TERMINIX GLOBAL HOLDINGS INC - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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For the fiscal year ended December 31, 2021

or

Commission file number 001-36507

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Terminix Global Holdings, Inc.

(Exact name of registrant as specified in its charter)

150 Peabody Place, Memphis, Tennessee 38103

(Address of principal executive offices) (Zip Code)

901-597-1400

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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).

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

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. ☐

Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

As of June 30, 2021, there were 125,271,848 shares of the registrant’s common stock outstanding, and the aggregate market value of the voting stock held by non-affiliates (assuming only for purposes of this computation that individuals then serving as our directors and executive officers may be affiliates) was approximately $6 billion based on the closing price of common stock on the NYSE on June 30, 2021 of $47.71 per share.

The number of shares of the registrant’s common stock outstanding as of February 24, 2022: 121,417,358 shares of common stock, par value $0.01 per share.

Documents incorporated by reference:

Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2022 annual meeting of stockholders (the “Proxy Statement”) are incorporated by reference into Part III hereof. Such Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended December 31, 2021. 

TABLE OF CONTENTS 

PART I

ITEM 1. BUSINESS

The following discussion of our business contains “forward-looking statements,” as discussed in Part II, Item 7 below. Our business, operations and financial condition are subject to various risks as set forth in Part I, Item 1A below. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and related notes and the Risk Factors included elsewhere in this Annual Report on Form 10-K.

Overview

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 residential and commercial termite and pest management services, specializing in protection against termite damage, rodents, insects and other pests, including cockroaches, spiders, wood-destroying ants, ticks, fleas, mosquitos and bed bugs. Our services include termite remediation, annual termite inspection and prevention treatments that may include termite damage repair guarantees, periodic pest management services, insulation services, crawlspace encapsulation, wildlife exclusion and disinfection services. Our portfolio of well-recognized brands includes Terminix, Assured Environments, Copesan Services, Inc. (“Copesan”), Gregory Pest Solutions (“Gregory”), McCloud Services (“McCloud”) and Nomor AB (“Nomor”). We have one reportable segment, our pest management and termite business. Our vision is to be the global leader in professional pest management by consistently delivering superior solutions that build unrivaled trust and value with our stakeholders.

Organized in Delaware in 2007, Terminix is the successor to various entities dating back to 1927. Terminix operates through an extensive service network of approximately 380 company-owned branches in the United States (“U.S.”), Europe, Canada, Mexico and Central America, over 100 franchise and licensed locations in the U.S., Japan, South Korea, Southeast Asia and the Caribbean, and joint ventures in India and China. Terminix serves both residential and commercial customers, principally in the U.S. We made a daily average of over 50,000 visits to residential and commercial customer locations during 2021.

For the year ended December 31, 2021, Terminix recorded revenue of $2,045 million, net income of $125 million and Adjusted EBITDA of $387 million. For a reconciliation of net income (loss) to Adjusted EBITDA, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In 2021, approximately 93 percent of our revenue was generated by sales in the U.S. and approximately 90 percent of the book value of our assets is located in the U.S.

Revenue from services in the years ended December 31, 2021 and 2020 was as follows:

Over 80 percent of Terminix revenue comes from customers who enter into contracts with the option to renew periodically (e.g. annually, monthly or quarterly). Typically, termite services require an initial inspection and the installation of a protective bait station or, in certain situations, a liquid barrier surrounding the home. Termite contracts can be either service contracts or protection plans. The protection plan contracts provide a guarantee for the repair of new damage resulting from termite infestation. After the initial term, typically one year, a customer has the option to renew the contract at a significantly reduced cost that extends the guarantee. Consequently, revenue generated from a renewal customer is less than revenue generated from a first-year termite customer. “Sales of Products and Other” includes product sales and franchise fees. Franchise fees represent less than one percent of our revenue.

Terminix Competitive Strengths

#1 recognized brand in U.S. termite and pest management services

Passionate and empowered teammates focused on delivering superior customer service

Trusted pest management expertise built over a 95-year history

Expansive scale and deep presence across the U.S.

Effective multi-channel customer acquisition strategy

History of innovative leadership and introducing new products and services

Sale of ServiceMaster Brands

On October 1, 2020, we completed the sale of the assets and liabilities of the ServiceMaster Brands businesses, which was comprised of the Amerispec, Furniture Medic, Merry Maids, ServiceMaster Clean and ServiceMaster Restore brands, certain assets and liabilities of ServiceMaster Acceptance Corporation, our financing subsidiary that was historically reported as part of European Pest Control and Other, and the ServiceMaster trade name (the “ServiceMaster Brands Divestiture Group”) for $1,541 million to RW Purchaser LLC, an affiliate of investment funds managed by Roark Capital Management LLC (“Roark”) after working capital adjustments, resulting in a gain of $494 million, net of income taxes. We also entered into a transition services agreement and sublease agreement with Roark. See Note 7 to the Consolidated Financial Statements for further discussion of these agreements.

The historical results of the ServiceMaster Brands Divestiture Group, including the results of operations, cash flows and related assets and liabilities, are reported as discontinued operations for all periods presented herein.

COVID-19

Since March 11, 2020, when the World Health Organization designated COVID-19 as a global pandemic (“COVID-19” or “pandemic”), we have experienced increased demand in our residential pest management and termite and home services service lines as customers are spending more time at home. We have also experienced disruptions in our business, primarily in the commercial pest management service line, driven by both temporary and permanent 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 providing personal protective equipment and designing safety policies and measures for our field teammates, and relying on 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 (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 of Rentokil (each representing a beneficial interest in five 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 American depositary shares (measured using the volume weighted average price of Rentokil ordinary shares as a proxy) for the trading day that is two trading days prior to the Effective Time (or such other date as may be mutually agreed to by Rentokil and the Company) (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”),

in each case at the election of the holder of such share of our common stock, subject to certain allocation and proration provisions of the Merger Agreement. Immediately following such conversion, our shares of common stock will be automatically cancelled and cease to exist. The aggregate Cash Consideration and the aggregate Stock Consideration that will be issued in the Mergers will not vary as a result of individual election preferences.

The respective obligations of the Company and Rentokil to consummate the Mergers are subject to the satisfaction or waiver of a number of conditions, including, among others the approval of the Merger Agreement by the Company’s stockholders, approval of the transactions contemplated by the Merger Agreement and other related matters by Rentokil’s shareholders, and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

Our Opportunity

We believe our business is strategically positioned to benefit from a number of favorable demographic and secular trends, including growth in population, household formation, new and existing home sales increasing regulation of commercial pest management services and increasing pest populations driven by the increasing temperatures of climate change. In addition, we believe there is increasing demand for outsourced services, fueled by a trend toward “do-it-for-me” as a result of an aging population and shifts in household structure and behaviors, such as dual-income families and consumers with “on-the-go” lifestyles.

U.S. Termite and Pest Management Industry

The outsourced segment for residential and commercial termite and pest management services in the U.S. was approximately $10 billion in 2021. We estimate that there are approximately 19,000 U.S. termite and pest management companies, nearly all of which have fewer than 100 teammates.

Termites are responsible for an estimated $5 billion in home damage in the U.S. annually. The termite control industry provides treatment and inspection services to residential and commercial property owners for the remediation and prevention of termite infestations. We believe homeowners value quality and reliability over price in choosing professional termite control services, as the cost of most professional treatments is well below the potential cost of inaction or ineffective treatment. As a result, we believe the demand for termite remediation services is relatively insulated from changes in consumer spending. In addition to remediation services, the termite control industry offers periodic termite inspections and preventative treatments to residential and commercial property owners in areas with high termite activity, typically through renewable contracts. These contracts may carry guarantees that protect the property owner against the cost of structural damage caused by a termite infestation. Termites can cause significant damage to a structure before becoming visible to the untrained eye, highlighting the value proposition of professional preventative termite services. As a result, the termite control industry experiences high renewal rates on these preventative inspection and treatment contracts and revenues from such contracts are generally stable and recurring.

