which we provide termite control services, often accompanied by a termite damage warranty. Our termite damage warranty is a differentiator in the industry that has enabled us to become a market leader of this product line. Termite damage claims include circumstances when a customer notifies us that they have experienced damage to their property and we reach an agreement to remediate that damage (a “Non-Litigated Claim”); and circumstances when we do not reach an agreement with a customer to remediate the damage and that customer initiates litigation or arbitration proceedings (a “Litigated Claim”). We accrue for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Current activity can differ, causing a change in estimates which could be material.

A reconciliation of beginning and ending accrued Litigated Claims, which are included in Accrued liabilities—Other and Other long-term obligations, primarily self-insured claims on the unaudited Condensed Consolidated Statements of Financial Position, and Non-Litigated Claims, which are included in Accrued liabilities—Self-insured claims and related expenses on the unaudited Condensed Consolidated Statements of Financial Position, is presented as follows:


	Accrued
	Termite Damage
(In millions)	Claims
Balance as of December 31, 2021	$	72
Provision for termite damage claims		36
Cash payments		(30)
Balance as of June 30, 2022	$	78

Balance as of December 31, 2020	$	72
Provision for termite damage claims		34
Cash payments		(34)
Balance as of June 30, 2021	$	71

Mobile Bay Formosan Termite Settlement

In November 2020, the Company entered into the Consent Judgment and Settlement Agreement (the “Settlement”) with the Office of the Attorney General of the State of Alabama (the “AL AG”) and other Alabama state regulators, primarily related to termite renewal pricing changes we made in our branches in Mobile, Alabama and Gulf Shores, Alabama, which comprise all of our customers in the area, (collectively, the “Mobile Bay Area”) in 2019 and certain other termite inspection and treatment practices regarding the control of Formosan termites in that area that allegedly violated the Alabama Deceptive Trade Practices Act (the “ADTPA”). The Settlement provides for: immediate remediation measures to be provided directly to current and former customers in the Mobile Bay 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 the AL AG’s office and the Department 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 of Alabama $19 million.

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certain specified response and remediation timeframes for future termite damage claims. We do not expect the financial impact of these additional 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 unaudited Condensed 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. NaN adjustments were made in the second quarter of 2022. The fund’s receiver has paid a total of $11 million from the fund through the second quarter of 2022.

State of Mississippi Formosan Termite Litigation

On April 22, 2021, the State of Mississippi brought litigation against us related to our termite inspection and treatment practices. The Company disputes the claims made in the litigation and intends to defend the matter vigorously. However, given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for success on the merits, the Company cannot predict with certainty the outcome of the Mississippi litigation.

Fumigation Related Matters

On December 16, 2016, the U.S. Virgin Islands Department of Justice filed a civil complaint in the Superior Court of the Virgin Islands related to the aforementioned fumigation incident in a matter styled Government of the United States Virgin Islands v. The ServiceMaster Company, LLC, The Terminix International Company Limited Partnership, and Terminix International USVI, LLC (collectively, “the Parties”). On November 15, 2021, the Parties reached a settlement agreement whereby the Company agreed to pay $3 million to the Government of the U.S. Virgin Islands and the settlement was paid in the three months ended March 31, 2022.

On January 20, 2017, TMX USVI and TMX LP, each an indirect, wholly-owned subsidiary of the Company, entered into a revised Plea Agreement in connection with the investigation initiated by the DOJ into allegations that a local Terminix branch used methyl bromide as a fumigant at a resort in St. John, U.S. Virgin Islands. Under the terms of sentencing handed down on November 20, 2017, (i) TMX USVI and TMX LP each paid a fine of $4.6 million (total of $9.2 million); (ii) TMX USVI and TMX LP paid a total of $1.2 million to the EPA for costs incurred by the EPA for the response and clean-up of the affected units at the resort in St. John; and (iii) both TMX USVI and TMX LP will serve a five year probation period. In lieu of the $1 million community service payment that was proposed in the Plea Agreement, the court required TMX USVI and TMX LP to provide for training certification courses with respect to pesticide application and safety in the U.S. Virgin Islands until November 2022.

Other Litigation

On March 25, 2022, in connection with its previously filed complaint on October 20, 2020, Bruce-Terminix Company, a licensee of the Company (“Bruce” or the “Licensee”), filed a supplemental complaint against the Company and The Terminix International Company Limited Partnership, a subsidiary of the Company, under the caption Bruce-Terminix Company v. The Terminix International Company Limited Partnership, and Terminix Global Holdings, Inc., Civil Action No: 1:20-CV-962 (M.D.N.C.) (the “Bruce Lawsuit”). The original complaint generally alleged, among other things, that certain subsidiaries of the Company violated the non-compete restriction under the Licensee’s license agreement and the North Carolina Unfair and Deceptive Trade Practices Act. As supplemented, the Bruce Lawsuit further generally alleges, among other things, that a Rentokil subsidiary currently competes in the Licensee’s territory and that the Mergers would violate the non-compete restriction under the Licensee’s license agreement. The Bruce Lawsuit also alleges, among other things, that Bruce would suffer irreparable harm from purported competition with Rentokil should the Mergers be consummated, and seeks, among other things, injunctive relief enjoining the defendants from merging with Rentokil so long as Rentokil owns pest control companies with locations within Bruce’s service area and from disclosing to Rentokil certain confidential or proprietary information of the Company. On August 1, 2022, the court denied Bruce’s motion for a preliminary injunction to enjoin the Rentokil-Terminix merger. The Company believes that the claims asserted in the Bruce Lawsuit are without merit.