Pest infestations may damage a home or business while also carrying the risk of the spread of diseases. Moreover, for many commercial facilities, pest management is essential to regular operations and regulatory compliance (e.g., food processing, hotels, restaurants and healthcare facilities). As a result of these dynamics, the pest management industry experiences high rates of renewal for its pest inspection and treatment contracts. Pest management services are often delivered on a contracted basis through regularly scheduled service visits, which include an inspection of premises and application of pest management materials.

Both termite and pest activity are affected by weather. Termite activity increases during the spring and summer months, the intensity of which varies based on weather and is changing due to the effects of climate change. Similarly, pest activity tends to accelerate in the spring months when warmer temperatures arrive in many U.S. regions. However, the high proportion of termite and pest management services which are contracted and recurring, as well as the high renewal rates for those services, limit the effect of weather anomalies on the termite and pest management industry in any given year.

European Pest Management Industry

The European pest management market was approximately $4.9 billion in 2021. Our European operations currently represent four percent of our revenue.

Our Competitive Strengths

#1 Recognized brand in U.S. termite and pest management services. We are a leading provider of essential residential and commercial services. The pest management industry is large, growing and highly fragmented, and we believe we have significant advantages over smaller local and regional competitors. We have spent decades developing a reputation built on reliability and superior quality and service. As a result, we enjoy industry leading brand awareness and a reputation for high-quality customer service, both of which serve as key drivers of our customer acquisition efforts. Our nationwide presence also allows our brands to effectively serve both local residential customers and large national commercial accounts.

Passionate and empowered teammates focused on delivering superior customer service. We believe our high customer retention demonstrates the valued nature of the services we offer and the consistently strong level of customer service that we provide. Many of our technicians have built long-standing, personal relationships with their customers. We believe these personal bonds, often forged over decades, help to drive customer loyalty and retention. As a result of our high retention and long-standing customer relationships, we enjoy significant visibility and stability in our business, and these factors limit the effect of adverse economic cycles on our revenue base.

We are constantly focused on improving customer service. The customer experience is at the foundation of our business model and we believe that each teammate is an extension of Terminix’s reputation. We employ rigorous hiring and training practices and continuously analyze our operating metrics to identify potential improvements in service and productivity. Technicians in our Terminix branches create continuity in customer relationships and ensure the development of best practices based on on-the-ground experience. We also provide our field teammates with access to sophisticated data management and mobility tools which enable them to drive efficiencies, improve customer service and ultimately grow our customer base and profitability.

Trusted pest management expertise built over a 95-year history. We believe our long history, rigorous training practices and high level of customer service establishes our reputation as the trusted expert in the eyes of our residential and commercial customers. The relationship of our technician with our customers is the foundation of our business and we believe sharing our expertise with customers to mitigate and prevent pest infestation is an important component of our service offering. Supported by mobile technology and robust inspection techniques, our technicians are able to provide valuable insights to customers that allow them to protect their most important asset. We believe the development of this relationship across our customer base with an average of over 50,000 touchpoints per day enhances our ability to cross-sell and increase customer penetration.

Expansive scale and deep presence across a national footprint. We are diversified in terms of customers and geographies within the U.S. We serve approximately 2.9 million residential and commercial customers across the U.S. Our diverse customer base and geographies help to mitigate the effect of adverse regional weather and market conditions and other risks in any particular geography or customer segment we serve. We therefore believe our size and scale provides us with added protection from risk relative to our smaller local and regional competitors.

Effective multi-channel customer acquisition strategy. Our multi-channel marketing approach focuses on building the value of our brands and generating revenue by understanding the decisions consumers make at each stage in the purchase of residential and commercial services. We also have been deploying increasingly sophisticated consumer analytics models that allow us to more effectively segment our prospective customers and tailor campaigns towards them. In addition, we are seeing success with innovative ways of reaching and marketing to consumers, including e-commerce, digital content marketing, online reputation management and social media channels.

History of innovative leadership and introducing new products and services.

Solid revenue and Adjusted EBITDA growth through business cycles. Our consolidated revenue and Adjusted EBITDA compound annual growth rates from 2017 through 2021 were seven percent and nine percent, respectively. We believe that our strong performance is attributable to the essential nature of our services, our strong value proposition and management’s focus on driving results through strategic investment and operational execution.

Solid margins with attractive operating leverage and productivity improvement initiatives. Our business model enjoys inherent operating leverage stemming from route density and fixed investments in infrastructure and technology, among other factors. This allows us to generate productivity to expand margins through a variety of initiatives, including metric-driven continuous improvement in our customer care centers, application of consistent process guidelines at the branch level, leveraging size and scale to improve the sourcing of labor and materials and deploying shared services models. We have also deployed mobility solutions and routing and scheduling systems across our business in order to enhance overall efficiency and reduce operating costs.

Our Strategy

Grow Our Customer Base. We are focused on the growth of our business through the introduction and delivery of high-value services to new and existing customers.

To accelerate new customer growth, we make strategic investments in sales, marketing and advertising to drive new business leads, brand awareness and market share. In addition, we employ multiple initiatives to improve customer satisfaction and service delivery, which we believe leads to improved retention and growth in our customer base across our service lines.

Develop and Expand New Service Offerings. We intend to continue to leverage our existing sales channels and local coverage to deliver additional value-added services to our customers. Our product development teams draw upon the experience of our technicians in the field, combined with in-house scientific expertise, to create innovative customer solutions for both our existing customer base and identified service/category adjacencies. We have a strong history of new product introductions, such as Terminix’s crawlspace encapsulation, disinfection services, mosquito control and wildlife exclusion services, that we believe will appeal to new potential customers as well as our existing customer base. Mosquito, wildlife exclusion and crawl space encapsulation are being offered in substantially all U.S. geographic segments where we believe significant opportunity exists. We are now focusing our efforts on increasing our market share in these product lines.

National Accounts Platform. Our Terminix and Copesan brands provide national account service offerings in commercial pest management and provide us with the opportunity to expand into combined offerings in the future. These national account customers operate multi-location businesses that leverage our national footprint.

Grow Our Commercial Business. Our revenue from commercial customers comprised approximately 27 percent of our 2021 revenue. We believe we are well positioned to leverage our national coverage, brand strength and broad service offerings to target both large multi-regional accounts and local and regional commercial customers. Our commercial expansion strategy targets industries with a demonstrated need for our services, including healthcare, manufacturing, warehouses, hotels and commercial real estate.

Expand the Geographies We Serve. Through detailed assessments of local economic conditions and demographics, we have identified target geographies for expansion, both in existing geographies where we have capacity to increase our local position and in new geographies, where we see opportunities.

Enhance Our Profitability. We have and will continue to invest in initiatives designed to improve our margins and drive profitable growth. We have been able to increase productivity through actions such as continuous process improvement, targeted systems investments, sales force initiatives and technician mobility tools. We also focus on strategically capitalizing on our purchasing power to achieve more favorable pricing and terms. In addition, we have implemented tools and processes to centralize and systematize pricing decisions. These tools and processes enable us to optimize pricing at the local and product levels while creating a flexible and scalable pricing architecture across our business. We intend to leverage these investments as well as identify further opportunities to enhance profitability.

Pursue Selective Acquisitions. Historically, we have a track record of being able to source and purchase targets at accretive prices and successfully integrate them into our business to increase branch density and improve operating margins. We anticipate that the highly fragmented nature of the markets in which we operate will continue to create opportunities for further consolidation. In the future, we intend to continue to take advantage of tuck-in as well as strategic acquisition opportunities, including Terminix franchise repurchases, particularly in under-penetrated geographies where we can enhance and expand our service capabilities.

Capital-Light Business Model

Our business model is characterized by strong margins and limited capital requirements. For the years ended December 31, 2021, 2020 and 2019, our net cash provided from operating activities from continuing operations was $239 million, $198 million and $164 million, respectively, and our property additions were $22 million, $26 million and $25 million, respectively. Free Cash Flow was $217 million, $172 million and $139 million for the years ended December 31, 2021, 2020 and 2019, respectively. For a reconciliation of Free Cash Flow to net cash provided from operating activities from continuing operations, which we consider to be the most directly comparable financial measure presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”), see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Sales and Marketing

We market our services to both homeowners and businesses through various means, including digital marketing, television and radio advertising, print advertisements, marketing partnerships, door-to-door summer sales programs, telemarketing, various social media channels and through national, regional and local sales teams.

Customers and Geographies

Our revenues are not dependent on a single customer. However, a significant percentage of our revenue is concentrated in the southern and western regions of the U.S., with California, Texas and Florida collectively accounting for approximately one-third of our revenue in 2021.

Competition

We compete in the residential and commercial termite and pest management markets. We compete with many other companies in the sale of our services and products. The principal methods of competition in our business include quality and speed of service, brand awareness and reputation, technology and systems, customer satisfaction, pricing and promotions, professional sales forces, contractor network and referrals. All of the primary market segments in which we operate are highly fragmented, with approximately 19,000 providers nationwide. While competition includes many smaller independent competitors that make up the majority of the pest control market, our larger, more recognizable competitors include Orkin, Inc. (a subsidiary of Rollins, Inc.), Ecolab, Inc., Rentokil and Anticimex International AB, all of which compete internationally.

Information Technology

We have invested in information systems and software packages designed to allow us to grow efficiently and scale across our organization, while retaining local and regional flexibility. Our sophisticated IT systems enable us to provide a high level of convenience and service to our customers. We are developing a new customer experience platform to replace legacy operating systems as part of a fundamental reimagining of our operating model which will provide a full 360-degree vision of the customer and enable more data driven decision making. The new customer experience platform began a phased deployment at the end of 2021, and we believe it will provide us with a competitive advantage in our operations.

Human Capital Management

Terminix employs approximately 10,000 teammates in the U.S. and 1,700 teammates outside the U.S. in Europe, Canada and Central America. As a leader in the pest management industry, we recognize that our teammates are our most important asset in the delivery of the services we provide to customers. Since we deliver services in various communities around the world, it is important that our Teammate base reflect the values and customers of those communities we serve. In this regard, we are committed to fostering a safe, inclusive, and equitable workplace that attracts and retains exceptional talent, enabling us to better serve to our customers.

Five key areas in which we focus our efforts include:

1.Teammate Safety

2.Inclusion, Diversity, and Equity

3.Training and Development

4.Teammate Retention

5.Compensation and Benefits

Teammate Safety

At Terminix, safety is a core value. We maintain strong safety programs focused on continuously improving the safety and wellbeing of our communities, our teammates and the customers we serve. We maintain a safety first always culture grounded in striving for zero teammate injuries and illnesses, while operating and delivering our services responsibly and sustainably, and eliminating workplace safety incidents, risks and hazards. We review and monitor our performance regularly with a goal to continually reduce recordable incidents. During 2021, our recordable incident rate declined more than fifteen percent compared to 2020.

Since March 2020 when COVID-19 initially impacted the U.S. and continuing throughout 2021, our focus on workplace safety enabled us to preserve business continuity without sacrificing our commitment to keep our teammates, workplace visitors and customers safe.

Terminix was designated an essential business early in the COVID-19 pandemic. Since the onset of the pandemic, we have taken an integrated approach to helping our teammates manage their work and personal responsibilities, with the priority on teammate wellbeing, health and safety. Terminix has worked with suppliers to ensure we provide our teammates with the appropriate personal protection equipment to allow them to continue to serve our customers in a safe manner, protecting both the customer and the teammate. We continue to evaluate and evolve our COVID-19 protocols to align with the most current health recommendations in order to minimize any exposure to the virus by our teammates.

Inclusion, Diversity and Equity

At Terminix, we believe inclusion inspires results. Perspectives from a diverse workforce can provide key insights into selling into diverse communities, providing numerous avenues for the growth of the business and ultimately improving customer satisfaction.

The Company has created a Culture, Inclusion and Diversity Advisory Team (“Advisory Team”) with a mission to foster actions that create an inclusive work environment valuing the contributions and perspectives of all teammates. The goal of the Advisory Team is to advance a workforce that builds and advocates for gender, race, age, language, cultural background, education, work experience, ethnicity, sexual orientation, physical ability, as well as the religious and cultural views of our teammates. The Advisory Team is representative of Terminix teammates chosen to help engage in ongoing evaluation of Terminix’s internal business practices and advise the Terminix executive team on driving a culture of inclusion, diversity and equity.

The Advisory Team is committed to promoting and advancing this important work through five distinct subcommittees that drive inclusion, diversity and equity goals across core business streams:

Corporate Responsibility

Culture

Inclusion

Supplier Diversity

Talent and Equity

As of December 31, 2021, our workforce in the U.S. consisted of 60 percent white and 40 percent minority representation. Also, our workforce was 81 percent male and 18 percent female, with one percent undeclared. Terminix is committed to improving the levels of both racial and gender representation to better reflect the communities in which we operate.

We have long-established, teammate-driven Business Resource Groups, which provide opportunities for education, community partnerships, cultural awareness and career development.

Training and Development

We have made investments in our human resources organization and structure that centralized and standardized hiring and training practices. We have also introduced tools to help our branch managers manage labor more efficiently, and we continue to invest in attracting, developing and retaining talent. Our front-line teammates also receive on-the-job training to ensure we are executing for our customers. Our online training platforms provide our teammates with access to a multitude of training courses, videos, reference material and other tools.

As part of encouraging internal development, we engage in regular discussions around succession planning and talent development at all levels of our Company. Our board of directors has frequent contact with business leaders within the organization and participates actively in the succession planning process. Our Senior Vice President, Chief Human Resources Officer reports directly to the CEO and works with management to evaluate internal talent for future leadership positions within the organization on an ongoing basis. In evaluating potential acquisitions, an important consideration is the quality of the management team of the target company and our ability to ensure such management team will remain with the Company as needed if we acquire the business.

Teammate Retention

Our experience has demonstrated that the retention of well-trained, high-performing teammates results in higher customer retention and improved financial results. Terminix has made significant investments in the hiring and training of teammates, especially those who are the Company’s face to the customer. Turnover rates for pest technicians tend to be higher in the first year of employment with a reduced rate beyond the first year. Consequently, Terminix has made investments in the recruiting, onboarding and training of new teammates to enhance their ability to deliver quality service to our customers and to keep them engaged in the Terminix business. The Company is also implementing the Terminix Way that includes the development of enhanced standard operating procedures, training paths and technology for frontline teammates that will improve consistency from branch-to-branch and teammate-to-teammate, and provide well-defined career paths for our teammates.