In connection with the Mergers, three complaints have been filed by purported Terminix stockholders against the Company and its directors, and one draft complaint has been sent to the Company. The complaints are captioned Ferreiro v. Terminix Global Holdings, Inc., et al., No. 1:22-cv-04987 (S.D.N.Y); Justice v. Terminix Global Holdings, Inc., et al., No. 1:22-cv-05519 (S.D.N.Y.); and Baker v. Terminix Global Holdings, Inc., et al., No. 1:22-cv-05524 (S.D.N.Y.). The draft complaint is captioned Paxton v. Terminix Global Holdings, Inc., et al. and does not specify any court. The complaints and draft complaint generally allege that the preliminary registration statement filed by Rentokil with the SEC on June 7, 2022 omitted certain allegedly material information in connection with the transaction in violation of federal proxy laws, and one of the complaints further alleges that the Company’s directors further breached their fiduciary duties in connection with the transaction and that the Company aided and abetted that breach. The lawsuits seek various remedies, including: enjoining the consummation of the transaction; rescission of the transaction, or rescissory damages in the event the transaction is consummated without the allegedly material disclosures; declaring the Merger Agreement unenforceable; directing dissemination of additional allegedly material disclosures; declaring that the Company and its directors violated federal proxy laws; awarding plaintiffs costs and an allowance for attorneys’ and experts fees; and an accounting to the plaintiffs for any damages allegedly suffered. Given the early stage of the proceedings, it is impossible to predict the outcome or to

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estimate possible loss or range of loss. The Company believes that the claims asserted in the complaints and draft complaint are without merit.

In addition to the matters discussed above, in the ordinary course of conducting business activities, we and our subsidiaries become involved in judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. We accrue for these liabilities when it is probable the future costs will be incurred and such costs can be reasonably estimated. Current activity can differ, causing a change in estimates which could be material. These proceedings include insured and uninsured matters that are brought on an individual, collective, representative and class action basis, or other proceedings involving regulatory, employment, general and commercial liability, automobile liability, wage and hour, environmental, shareholder and other matters. We have entered into settlement agreements in certain cases, including with respect to putative collective and class actions, which are subject to court or other approvals, and which require compliance with the terms of the agreements. If one or more of our settlements are not finally approved and implemented, we could have additional or different exposure, which could be material. Subject to the paragraphs above, we do not expect any of these proceedings to have a material effect on our reputation, business, financial position, results of operations or cash flows; however, we can give no assurance that the results of any such proceedings will not materially affect our reputation, business, financial position, results of operations and cash flows.

Note 6. Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets, primarily trade names, are not amortized and are subject to assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a potential impairment. There were 0 impairment charges recorded in the three and six months ended June 30, 2022 and 2021.

Customer relationships and Other intangible assets, which primarily includes trade names subject to amortization, are amortized over their respective useful lives.

The table below summarizes the goodwill balances:



(In millions)
Balance as of December 31, 2021	$	2,211
Acquisitions		3
Disposals⁽¹⁾		(91)
Impact of foreign exchange rates		(16)
Balance as of June 30, 2022	$	2,107

___________________________________

(1)Includes divestment of the pest management businesses in the UK and Norway, which was completed as of June 1, 2022 as described in Note 12.

The table below summarizes the other intangible asset balances:



	As of June 30, 2022						As of December 31, 2021
			Accumulated						Accumulated
(In millions)	Gross		Amortization		Net		Gross		Amortization		Net
Trade names⁽¹⁾	$	888	$	—	$	888	$	888	$	—	$	888
Customer relationships⁽²⁾		641		(493)		148		670		(484)		187
Other⁽²⁾		65		(51)		15		71		(50)		22
Total	$	1,595	$	(544)	$	1,051	$	1,630	$	(533)	$	1,097

___________________________________

(1)Not subject to amortization.

(2)Includes divestment of the pest management businesses in the UK and Norway, which was completed as of June 1, 2022 as described in Note 12.

For the existing intangible assets, we anticipate amortization expense for the remainder of 2022 and each of the next five years as follows:


(In millions)	2022		2023		2024		2025		2026		2027
Amortization expense	$	19	$	33	$	24	$	19	$	14	$	10

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Note 7. Stock-Based Compensation

For each of the three months ended June 30, 2022 and 2021, we recognized stock-based compensation expense of $5 million ($4 million, net of tax) and $6 million ($4 million, net of tax), respectively. For the six months ended June 30, 2022 and 2021, we recognized stock-based compensation expense of $11 million ($8 million, net of tax) and $11 million ($9 million, net of tax), respectively. These charges are recorded within Selling and administrative expenses in the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

As of June 30, 2022, there were $36 million of total unrecognized compensation costs related to non-vested stock options, restricted stock units (“RSUs”) and performance share units granted under the Amended and Restated Terminix Global Holdings, Inc. 2014 Omnibus Incentive Plan (the “Omnibus Incentive Plan”). These remaining costs are expected to be recognized over a weighted-average period of 1.96 years.