Compensation and Benefits

Terminix is committed to investing in our workforce by providing competitive compensation and benefit programs.

Compensation programs include base salary and variable compensation programs such as annual bonus, production plans, sales commissions, spot bonus and stock awards. The variable compensation programs are performance based, with the actual amount earned depending on the performance of the Company and the teammate. Other programs include:

Comprehensive health and dental coverage is offered to teammates;

A 401(k) savings plan with a Company match is offered that allows teammates to save for their future;

Parental leave is provided to all new parents of both genders for births and adoptions; and

Other insurance benefits are also offered, including Company-paid and supplemental teammate-paid life insurance, long-term disability and accidental death and disability coverage.

An Employee Stock Purchase Plan, where teammates can purchase stock in the Company to participate in the success of the Company, is also offered to teammates. This plan has been suspended as of December 31, 2021 due to the proposed acquisition by Rentokil.

Intellectual Property

We hold various service marks, trademarks and trade names, such as Terminix, that we deem particularly important to our advertising activities. As of December 31, 2021, we had marks that were protected by registration (either by direct registration or by treaty) in the U.S. and approximately 70 other countries.

Insurance

We maintain insurance coverage that we believe is appropriate for our business, including workers’ compensation, auto liability, general liability, umbrella and property insurance. In addition, we provide various insurance coverages, including deductible reimbursement policies, to our business units through our wholly-owned captive insurance company.

Regulatory Compliance

Our business is subject to various international, federal, state, provincial and local laws and regulations, compliance with which increases our operating costs, limits or restricts the services provided or the methods by which our business offers, sells and fulfills those services or conducts business, or subjects us to the possibility of regulatory actions or proceedings. Noncompliance with these laws and regulations can subject us to fines or various forms of civil or criminal prosecution, any of which could have a material adverse effect on our reputation, business, financial position, results of operations and cash flows.

These international, federal, state, provincial and local laws and regulations include laws relating to consumer protection and data privacy, wage and hour, deceptive trade practices, permitting and licensing, state contractor laws, workers’ safety, tax, healthcare reforms, franchise-related issues, collective bargaining and other labor matters, environmental and teammate benefits. The Terminix business must also meet certain Occupational Health & Safety Administration (OSHA) requirements, as well as Department of Transportation and Federal Motor Carrier Safety Administration requirements with respect to certain vehicles in its fleet. Terminix is regulated by federal, state and local laws, ordinances and regulations which are enforced by pest management boards, environmental protection agencies and similar government entities. Terminix uses products containing ingredients regulated by the U.S. Environmental Protection Agency (the “EPA”).

Environmental, Health and Safety Matters

Our business is subject to various international, federal, state and local laws and regulations regarding environmental, health and safety matters. Among other things, these laws regulate the emission or discharge of materials into the environment, govern the use, storage, treatment, disposal, transportation and management of hazardous substances and wastes and protect the health and safety of our teammates. These laws also impose liability for the costs of investigating and remediating, and damages resulting from, present and past releases of hazardous substances, including releases by prior owners or operators of sites we currently own or operate.

Compliance with environmental, health and safety laws increases our operating costs, limits or restricts the services provided or the methods by which we offer, sell and fulfill those services or conduct business, or subjects us to the possibility of regulatory or private actions or proceedings.

Terminix is regulated under many federal and state environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Environmental Pesticide Control Act of 1972, the Federal Insecticide, Fungicide and Rodenticide Act of 1947, the Resource Conservation and Recovery Act of 1976, the Clean Air Act, the Emergency Planning and Community Right-to-Know Act of 1986, the Oil Pollution Act of 1990 and the Clean Water Act of 1977, each as amended.

We cannot predict the effect of possible future environmental laws on our operations. Changes in, or new interpretations of, existing laws, regulations or enforcement policies, the discovery of previously unknown contamination, or the imposition of other environmental liabilities or obligations in the future, may lead to additional compliance or other costs. During 2021, there were no material capital expenditures for environmental control facilities, and there are no material expenditures anticipated for 2022 or 2023 related to such facilities.

Consumer Protection and Solicitation Matters

We are subject to international, federal, state, provincial and local laws and regulations designed to protect consumers, including laws governing consumer privacy and fraud, the collection and use of consumer data, telemarketing and other forms of solicitation.

The telemarketing rules adopted by the Federal Communications Commission pursuant to the Federal Telephone Consumer Protection Act and the Federal Telemarketing Sales Rule issued by the Federal Trade Commission govern our telephone sales practices. The CAN-SPAM Act regulates email solicitations and the Consumer Review Fairness Act regulates consumer opinions on social media regarding products and services. In addition, some states and local governing bodies have adopted laws and regulations targeted at direct telephone sales and “do-not-knock,” “do-not-mail” and “do-not-leave” activities. If we were to fail to comply with any applicable law or regulation, we could be subject to substantial fines or damages, be involved in lawsuits, enforcement actions and other claims by third parties or governmental authorities, suffer losses to our reputation and our business or suffer the loss of licenses or penalties that may affect how the business is operated, which, in turn, could have a material adverse effect on our financial position, results of operations and cash flows.

Available Information

Terminix maintains a website at http://www.terminix.com that includes a hyperlink to a website maintained by a third party where Terminix’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge as soon as reasonably practicable following the time that they are filed with or furnished to the Securities and Exchange Commission (the “SEC”). The information found on our website is not a part of this or any other report filed with or furnished to the SEC.

ITEM 1A. RISK FACTORS

 You should carefully consider the factors described below, in addition to the other information set forth in this Annual Report on Form 10-K. These risk factors are important to understanding the contents of this Annual Report on Form 10-K and of other reports. Our reputation, business, financial position, results of operations and cash flows are subject to various risks. The risks and uncertainties described below are not the only ones relevant to us. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also materially and adversely affect our reputation, business, financial position, results of operations and cash flows. The risk factors generally have been separated into five groups: risks related to our business and our industry, risks related to our indebtedness, risks related to our common stock, risks related to COVID-19 and risks related to the proposed acquisition by Rentokil.

The materialization of any risks and uncertainties set forth below or identified in forward-looking statements contained in this report and our other filings with the SEC or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Information Regarding Forward-Looking Statements” below.

Risks Related to Our Business and Our Industry

Our industry is highly competitive. Competition could reduce our market share and adversely affect our reputation, business, financial position, results of operations and cash flows.

We operate in a highly competitive industry. Changes in the source and intensity of competition within the industry may impact the demand for our services and may also result in additional pricing pressure. Regional and local competitors operating in a limited geographic area may have lower labor, teammate benefits and overhead costs than us. The principal methods of competition in our business include quality and speed of customer service, brand awareness and reputation, technology and systems, customer satisfaction, fairness of contract terms, including price and promotions, professional sales forces, contractor network and referrals. We may be unable to compete successfully against current or future competitors, and the competitive pressures that we face may result in reduced share, reduced pricing or an adverse impact to our reputation, business, financial position, results of operations and cash flows.

Weakening general economic conditions, especially as they may affect home sales, unemployment or consumer confidence or spending levels, may adversely impact our business, financial position, results of operations and cash flows.

Our results of operations are dependent upon consumer spending. Deterioration in general economic conditions and consumer confidence, particularly in California, Texas and Florida, which collectively represented approximately one-third of our revenue in 2021, could affect the demand for our services. Consumer spending and confidence tend to decline during times of declining economic conditions. A worsening of macroeconomic indicators, including weak home sales, higher home foreclosures, declining consumer confidence or rising unemployment rates, could adversely affect consumer spending levels, reduce demand for our services and adversely impact our business, financial position, results of operations and cash flows.

Termite damage claims and lawsuits related thereto could increase our legal expenses and may adversely impact our business, financial position, results of operations and cash flows.

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 the market leader of this product line. Damage claims include circumstances when a customer notifies us that they have experienced damage 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”). Recently we have experienced higher Non-litigated Claim activity concentrated in our branches in Mobile, Alabama and Gulf Shores, Alabama, which comprise all of our customers in the area, (collectively, the “Mobile Bay Area”) related to Formosan termites, an invasive species, which has driven higher Non-litigated Claims expense. In addition, since the beginning of 2017, we have been served with an increasing number of Litigated Claims, again primarily concentrated in the Mobile Bay Area and related to Formosan termite activity, which has driven higher Litigated Claims expense. Some plaintiffs have sought to demonstrate a pattern and practice of fraud in connection with Litigated Claims and have sought awards, in addition to repair costs, which included punitive damages and damages for mental anguish. We defend these Litigated Claims vigorously, and we are taking decisive actions to mitigate increasing claims costs, however, we cannot give assurance that these mitigation actions will be effective in reducing claims or costs related thereto, nor can we give assurance that lawsuits or other proceedings related to termite damage claims will not materially affect our reputation, business, financial position, results of operations and cash flows.

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 our termite renewal pricing changes we made 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 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 paid the state of Alabama $19 million. In the years ended December 31, 2021 and 2020, the Company recorded charges of $4 million and $49 million, respectively, and a reduction of revenue of $4 million was recorded in December 2020 related to these remediation measures.

Pursuant to the Settlement, we have also agreed to provide the opportunity to reinstate service for customers who canceled their services during certain 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. The financial impact of these remedies did not have a material impact on our results of operations or cash flows.

We entered into the Settlement, in part, because after consultation with Alabama legal counsel and a review of the relevant statutes and case law, the Settlement provides us with a preclusivity position to negate punitive damage awards related to future Litigated Claims in the Mobile Bay Area. The validity of the preclusivity position related to future Litigated 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 has experienced limited testing in legal proceedings with our fact scenarios and could fail to negate awards of punitive damages in future legal proceedings.

We remain in compliance with the Settlement and do not expect to incur additional material expenses related to the settlement in future periods.

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.

We may not successfully implement our business strategies, including achieving our growth objectives.

We may not be able to fully implement our business strategies or realize, in whole or in part within the expected time frames, the anticipated benefits of various growth or other initiatives. Our business strategies and initiatives, including growth of our customer base, introduction of new service and product offerings, geographic expansion and enhancement of profitability, are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.

We will incur certain costs to achieve efficiency improvements, systems implementations and growth in our business, and we may not meet anticipated implementation timetables or stay within budgeted costs. As these efficiency improvements, system implementations and growth initiatives are implemented, we may not fully achieve expected cost savings and efficiency improvements, system implementations or growth rates, or these initiatives could adversely impact customer retention or our operations. Also, our business strategies may change in light of our ability to implement new business initiatives, competitive pressures, economic uncertainties or developments or other factors.

Adverse credit and financial market events and conditions could, among other things, impede access to or increase the cost of financing, which could have a material adverse impact on our business, financial position, results of operations and cash flows.

Disruptions in credit or financial markets could make it more difficult for us to obtain, or increase our cost of obtaining, financing for our operations or investments or to refinance our proposed indebtedness, or cause the proposed lenders to depart from prior credit industry practice and not give technical or other waivers under credit facility or other agreements to the extent we may seek them in the future, thereby causing us to be in default. Market changes in the real estate segment could also affect the demand for our services as home buyers elect not to purchase our services, which could have a material adverse impact on our business, financial position, results of operations and cash flows.

Weather conditions and seasonality affect the demand for our services and our results of operations and cash flows.

The demand for our services and our results of operations are affected by weather conditions, including, without limitation, potential impacts, if any, from climate change, known and unknown, and by the seasonal nature of our termite and pest management services. Adverse weather conditions (e.g., cooler temperatures or droughts), whether created by climate change factors or otherwise, can impede the development of termite swarms and lead to lower demand for our termite control services. Extreme or unpredictable weather conditions could materially adversely impact our business, financial position, results of operations and cash flows.

Increases in raw material prices, fuel prices and other operating costs could adversely impact our business, financial position, results of operations and cash flows.

Our financial performance may be adversely affected by increases in the level of our operating expenses, such as fuel, chemicals, raw materials, wages and salaries, teammate benefits, health care, vehicle maintenance, building materials, contractor costs, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs, all of which may be subject to inflationary pressures.

Fuel prices are subject to market volatility. Our fleet has been negatively impacted by significant increases in fuel prices in the past and could be negatively impacted in the future. Previous increases in fuel prices increased our costs of operating vehicles and equipment. There can be no assurances that rates will not fluctuate materially in future years. We cannot predict what effect global events could have on fuel prices, but it is possible that such events could lead to higher fuel prices. Although we hedge a significant portion of our fuel costs, we do not hedge all of those costs. We expect to use approximately 9.5 million to 11 million gallons of fuel in 2022. Fuel price increases can also result in increases in the cost of chemicals and other materials used in our business. We cannot predict the extent to which we may experience future increases in costs of fuel, chemicals, and equipment, parts, raw materials, wages and salaries, teammate benefits, health care, vehicle maintenance, contractor costs, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs and other operating costs. To the extent such costs increase, we may be prevented, in whole or in part, from passing these cost increases through to our existing and prospective customers, which could have a material adverse impact on our business, financial position, results of operations and cash flows.

We may not be able to attract and retain qualified key executives or transition smoothly to new leadership, which could adversely impact us and our business and inhibit our ability to operate and grow successfully.

The execution of our business strategy and our financial performance will continue to depend in significant part on our executive management team and other key management teammates. Any inability to attract in a timely manner qualified executives, retain our leadership team and recruit other important teammates could have a material adverse impact on our business, financial position, results of operations and cash flows.

Compliance with, or violation of, environmental, health and safety laws and regulations, including laws pertaining to the use of pesticides, could result in significant costs that adversely impact our reputation, business, financial position, results of operations and cash flows.

International, federal, state, provincial and local laws and regulations relating to environmental, health and safety matters affect us in several ways. In the U.S., products containing pesticides generally must be registered with the EPA, and similar state agencies before they can be sold or applied. The failure to obtain, or the cancellation of, any such registration, or the withdrawal from the marketplace of such pesticides, could have an adverse effect on our business, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected. The pesticides we use are manufactured by independent third parties and are evaluated by the EPA as part of its ongoing exposure risk assessment. The EPA may decide that a pesticide we use will be limited or will not be re-registered for use in the U.S. We cannot predict the outcome or the severity of the effect of the EPA’s continuing evaluations.

In addition, the use of certain pesticide products is regulated by various international, federal, state, provincial and local environmental and public health agencies. Although we strive to comply with such laws and regulations and have processes in place designed to achieve compliance, given our dispersed locations, distributed operations and numerous teammates and franchise associates, we may be unable to prevent violations of these or other laws and regulations from occurring. Even if we are able to comply with all such laws and regulations and obtain all necessary registrations and licenses, the pesticides or other products we apply or use, or the manner in which we apply or use them, could be alleged to cause injury to the environment, to people or to animals, or such products could be banned in certain circumstances. The laws and regulations may also apply to third-party vendors who are hired to repair or remediate property and who may fail to comply with environmental laws, health and safety laws and regulations and subject us to risk of legal exposure. The costs of compliance, non-compliance, investigation, remediation, combating reputational harm or defending civil or criminal proceedings, products liability, personal injury or other lawsuits could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

International, federal, state, provincial and local agencies regulate the disposal, handling and storage of waste, discharges from our facilities and the investigation and clean-up of contaminated sites. We could incur significant costs, including investigation and clean-up costs, fines, penalties and civil or criminal sanctions and claims by third parties for property damage and personal injury, as a result of violations of, or liabilities under, these laws and regulations. In addition, potentially significant expenditures could be required to comply with environmental, health and safety laws and regulations, including requirements that may be adopted or imposed in the future.