On February 24, 2015, our board of directors approved and recommended for approval by our stockholders the Terminix Global Holdings, Inc. Employee Stock Purchase Plan (“Employee Stock Purchase Plan”), which became effective for offering periods commencing July 1, 2015. On April 27, 2015, our stockholders approved the Employee Stock Purchase Plan with a maximum of 1 million shares of common stock authorized for sale under the plan. On November 3, 2015, we filed a registration statement on Form S-8 under the Securities Act to register the 1 million shares of common stock that may be issued under the Employee Stock Purchase Plan and, as a result, all shares of common stock acquired under the Employee Stock Purchase Plan will be freely tradable under the Securities Act, unless purchased by our affiliates. Our Compensation Committee amended the Employee Stock Purchase Plan in February 2019 to allow for more frequent purchase periods and to change the allowed 10 percent discount to a company match of 10 percent of employee contributions. The authorized number of shares remaining in the Employee Stock Purchase Plan was not changed from 843,584 and the expiration date of the Employee Stock Purchase Plan was not changed from April 27, 2025. As of June 30, 2022, there were 741,120 shares available for issuance under the Employee Stock Purchase Plan. In connection with the announcement of the proposed acquisition of the Company by Rentokil, the Employee Stock Purchase Plan was indefinitely suspended as of January 1, 2022.

Note 8. Comprehensive Income (Loss)

Comprehensive income (loss), which primarily includes net income, unrealized gains and losses on derivative instruments and the effect of foreign currency translation, is included in the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

During 2019, we terminated our then-existing $650 million interest rate swap, receiving $12 million from the counterparty. The fair value of the terminated agreement is recorded within accumulated other comprehensive income (loss) on the unaudited Condensed Consolidated Statements of Financial Position and will be amortized into interest expense over the original term of the agreement. The remaining unamortized balance at June 30, 2022 was $3 million.

On June 1, 2022, in connection with the sale of our Norway pest management business, we terminated our fixed-to-fixed cross-currency interest rate swap to hedge foreign currency risk associated with the fixed-rate Swedish krona denominated intercompany debt at Nomor. The five year interest rate swap was scheduled to mature March 31, 2025 and had a notional amount of 725 million Swedish krona, or approximately $74 million, and swaps interest payments of 3.5 percent Swedish krona for interest receipts of 4.147 percent U.S. dollar. This contract was designated as a cash flow hedge of a fixed-rate borrowing and we recognized a loss of approximately $1 million related to the termination of the swap agreement for the three and six months ended June 30, 2022 in loss on sale of international subsidiaries.

We also terminated the cross-currency swap agreement hedging a portion of our net investment in Nomor against future volatility in the exchange rates between the Swedish krona and the U.S. dollar. The five year cross-currency swap had a fixed notional amount of 1.275 billion Swedish krona, or approximately $131 million, at an annual rate of 0 percent and a maturity date of March 31, 2025. At inception, the cross-currency swap was designated as a net investment hedge. As the sale of our Norway pest management business did not result in a substantially complete liquidation of the Company’s investment in Nomor, the accumulated other comprehensive loss of $1 million on the date of termination of the agreement is recorded within accumulated other comprehensive income (loss) on the unaudited Condensed Consolidated Statements of Financial Position as of June 30, 2022.

‎

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The following tables summarize the activity in accumulated other comprehensive income (loss), net of the related tax effects.



	Unrealized
	Gains		Foreign
	(Losses) on		Currency
(In millions)	Derivatives		Translation		Total
Balance as of December 31, 2021	$	(5)	$	(16)	$	(22)
Other comprehensive income (loss) before reclassifications:
Pre-tax amount		58		(2)		56
Tax provision		(13)		—		(13)
After-tax amount		45		(2)		43
Amounts reclassified from accumulated other comprehensive income (loss)⁽¹⁾		(6)		—		(6)
Amounts reclassified due to the sale of international subsidiaries⁽²⁾		—		(8)		(8)
Total amounts reclassified from accumulated other comprehensive income (loss)		(6)		(8)		(14)
Amounts reclassified within accumulated other comprehensive income (loss)⁽³⁾		(10)		10		—
Net current period other comprehensive income		30		—		29
Balance as of June 30, 2022	$	24	$	(17)	$	8

Balance as of December 31, 2020	$	(16)	$	(23)	$	(39)
Other comprehensive income (loss) before reclassifications:
Pre-tax amount		26		(1)		25
Tax provision		(5)		—		(5)
After-tax amount		21		(1)		20
Amounts reclassified from accumulated other comprehensive income (loss)⁽¹⁾		(4)		—		(4)
Amounts reclassified within accumulated other comprehensive income (loss)⁽³⁾		(6)		6		—
Net current period other comprehensive income		11		5		17
Balance as of June 30, 2021	$	(4)	$	(18)	$	(22)

___________________________________

(1)Amounts are net of tax. See reclassification out of accumulated other comprehensive income below for further details.

(2)Includes divestment of the pest management businesses in the UK and Norway, which was completed as of June 1, 2022 as described in Note 12.

(3)Represents reclassifications from our net investment hedge related to foreign currency exchange rate fluctuations.

Reclassifications out of accumulated other comprehensive income included the following components for the periods indicated:


	Amounts Reclassified from Accumulated
	Other Comprehensive Income (Loss)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2022		2021		2022		2021
Gains (losses) on derivatives:
Fuel swap contracts	$	3	$	2	$	5		3
Interest rate swap contracts		(1)		(2)		(2)		(3)
Cross-currency interest rate swap		3		(2)		5		3
Net gains (losses) on derivatives		6		(1)		8		4
Sale of international subsidiaries⁽¹⁾		8		—		8		—
Impact of income taxes		(2)		—		(2)		—
Total reclassifications for the period	$	11	$	(1)	$	14	$	4

(1)Includes divestment of the pest management businesses in the UK and Norway, which was completed as of June 1, 2022, as described in Note 12.

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Note 9. Supplemental Cash Flow Information

Supplemental information relating to the unaudited Condensed Consolidated Statements of Cash Flows is presented in the following table. The non-cash lease transactions are described in Note 11.



	Six Months Ended
	June 30,
(In millions)	2022		2021
Cash paid for or (received from):
Interest expense	$	20	$	27
Income taxes, net of refunds		(4)		3

For the six months ended June 30, 2022, cash received for income taxes of $4 million includes refunds of $13 million of tax overpayments made related to the sale of the ServiceMaster Brands Divestiture Group, which is reported in Cash flows from discontinued operations on the unaudited Condensed Consolidated Statements of Cash Flows.

Cash and Cash Equivalents and Restricted Cash at End of Period on the unaudited Condensed Consolidated Statements of Cash Flows consists of the following:


	As of June 30,
(In millions)	2022		2021
Cash and cash equivalents	$	277	$	313
Restricted cash		89		89
Total Cash and cash equivalents and Restricted cash	$	366	$	402

Note 10. Long-Term Debt

Long-term debt is summarized in the following table:



	As of		As of
	June 30,		December 31,
(In millions)	2022		2021
Senior secured term loan facility maturing in 2026⁽¹⁾	$	541	$	540
7.45% notes maturing in 2027⁽²⁾		173		172
7.25% notes maturing in 2038⁽³⁾		41		41
Vehicle finance leases⁽⁴⁾		116		119
Other⁽⁵⁾		22		26
Less current portion		(47)		(50)
Total long-term debt	$	846	$	849

__________________________________

(1)As of June 30, 2022 and December 31, 2021, presented net of $5 million and $6 million in unamortized debt issuance costs, respectively. As of December 31, 2021, presented net of $1 million of unamortized original issue discount.

(2)As of June 30, 2022 and December 31, 2021, presented net of $13 million and $14 million, respectively of unamortized fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates above.

(3)As of both June 30, 2022 and December 31, 2021, presented net of $8 million of unamortized fair value adjustments related to purchase accounting, which increases the effective interest rate from the coupon rates shown above.

(4)We have entered into a fleet management services agreement (the “Fleet Agreement”) which, among other things, allows us to obtain fleet vehicles through a leasing program. 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% to 2.45%.

(5)Primarily represents future payments in connection with acquisitions.

Interest Rate Swap

The interest rate swap agreement in effect as of June 30, 2022 is as follows:


Trade Date	Effective Date	Expiration Date	Notional Amount	Fixed Rate - Pay⁽¹⁾	Floating Rate - Receive
November 5, 2019	November 5, 2019	November 5, 2026	$546 million	1.615%	0.450%

(1)Before the application of the applicable borrowing margin.

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Revolving Credit Facility

On January 6, 2022, we borrowed an aggregate principal amount of $80 million under the Revolving Credit Facility maturing November 4, 2024 (the “Revolving Credit Facility”). On March 31, 2022, we repaid $50 million of the outstanding balance. The remaining $30 million was repaid in April 2022.

Note 11. Leases

We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets, Current portion of lease liability and Long-term lease liability on the unaudited Condensed Consolidated Statements of Financial Position. Finance leases are included in Property and equipment, net; Current portion of long-term debt and Long-term debt on the unaudited Condensed Consolidated Statements of Financial Position. As of June 30, 2022 and December 31, 2021, assets recorded under finance leases were $281 million and $277 million, respectively, and accumulated depreciation was $166 million and $159 million, respectively.

The components of lease expense were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2022		2021		2022		2021
Finance lease cost
Depreciation of finance lease ROU assets	$	10	$	10	$	20		21
Interest on finance lease liabilities		1		1		1		1
Operating lease cost		6		5		11		11
Variable lease cost		1		—		1		1
Sublease income		(1)		(1)		(2)		(2)
Total lease cost	$	16	$	16	$	32	$	32

Supplemental cash flow information and other information for leases was as follows:


	As of June 30,
(In millions)	2022			2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	12		$	12
Operating cash flows for finance leases		1			1
Financing cash flows for finance leases		20			20
ROU assets obtained in exchange for lease obligations:
Operating leases		8			8
Finance leases		20			23
Weighted Average Remaining Lease Term (in years):
Operating leases		9.37			10.10
Finance leases		3.93			3.62
Weighted Average Discount Rate:
Operating leases		5.20	%		5.25	%
Finance leases		7.08	%		4.90	%

As of June 30, 2022 and December 31, 2021, there were $36 million and $37 million of finance leases included within Current portion of long-term debt and $80 million and $82 million of finance leases included within Long-term debt on the unaudited Condensed Consolidated Statements of Financial Position, respectively.

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Future minimum lease payments under non-cancellable leases as of June 30, 2022 were as follows:


(In millions)	Operating Leases⁽¹⁾		Finance Leases
Year ended December 31,
2022 (excluding the Six months ended June 30, 2022)	$	12	$	20
2023		20		36
2024		16		27
2025		15		21
2026		11		16
Thereafter		65		5
Total future minimum lease payments		140		125
Less imputed interest		(32)		(9)
Total	$	108	$	116

(1)Each year is presented net of approximately $4-$5 million of projected annual sublease income.

Note 12. Acquisitions and Dispositions

Acquisitions have been accounted for as business combinations using the acquisition method and, accordingly, the results of operations of the acquired businesses have been included in the unaudited condensed consolidated financial statements since their dates of acquisition. The assets and liabilities of these businesses were recorded in the financial statements at their estimated fair values as of the acquisition dates.