On January 20, 2017, Terminix International USVI, LLC (“TMX USVI”) and The Terminix International Company Limited Partnership (“TMX LP”), each an indirect, wholly-owned subsidiary of the Company, entered into a revised Plea Agreement (the “Plea Agreement”) in connection with the investigation initiated by the U.S. Department of Justice Environmental Crimes Section (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, in addition to fines paid and reimbursement of clean-up costs, both TMX USVI and TMX LP will serve a five-year probation period ending in November 2022.

Public perceptions that the products we use and the services we deliver are not environmentally friendly or safe may adversely impact the demand for our services.

In providing our services, we use, among other things, pesticides and other chemicals. Public perception that the products we use and the services we deliver are not environmentally friendly or safe or are harmful to humans or animals, whether justified or not, or our improper application of these chemicals, could reduce demand for our services, increase regulation or government restrictions or actions, result in fines or penalties, impair our reputation, involve us in litigation, damage our brand names and otherwise have a material adverse impact on our business, financial position, results of operations and cash flows.

Laws and government regulations applicable to our business and lawsuits, enforcement actions and other claims by third parties or governmental authorities could increase our legal and regulatory expenses, and impact our business, financial position, results of operations and cash flows.

Our business is subject to significant international, federal, state, provincial and local laws and regulations. These laws and regulations include laws relating to consumer protection, wage and hour requirements, franchising, the employment of immigrants, labor relations, permitting and licensing, building code requirements, workers’ safety, the environment, insurance coverages, sales tax collection and remittance, teammate benefits, marketing (including, without limitation, telemarketing) and advertising, the application and use of pesticides and other chemicals. In particular, we anticipate that various international, federal, state, provincial and local governing bodies may propose additional legislation and regulation that may be detrimental to our business or may substantially increase our operating costs, including increases in the minimum wage; environmental regulations related to chemical use, climate change and other environmental matters; health care coverage; or “do-not-call” or other marketing regulations.

We are also subject to various consumer protection laws and subject to receiving inquiries or investigative demands by regulatory bodies, including the Consumer Financial Protection Bureau and state attorneys general and other state agencies. It is difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting our business and changes to such requirements may adversely affect our business, financial position, results of operations and cash flows. In addition, if we were to fail to comply with any applicable law or regulation, we could be subject to substantial fines or damages, be involved in lawsuits, enforcement actions and other claims by third parties or governmental authorities, suffer harm to our reputation, suffer the loss of licenses or incur penalties that may affect how our business is operated, which, in turn, could have a material adverse impact on our business, financial position, results of operations and cash flows.

We are dependent on labor availability at our customer care centers and branches.

Our ability to conduct our operations is in part affected by our ability to increase our labor force, including on a seasonal basis at our customer care centers, which may be adversely affected by a number of factors. The ongoing labor shortage is challenging for all companies in the U.S. and we could be forced to increase wages to attract and retain teammates, which would result in higher operating costs and reduced profitability and could make it more difficult for us in responding to customer calls in a timely fashion or delivering our services in a high-quality or timely manner. Long wait times by customers during peak operating times could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

Decisions and rules by the National Labor Relations Board, including “expedited elections” and restrictions on appeals, could lead to increased organizing activities at our subsidiaries or franchisees. If these labor organizing activities were successful, it could further increase labor costs, decrease operating efficiency and productivity in the future, or otherwise disrupt or negatively impact our operations. In addition, potential competition from key teammates who leave Terminix could impact our ability to maintain our share in certain geographic areas.

Our franchisees, subcontractors, third-party distributors and vendors could take actions that could harm our business.

For the year ended December 31, 2021, $12 million of our consolidated revenue was received in the form of franchise revenues while $11 million of our consolidated revenue was received in the form of franchise revenues for each of the years ended December 31, 2020 and 2019. We estimate customer level revenue of our franchisees was $386 million, $369 million and $372 million for the years ended December 31, 2021, 2020 and 2019, respectively. Our franchisees, subcontractors, third-party distributors and vendors are contractually obligated to operate their businesses in accordance with the standards set forth in our agreements with them. However, franchisees, subcontractors, third-party distributors and vendors are independent third parties that we do not control, and who own, operate and oversee the daily operations of their businesses. As a result, the ultimate success of any franchise operation rests with the franchisee. If franchisees do not successfully operate their businesses in a manner consistent with regulatory standards, royalty payments to us will be adversely affected and our brands’ image and reputation could be harmed. Similarly, if third-party distributors, subcontractors, vendors and franchisees do not successfully operate their businesses in a manner consistent with required laws, standards and regulations, we could be subject to claims from regulators or legal claims for the actions or omissions of such third-party distributors, subcontractors, vendors and franchisees. In addition, our relationship with our franchisees, third-party distributors, subcontractors and vendors could become strained (including resulting in litigation) and these strains in our relationships or claims could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

From time to time, we receive communications from our franchisees regarding complaints, disputes or questions about our practices and standards. If franchisees or groups representing franchisees were to bring legal proceedings against us, we would vigorously defend against the claims in any such proceeding, but our reputation, business, financial position, results of operations and cash flows could be materially adversely impacted and the price of our common stock could decline.

Disruptions or failures in our information technology systems could create liability for us or limit our ability to effectively monitor, operate and control our operations and adversely impact our reputation, business, financial position, results of operations and cash flows.

Our information technology systems facilitate our ability to monitor, operate and control our operations. Changes or modifications to our information technology systems could cause disruption to our operations or cause challenges with respect to our compliance with laws, regulations or other applicable standards. As the development and implementation of our information technology systems (including our operating systems) evolve, we may elect to modify, replace or abandon certain technology initiatives, which could result in write-downs.

Any disruption in our information technology systems, including capacity limitations, instabilities, or failure to operate as expected, could, depending on the magnitude of the problem, adversely impact our business, financial position, results of operations and cash flows, including by limiting our capacity to monitor, operate and control our operations effectively. Failures of our information technology systems could also lead to violations of privacy laws, regulations, trade guidelines or practices related to our customers and teammates. If our disaster recovery plans do not work as anticipated, or if the third-party vendors to which we have outsourced certain information technology, customer care center or other services fail to fulfill their obligations to us, our operations may be adversely affected, and any of these circumstances could adversely affect our reputation, business, financial position, results of operations and cash flows.

We may experience difficulties implementing our new customer experience platform.

We are engaged in a multi-year implementation of a new system that will integrate all legacy operating systems onto a single platform accessible by all. The new system will continue to require significant investment of human and financial resources. In implementing the system, we may experience significant delays, increased costs and other difficulties. Any significant disruption or deficiency in the design and implementation of the system could adversely affect our ability to process work orders, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. In addition, our efforts to centralize various business processes within our organization in connection with this implementation may disrupt our operations and negatively impact our business, results of operations and financial condition.

Changes in the services we deliver or the products we use could affect our reputation, business, financial position, results of operations, cash flows and future plans.