During the six months ended June 30, 2022, we used available cash on hand to fund a $3 million investment for 1 acquisition. Another $1 million of deferred purchase price is due to the sellers one year from the acquisition date. We recorded preliminary goodwill of $3 million, and we are evaluating other intangibles, working capital balances, tangible assets acquired and appropriate useful lives to assign to all assets, including intangibles. The purchase price allocations for this acquisition will be finalized no later than one year from the respective acquisition date. Additionally, we reversed $1 million of contingent consideration related to an acquisition that closed in 2021 as the contingency was not met. The reversal was recorded within Acquisition-related costs in the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income, and partially offset by acquisition costs.

In the six months ended June 30, 2022, the Company initiated a series of transactions to restructure its joint ventures in China. The Company contributed $31 million of cash to effect the restructuring during the six months ended June 30, 2022, which is reflected in other investing in the unaudited 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.

During the six months ended June 30, 2021, we used available cash on hand to fund a $45 million investment in acquisitions, which included $36 million for 5 tuck-in acquisitions. As of June 30, 2021, another $5 million of deferred purchase price is due to the sellers between one year and three years from the acquisition dates. As of June 30, 2021, we had recorded goodwill of $25 million and other intangibles, primarily customer relationships, of $14 million related to these acquisitions. As of June 30, 2022, all purchase price allocations for 2021 acquisitions were completed, resulting in no changes to goodwill or intangibles. We also completed approximately $9 million of funding for a minority interest investment that was included in Accrued liabilities‒Other on the Consolidated Statements of Financial position as of December 31, 2020.

Supplemental cash flow information regarding the acquisitions was as follows:


	Six Months Ended
	June 30,
(In millions)	2022		2021
Assets acquired	$	3	$	40
Liabilities assumed		—		—
Net assets acquired	$	3	$	40

Net cash paid	$	3	$	36
Seller financed debt		1		5
Purchase price	$	3	$	40

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On June 1, 2022, in order to satisfy closing conditions of the proposed acquisition by Rentokil, the Company divested its international pest management businesses in the UK and Norway. In connection with the sale of the UK and Norway businesses, the Company received $73 million net of cash disposed in the second quarter of 2022. Additionally, the Company recognized a loss on sale of these international subsidiaries of $41 million for the three and six months ended June 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 the Norway business.

Note 13. Income Taxes

As required by ASC 740, “Income Taxes,” we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from continuing operations before income taxes, except for significant unusual or infrequently occurring items. Our estimated tax rate is adjusted each quarter in accordance with ASC 740.

The effective tax rate on net income was 97.9 percent and 27.9 percent for the three months ended June 30, 2022 and 2021, respectively. The effective tax rate on net income was 53.8 percent and 28.1 percent for the six months ended June 30, 2022 and 2021, respectively.

We had $10 million and $13 million of tax benefits primarily reflected in U.S. Federal and state tax returns that have not been recognized for financial reporting purposes (“unrecognized tax benefits”) as of June 30, 2022 and December 31, 2021, respectively. Based on information currently available, it is reasonably possible that over the next 12 month period unrecognized tax benefits may decrease by $1 million as the result of settlements of ongoing audits, statute of limitation expirations or final settlements of uncertain tax positions in multiple jurisdictions. Our policy is to recognize interest income, interest expense and penalties related to our tax positions within the tax provision.

Note 14. Fair Value Measurements

The period-end carrying amounts of cash and cash equivalents, receivables, restricted cash, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The period-end carrying amounts of long-term notes receivable approximate fair value as the effective interest rates for these instruments are comparable to period-end market rates. The period-end carrying amounts of short- and long-term marketable securities also approximate fair value, with unrealized gains and losses reported in interest and net investment income in the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income. The carrying amount of total debt excluding vehicle financing leases was $777 million and $779 million, and the estimated fair value was $835 million and $866 million as of June 30, 2022 and December 31, 2021, respectively. The fair value of our debt is estimated based on available market prices for the same or similar instruments which are considered significant other observable inputs (Level 2) within the fair value hierarchy. The fair values presented reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to us as of June 30, 2022 and December 31, 2021.

We have estimated the fair value of our financial instruments measured at fair value on a recurring basis using the market and income approaches. For deferred compensation trust assets and derivative contracts, which are carried at their fair values, our fair value estimates incorporate quoted market prices, other observable inputs (for example, forward interest rates) and unobservable inputs (for example, forward commodity prices) at the balance sheet date.

Interest rate swap contracts are valued using forward interest rate curves obtained from third-party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contracts.

Fuel swap contracts are valued using forward fuel price curves obtained from third-party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements are determined by comparing the contract fuel price to the expected forward fuel price as of each settlement date and applying the difference between the contract and expected prices to the notional gallons in the fuel swap contracts. We regularly review the forward price curves obtained from third-party market data providers and related changes in fair value for reasonableness utilizing information available to us from other published sources.

Cross-currency interest rate swaps were valued using forward foreign currency exchange rates obtained from third-party market data providers. The fair value of each contract is the sum of the expected future settlements between the contract counterparties, discounted to present value. The expected future settlements were determined by comparing the contract foreign exchange rate between the U.S. dollar and Swedish krona as of each settlement date and applying the difference between the two rates to the notional amount of the investment in the cross-currency interest rate swap contracts. On June 1, 2022, in connection with the sale of the Company’s pest management business in Norway, the cross-currency interest rate swap was terminated (See Note 8).

Changes in the fair value of the interest rate swap contracts, fuel swap contracts and cross-currency interest rate swap designated as a net investment hedge are recorded within Accumulated other comprehensive income (loss) on the unaudited Condensed Consolidated Statements of Financial Position. Changes in the fair value of the cross-currency interest rate swap

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designated as a cash flow hedge are recorded within Selling and administrative expenses on the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income, offsetting foreign currency fluctuations on the hedged instrument. Interest accruals and coupon payments are recognized directly in interest expense, thus reflecting a Swedish krona fixed rate. The net investment hedge was terminated on June 1, 2022 (See Note 8). The hedged net investment was not substantially liquidated, therefore, the changes in spot value and any amounts excluded from the assessment of hedge effectiveness that have not been recognized in earnings will remain within CTA until the hedged net investment is sold, diluted, or liquidated.

We have not changed our valuation techniques for measuring the fair value of any financial assets and liabilities during the year. Transfers between levels, if any, are recognized at the end of the reporting period. There were no significant transfers between levels during each of the six month periods ended June 30, 2022 and 2021.

The carrying amount and estimated fair value of our financial instruments that are recorded at fair value on a recurring basis for the periods presented were as follows:


				Estimated Fair Value Measurements
				Quoted		Significant
				Prices In		Other		Significant
				Active		Observable		Unobservable
	Statement of Financial	Carrying		Markets		Inputs		Inputs
(In millions)	Position Location	Value		(Level 1)		(Level 2)		(Level 3)
As of June 30, 2022:
Financial Assets:
Deferred compensation trust	Long-term marketable securities	$	12	$	12	$	—	$	—
Fuel swap contracts	Prepaid expenses		5		—		—		5
Interest rate swap contract	Prepaid expenses and other assets and Other assets		29		—		29		—
Total financial assets		$	46	$	12	$	29	$	5

As of December 31, 2021:
Financial Assets:
Deferred compensation trust assets	Long-term marketable securities	$	15	$	15	$	—	$	—
Fuel swap contracts	Prepaid expenses and other assets and Other assets		2		—		—		2
Total financial assets		$	17	$	15	$	—	$	2
Financial Liabilities:
Cross-currency interest rate swap	Other long-term obligations, primarily self-insured claims	$	7	$	—	$	7	$	—
Net investment hedge	Other long-term obligations, primarily self-insured claims		11		—		11		—
Interest rate swap contract	Accrued liabilities—Other and Other long-term obligations, primarily self-insured claims		8		—		8		—
Total financial liabilities		$	26	$	—	$	26	$	—

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A reconciliation of the beginning and ending fair values of financial instruments valued using significant unobservable inputs (Level 3) on a recurring basis is presented as follows:



	Fuel Swap
	Contract
	Assets
(In millions)	(Liabilities)		Location of Gain (Loss) included in Earnings
Balance as of December 31, 2021	$	2
Total gains (losses) (realized and unrealized)
Included in earnings		5	Cost of services rendered and products sold
Included in other comprehensive income		3
Settlements		(5)
Balance as of June 30, 2022	$	5

Balance as of December 31, 2020	$	3
Total gains (losses) (realized and unrealized)
Included in earnings		3	Cost of services rendered and products sold
Included in other comprehensive income		3
Settlements		(3)
Balance as of June 30, 2021	$	6

The following tables present information relating to the significant unobservable inputs of our Level 3 financial instruments:

Fair Value

Valuation

Weighted

(in millions)

Technique

Unobservable Input

Range

Average

As of June 30, 2022:

Fuel swap contracts

Discounted Cash Flows

Forward Unleaded Price per Gallon⁽¹⁾

$3.73 - $4.78

4.20

As of December 31, 2021:

Fuel swap contracts

Discounted Cash Flows

Forward Unleaded Price per Gallon⁽¹⁾

$3.02 - $3.42

3.23

___________________________________

(1)Forward prices per gallon were derived from third-party market data providers. A decrease in the forward price would result in a decrease in the fair value of the fuel swap contracts.

As of June 30, 2022, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $13 million, maturing through 2022. Under the terms of our fuel swap contracts, we are required to post collateral in the event that the fair value of the contracts exceeds a certain agreed upon liability level and in other circumstances required by the counterparty. As of June 30, 2022, we had posted $2 million in letters of credit as collateral under our fuel hedging program, which were issued under the Revolving Credit Facility.

The effective portion of the gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments is recorded in accumulated other comprehensive income. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted debt interest settlement or the fuel settlement affects earnings. See Note 8 to the unaudited Condensed Consolidated Financial Statements for the effective portion of the gain or loss on derivative instruments recorded in accumulated other comprehensive income and for the amounts reclassified out of accumulated other comprehensive income and into earnings. The amount expected to be reclassified into earnings during the next 12 months includes unrealized gains and losses related to open fuel hedges and interest rate swaps. Specifically, as the underlying forecasted transactions occur during the next 12 months, the hedging gains and losses in accumulated other comprehensive income expected to be recognized in earnings is a gain of $11 million, net of tax, as of June 30, 2022. The amounts that are ultimately reclassified into earnings will be based on actual fuel prices and interest rates at the time the positions are settled and may differ materially from the amount noted above.

Note 15. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income 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, RSUs and performance share units are reflected in diluted earnings per share by applying the treasury stock method.