Our financial performance is affected by changes in the services and products we offer to customers, including termite warranties. There can be no assurance that our strategies or product offerings will succeed in increasing revenue and growing profitability. An unsuccessful execution of strategies, including the rollout or adjustment of our new services or products, the effectiveness of sales and marketing plans and our handling of cases and claims for termite damages, particularly in the Mobile Bay Area, could cause us to reevaluate or change our business strategies and could have a material adverse impact on our reputation, business, financial position, results of operations, cash flows and future plans.

If we fail to protect the security of personal information about our customers, teammates and third parties, we could be subject to interruption of our business operations, private litigation, reputational damage and costly penalties.

We rely on, among other things, commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential information of customers, teammates and third parties, such as payment cards and personal information. The systems currently used for transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, are central to meeting standards set by the payment card industry (“PCI”). We continue to evaluate and modify these systems and protocols for PCI compliance purposes, and such PCI standards may change from time to time. Activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of these systems. Any compromises, breaches or errors in applications related to these systems or failures to comply with standards set by the PCI could cause damage to our reputation and interruptions in our operations, including customers’ ability to pay for services and products by credit card or their willingness to purchase our services and products and could result in a violation of applicable laws, regulations, orders, industry standards or agreements and subject us to costs, penalties and liabilities. We are subject to risks caused by data breaches and operational disruptions, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists. The frequency of data breaches of companies and governments have increased in recent years as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The occurrence of any of these events could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.

Our ability to compete effectively depends in part on our rights to proprietary information, service marks, trademarks, trade names and other intellectual property rights we own or license, particularly our registered brand names, Terminix, Copesan, Assured Environments, Gregory, McCloud and Nomor. We have not sought to register or protect every one of our marks either in the U.S. or in every country in which they are or may be used. Furthermore, because of the differences in foreign trademark, patent and other intellectual property or proprietary rights laws, we may not receive the same protection in other countries as we would in the U.S. If we are unable to protect our proprietary information and intellectual property rights, including brand names, it could cause a material adverse impact on our reputation, business, financial position, results of operations and cash flows. Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products, services or activities infringe their intellectual property rights.

Future acquisitions or other strategic transactions could negatively affect our reputation, business, financial position, results of operations and cash flows.

We may pursue strategic transactions in the future, which could involve acquisitions or dispositions of businesses or assets. Any future strategic transaction could involve integration or implementation challenges, business disruption or other risks, or change our business profile significantly. Any inability on our part to consolidate and manage growth from acquired business or successfully implement other strategic transactions could have an adverse impact on our reputation, business, financial position, results of operations and cash flows. Any acquisition that we make may not provide us with the benefits that were anticipated when entering into such acquisition. The process of integrating an acquired business may create unforeseen difficulties and expenses, including the diversion of resources needed to integrate new businesses, technologies, products, teammates or systems; the inability to retain teammates, customers and suppliers; the assumption of actual or contingent liabilities (including those relating to the environment); failure to effectively and timely adopt and adhere to our internal control processes and other policies; write-offs or impairment charges relating to goodwill and other intangible assets; unanticipated liabilities relating to acquired businesses; and potential expense associated with litigation with sellers of such businesses. Any future disposition transactions could also impact our business and may subject us to various risks, including failure to obtain appropriate value for the disposed businesses, post-closing claims being levied against us and disruption to our business during the sale process or thereafter.

We may be required to recognize impairment charges.

We have significant amounts of goodwill and intangible assets, such as trade names. In accordance with applicable accounting standards, goodwill and indefinite-lived intangible assets are not amortized and are subject to assessment for impairment by applying a fair-value based test annually, or more frequently if there are indicators of impairment, including:

significant adverse changes in the business climate, including economic or financial conditions;

significant adverse changes in expected operating results;

adverse actions or assessments by regulators;

unanticipated competition;

loss of key teammates; and

a current expectation that it is more likely than not that a reporting unit or intangible asset will be sold or otherwise disposed of.

Based upon future economic and financial market conditions, the operating performance of the Company and other factors, including those listed above, we may incur impairment charges in the future. It is possible that such impairment, if required, could be material. Any future impairment charges that we are required to record could have a material adverse impact on our results of operations.

We are subject to various restrictive covenants that could materially adversely impact our business, financial position, results of operations and cash flows.

From time to time, we enter into noncompetition agreements or other restrictive covenants (e.g., exclusivity, take or pay and non-solicitation obligations), including in connection with business dispositions or strategic contracts, that restrict us from entering into lines of business or operating in certain geographic areas into which we may desire to expand our business. We also are subject to various non-solicitation and no-hire covenants that may restrict our ability to solicit potential customers or teammates. If we do not comply with such restrictive covenants, or if a dispute arises regarding the scope and interpretation thereof, litigation could ensue, which could have an adverse impact on our business, financial position, results of operations and cash flows. Further, to the extent that such restrictive covenants prevent us from taking advantage of business opportunities, our business, financial position, results of operations and cash flows may be adversely impacted.

Our business process outsourcing initiatives have increased our reliance on third-party vendors and may expose our business to harm upon the termination or disruption of our third-party vendor relationships.

Our strategy to increase profitability, in part, by reducing our costs of operations includes the implementation of certain business process outsourcing initiatives. Any disruption, termination or substandard performance of these outsourced services, including possible breaches by third-party vendors of their agreements with us, could adversely affect our brands, reputation, customer relationships, financial position, results of operations and cash flows. Also, to the extent a third-party outsourcing provider relationship is terminated, there is a risk of disputes or litigation and that we may not be able to enter into a similar agreement with an alternate provider in a timely manner or on terms that we consider favorable, and even if we find an alternate provider, or choose to insource such services, there are significant risks associated with any transitioning activities. In addition, to the extent we decide to terminate outsourcing services and insource such services, there is a risk that we may not have the capabilities to perform these services internally, resulting in a disruption to our business, which could adversely impact our reputation, business, financial position, results of operations and cash flows. We could incur costs, including teammate and equipment costs, to insource previously outsourced services like these, and these costs could adversely affect our results of operations and cash flows.

Risks Related to Our Indebtedness

The agreements and instruments governing our indebtedness contain restrictions and limitations that could impact our ability to operate our business.

As of December 31, 2021, we had approximately $899 million of total consolidated long-term indebtedness, including the current portion of long-term debt, outstanding, and $22 million of letters of credit outstanding and $378 million of available borrowing capacity under our Revolving Credit Facility maturing November 4, 2024 (the “Revolving Credit Facility”). The agreements governing our $600 million Term Loan Facility maturing November 4, 2026 (the “Term Loan Facility”) and the Revolving Credit Facility (collectively, the “Credit Facilities”) contain covenants that, among other things, restrict our ability to (i) transfer or sell assets, (ii) create liens and (iii) enter into agreements restricting dividends or other distributions by our subsidiaries.

Our ability to comply with the covenants and restrictions contained in the agreements governing the Credit Facilities and the instruments governing our other indebtedness may be affected by economic, financial and industry conditions beyond our control including credit or capital market disruptions. The breach of any of these covenants or restrictions could result in a default that would permit the applicable lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay indebtedness, lenders having secured obligations, such as the lenders under the Credit Facilities, could proceed against the collateral securing the indebtedness. In any such case, we may be unable to borrow under the Credit Facilities and may not be able to repay the amounts due under such facilities or our other outstanding indebtedness. This could have serious consequences to our financial position and results of operations and could cause us to become bankrupt or insolvent.

A lowering or withdrawal of the ratings, outlook or watch assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.