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A reconciliation of the amounts included in the computation of basic earnings per share and diluted earnings per share is as follows:



	Three Months Ended				Six Months Ended
	June 30,				June 30,

(In millions, except per share data)	2022		2021		2022		2021
Net income	$	2	$	54	$	21	$	81
Weighted-average common shares outstanding		121.5		127.4		121.5		129.3
Effect of dilutive securities:
RSUs		0.1		0.3		0.1		0.3
Stock options⁽¹⁾		0.1		0.2		0.1		0.2
Weighted-average common shares outstanding—assuming dilution		121.7		127.8		121.7		129.8
Basic earnings per share	$	0.02	$	0.42	$	0.17	$	0.62
Diluted earnings per share	$	0.02	$	0.42	$	0.17	$	0.62

___________________________________

(1)Options to purchase 0.4 million and 0.1 million shares for the three months ended June 30, 2022 and 2021, respectively and 0.4 million and 0.1 million shares for the six months ended June 30, 2022, and 2021, respectively were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

On December 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 in U.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.

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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.

On June 1, 2022, in order to satisfy closing conditions of the proposed acquisition by Rentokil, the Company divested its international pest management businesses in the UK and Norway. 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 the U.S. We expect to continue our tuck-in acquisition program and to periodically evaluate other strategic acquisitions. As of June 30, 2022, approximately 95 percent of our revenue was generated by sales in the 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.

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A reconciliation of Net income to Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021 was as follows:


	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 ended June 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 June 30, 2022 Compared to Three months ended June 30, 2021

We reported revenue of $585 million and $560 million for the three months ended June 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 $25 million year-over-year, or four percent, including two percent from acquisitions.

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 the Norway and UK 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 the Norway and UK 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 ended June 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 June 30, 2022 Compared to Six months ended June 30, 2021

We reported revenue of $1,081 million and $1,032 million for the six months ended June 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	%

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Revenue growth was $50 million year-over-year, or five percent, including one percent from acquisitions.

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 the Norway and UK 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 and Norway and UK 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 ended June 30, 2022 and 2021, respectively and $636 million and $588 million for the six months ended June 20, 2022 and 2021, respectively.

For the three months ended June 30, 2022 compared to June 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 ended June 30, 2022 compared to June 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 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 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 June 30, 2022 and 2021:


	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	$	148	$	143	$	287	$	280

Selling and marketing expenses increased $2 million and $1 million, respectively in the three months and six months ended June 30, 2022 compared to the three months and six months ended June 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 ended June 30, 2022 compared to the three months and six months ended June 30, 2021, due to increased travel costs due to the implementation of Terminix 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 ended June 30, 2022 and 2021, and $20 million and $19 million for the six months ended June 30, 2022 and 2021, respectively.

Acquisition-Related Costs

For the three months ended June 30, 2022, Acquisition-related costs were $1 million. In the three and six months ended June 30, 2021, we reversed a previously accrued contingent consideration related to an acquisition for approximately $2 million as the

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contingency was not met. This offset approximately $1 million of acquisition-related costs incurred in the three and six months ended June 30, 2021.

Restructuring and Other Charges

We incurred restructuring and other charges of approximately $15 million and $2 million in the three months ended June 30, 2022 and 2021, respectively and $33 million and $9 million in the six months ended June 30, 2022 and 2021, respectively. Restructuring Charges for the three and six months ended June 30, 2022 primarily included costs related to our proposed acquisition by Rentokil. Restructuring Charges for the six months ended June 30, 2022, also included a $9 million impairment of our Memphis headquarters lease. Restructuring charges for the three and six months ended June 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 the ServiceMaster Brands Divestiture Group.

Loss on sale of international subsidiaries

We recognized a loss on sale of our international pest management businesses in the UK and Norway subsidiaries of $41 million for the three and six months ended June 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 the Norway business.

Interest Expense

Interest expense was $11 million for both the three months ended June 30, 2022 and 2021 and $23 million for both the six months ended June 30, 2022 and 2021.

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 ended June 30, 2022 and Interest and net investment income was $1 million for the three months ended June 30, 2021. Interest and net investment expense was $2 million for the six months ended June 30, 2022, and Interest and net investment income was $1 million for the six months ended June 30, 2021.

Income before Income Taxes

Income before income taxes was $19 million for the three months ended June 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 ended June 30, 2022 as compared to income before income taxes of $110 million for the six months ended June 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 ended June 30, 2022 and 2021, respectively and 53.8 percent and 28.1 percent for the six months ended June 30, 2022 and 2021, respectively. The effective tax rate on net income for the three months ended June 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 ended June 30, 2022, compared to net income of $54 million for the three months ended June 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 ended June 30, 2022 as compared to $81 million for the six months ended June 30, 2021, primarily driven by the $71 million decrease in Income before Income Taxes, offset by a $10 million decrease in Income Taxes.

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Adjusted EBITDA

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following table provides a summary of changes in Adjusted EBITDA for the three months ended June 30, 2022 compared to the three months ended June 30, 2021:




(In millions)
Three Months Ended June 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 June 30, 2022	$	120

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 of Terminix Way across the branch network.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The following table provides a summary of changes in Adjusted EBITDA for the six months ended June 30, 2022 compared to the six months ended June 30, 2021:



(In millions)
Six Months Ended June 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 Ended June 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 in Terminix 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.

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Termite Damage Claims

A summary of Litigated Claims and Non-Litigated Claims for the three and six months ended June 30, 2022 and 2021 was as follows:


	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 June 30, 2022 and 2021 is as follows:


	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

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In addition, our results of operations for the three and six months ended June 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 ended June 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 of June 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 of June 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.

At June 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 of June 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.

On September 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. On September 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 of June 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 of June 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 ended June 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 $12 million of capital expenditures in the six months ended June 30, 2022, reflecting ongoing technology projects and recurring capital needs.

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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 under U.S. tax principles, actual repatriation from our non-U.S. subsidiaries could still be subject to additional foreign withholding taxes and U.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	$	161	$	(302)

Operating Activities

Net cash provided from operating activities increased $8 million to $159 million for the six months ended June 30, 2022 compared to $151 million for the six months ended June 30, 2021.

Net cash provided from operating activities for the six months ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 $20 million for the six months ended June 30, 2022, compared to net cash used for investing activities $56 million for the six months ended June 30, 2021.

Proceeds from sale of international subsidiaries, net of cash disposed was $73 million for the six months ended June 30, 2022.

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$3 million was paid for business acquisitions for the six months ended June 30, 2022, compared to $45 million in cash paid for business acquisitions for the six months ended June 30, 2021. We expect to continue our tuck-in acquisition program and to periodically evaluate other strategic acquisitions.

In the six months ended June 30, 2022, the Company initiated a series of transactions to restructure its joint ventures in China. The Company contributed $31 million of cash to effect the restructuring during the six months ended June 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 ended June 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 June 30, 2022 and 2021 were $8 million and $1 million, respectively.

Financing Activities

Net cash used for financing activities was $26 million and $409 million for the six months ended June 30, 2022 and 2021, respectively.

During the six months ended June 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 ended June 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

In November 2020, the Company entered into the Settlement with the Office of the AL AG and other Alabama state regulators, primarily related to our termite renewal pricing changes we made in our branches in the Mobile Bay 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 Mobile Bay 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 the AL AG’s office and the Department 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 of Alabama $19 million.

Pursuant to the Settlement, we have also agreed to provide the opportunity to reinstate service for certain customers who 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 Mobile Bay termite Settlement remediation measures to current and former customers, including refunds of certain price increases and the establishment of the consumer fund intended to settle future Non-Litigated Claims for termite damage;

the validity of the Mobile 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 Mobile Bay Area;

any financial impact from the COVID-19 pandemic, including a global recession or a recession in the U.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 the State 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 SEC.

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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The economy and its impact on discretionary consumer spending, labor wages, fuel prices and other material costs, unemployment rates, insurance costs and medical costs could have a material adverse impact on future results of operations.

We do not hold or issue derivative financial instruments for trading or speculative purposes. We have entered into specific financial arrangements, primarily fuel swap agreements and interest rate swap agreements, in the normal course of business to manage certain market risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of derivative financial instrument transactions could have a material impact on our financial statements.

Interest Rate Risk

We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps.

We have hedged substantially all of our variable rate debt under our interest rate swap and, therefore, we believe our exposure to interest rate fluctuations, when viewed on a net basis, is not material to our overall results of operations. Assuming all revolving loans were fully drawn as of June 30, 2022, each one percentage point change in interest rates would result in an approximate $4 million change in annual interest expense on our Revolving Credit Facility.

Fuel Price Risk

We are exposed to market risk for changes in fuel prices through the consumption of fuel by our vehicle fleet in the delivery of services to our customers. We expect to use approximately 10 million to 12 million gallons of fuel in 2022. As of June 30, 2022, a 10 percent change in fuel prices would result in a change of approximately $2 million in our annual fuel cost before considering the impact of fuel swap contracts.

We use fuel swap contracts to mitigate the financial impact of fluctuations in fuel prices. As of June 30, 2022, we had fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $13 million, maturing through 2022. The estimated fair value of these contracts as of June 30, 2022 was a net asset of $5 million. These fuel swap contracts provide a fixed price for approximately 80 percent of our estimated fuel usage for the remainder of 2022.

Foreign Currency Risk

We are exposed to foreign currency exchange risk in Swedish krona, the euro, British pound, Canadian dollar, Mexican peso and Chinese yuan. A strengthening of the U.S. dollar relative to the currencies of the foreign countries in which we operate can have an impact on our operating results. On June 1, 2022, in order to satisfy closing conditions of the proposed acquisition by Rentokil, the Company divested its international pest management businesses in the UK and Norway eliminating our previous exposure to risks of fluctuations in Norwegian krone, and significantly reducing our exposure to the British pound.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our Chief Executive Officer, Brett T. Ponton, and Executive Vice President and Chief Financial Officer, Robert J. Riesbeck, have evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q as required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act. Messrs. Ponton and Riesbeck have concluded that both the design and operation of our disclosure controls and procedures were effective as of June 30, 2022.

Changes in internal control over financial reporting

No changes in our internal control over financial reporting, as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act, occurred during the six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information with respect to certain legal proceedings is set forth in Note 5 to the unaudited condensed consolidated financial statements (included in Part I of this Quarterly Report on Form 10-Q) and is incorporated herein by reference.

ITEM 1A. RISK FACTORS

We discuss in our 2021 Form 10-K and our other filings with the SEC various risks that may materially affect our business. There have been no material changes to the risk factors disclosed in the 2021 Form 10-K. The materialization of any risks and uncertainties identified in Forward-Looking Statements contained in this report, together with those previously disclosed in the 2021 Form 10-K and our other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our

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financial condition, results of operations and cash flows. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Information Regarding Forward-Looking Statements” above.

ITEM 2. UNREGISTERED SALES OF REGISTERED SECURITIES AND USE OF PROCEEDS

None.

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ITEM 6. EXHIBITS

Exhibit ‎Number		Description
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a — 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a — 14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Extension Presentation Linkbase
104*		Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

___________________________________

* Filed herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 5, 2022


	TERMINIX GLOBAL HOLDINGS, INC.
	(Registrant)

	By:	/s/ Robert J. Riesbeck
		Robert J. Riesbeck
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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Terminix Global (TMX) 10-Q2022 Q2 Quarterly report

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