Our indebtedness has primarily non-investment grade ratings, and any rating, outlook or watch assigned to our debt securities could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, current or future circumstances relating to the basis of the rating, outlook or watch, such as adverse changes to our business, so warrant. Any future lowering of our ratings, outlook or watch likely would make it more difficult or more expensive for us to obtain additional debt financing.

We and our subsidiaries may be able to incur substantially more indebtedness. This could further exacerbate the risks associated with our indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the instruments governing our indebtedness do not prohibit us or fully prohibit our subsidiaries from doing so. The Credit Facilities permit additional borrowings beyond the committed amounts under certain circumstances. If new indebtedness is added to our current indebtedness levels, the related risks we face would increase, and we may not be able to meet all of our debt obligations.

Risks Related to Our Common Stock

Terminix Global Holdings, Inc. is a holding company with no operations of its own, and it depends on its subsidiaries for cash to fund all of its operations and expenses, including to make future dividend payments, if any.

Terminix’s operations are conducted entirely through our subsidiaries, and our ability to generate cash to fund our operations and expenses, to pay dividends or to meet debt service obligations is highly dependent on the earnings and the receipt of funds from our subsidiaries through dividends or intercompany loans. Deterioration in the financial condition, earnings or cash flows of our subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, to the extent that Terminix needs funds, and its subsidiaries are restricted from making such distributions under applicable law or regulation or under the terms of our financing arrangements, or are otherwise unable to provide such funds, it could materially adversely affect our business, financial condition, results of operations or prospects.

We currently intend to use our future earnings to fund our growth, to develop our business, repay debt, make acquisitions, and for working capital needs and general corporate purposes. Any future determination to pay dividends on our common stock will be at the sole discretion of our board of directors after taking into account various factors, including general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock. To the extent that we determine in the future to pay dividends on our common stock, none of our subsidiaries will be obligated to make funds available to us for the payment of dividends.

The market price of our common stock may be volatile and could decline.

The market price of our common stock may fluctuate significantly. Among the factors that could affect our stock price are:

the proposed acquisition by Rentokil;

industry or general market conditions;

domestic and international economic factors unrelated to our performance;

lawsuits, enforcement actions and other claims by third parties or governmental authorities;

changes in our customers’ preferences;

new regulatory pronouncements and changes in regulatory guidelines; 

actual or anticipated fluctuations in our quarterly operating results;

changes in securities analysts’ estimates of our financial performance or lack of research coverage and reports by industry analysts;

action by institutional stockholders or other large stockholders;

failure to meet any guidance given by us or any change in any guidance given by us, or changes by us in our guidance practices;

announcements by us of significant impairment charges;

speculation in the press or investment community;

investor perception of us and our industry;

changes in market valuations or earnings of similar companies;

announcements by us or our competitors of significant contracts, acquisitions, dispositions or strategic partnerships;

war, terrorist acts and epidemic disease;

any future sales of our common stock or other securities; and

additions or departures of key teammates.

The stock markets have experienced volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, class action litigation has often been instituted against the affected company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management’s attention and resources, which would harm our business, operating results and financial condition.

Future sales of shares by existing stockholders could cause our stock price to decline.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

In July 2014, we filed a registration statement on Form S-8 under the Securities Act to register the shares of common stock to be issued under our equity compensation plans and, as a result, all shares of common stock acquired upon exercise of (i) stock options granted under these plans and (ii) other equity based awards granted under the Amended and Restated Terminix Global Holdings, Inc. 2014 Omnibus Incentive Plan (“Omnibus Incentive Plan”).

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 one million shares of common stock authorized for sale under the plan. In connection with the announcement of the proposed acquisition of the Company by Rentokil, the Employee Stock Purchase Plan was suspended as of January 1, 2022.

In the future, we may issue additional shares of common stock or other equity or debt securities convertible into or exercisable or exchangeable for shares of our common stock in connection with a financing, acquisition, litigation settlement or employee arrangement or otherwise. Any of these issuances could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock to decline.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts that covers our common stock downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of the analysts ceases coverage of our common stock or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our common stock price or trading volume to decline.

Future offerings of debt or equity securities which would rank senior to our common stock may adversely affect the market price of our common stock.

If, in the future, we decide to issue debt or equity securities that rank senior to our common stock, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us.

Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated by-laws could discourage, delay or prevent a change of control of our Company and may affect the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated by-laws include a number of provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For example, our amended and restated certificate of incorporation and amended and restated by-laws collectively:

authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;

provide for a classified board of directors, which divides our board of directors into three classes, with members of each class serving staggered three-year terms, which prevents stockholders from electing an entirely new board of directors at an annual meeting;

limit the ability of stockholders to remove directors;

provide that vacancies on our board of directors, including vacancies resulting from an enlargement of our board of directors, may be filled only by a majority vote of directors then in office;

prohibit stockholders from calling special meetings of stockholders;

prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders;

establish advance notice requirements for nominations of candidates for election as directors or to bring other business before an annual meeting of our stockholders; and

require the approval of holders of at least 66 2/3% of the outstanding shares of our common stock to amend our amended and restated by-laws and certain provisions of our amended and restated certificate of incorporation.

These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future.

Our amended and restated certificate of incorporation and amended and restated by laws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.

Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers, teammates or agents, (iii) any action asserting a claim against us arising under the General Corporation Law of the State of Delaware or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. By becoming a stockholder in our Company, you will be deemed to have notice of and have consented to the provisions of our amended and restated certificate of incorporation related to choice of forum. The choice of forum provision in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Risks Related to COVID-19

Our operations may be adversely impacted as a result of pandemic outbreaks, including COVID-19.

In December 2019, COVID-19 was first reported in Wuhan, China, and by March 11, 2020, as COVID-19 spread outside of China, the World Health Organization designated the outbreak as a global pandemic. The COVID-19 pandemic could have negative impacts on our operations, major facilities or teammates’ and consumers’ health. As the global pandemic and its negative impact on the global economy continue, we expect COVID-19 to continue to interfere with general commercial activity related to our supply chain and customer base, which could have a material adverse effect on our business, financial condition or results of operations. We have experienced and may continue to experience customer shutdowns, increased medical claims for our teammates, and supply chain disruptions related to COVID-19. To the extent that COVID-19 continues or worsens, governments may impose new or additional restrictions to slow its spread. The result of COVID-19 and those restrictions could result in additional businesses being shut down, additional work restrictions and supply chains being further interrupted, slowed, or rendered inoperable. As a result, it may be challenging to obtain raw materials to support our business needs, and individuals could become ill, quarantined or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes which could adversely impact our business, financial condition or results of operations. Further, if our customers’ businesses are similarly affected, they might delay or reduce purchases from us.

The potential effects of COVID-19 also could impact us in a number of other ways including, but not limited to, reductions to our profitability, laws and regulations affecting our business, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, credit risks of our customers and counterparties, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. Such increased costs and reductions in profitability may not be fully recoverable. The impact of the COVID-19 pandemic depends on factors beyond our knowledge or control, including the duration and severity of the outbreak and actions taken to contain its spread and mitigate its public health effects. We cannot at this time predict the impact of the COVID-19 pandemic on our financial condition or results of operation, but the impact could be material over time.

Risks Relating to the Proposed Acquisition by Rentokil

The completion of the Mergers is subject to certain closing conditions, including regulatory and stockholder approvals as well as other uncertainties, and there can be no assurances as to whether and when they may be completed.

The respective obligations of the Company and Rentokil to consummate the Mergers are subject to the satisfaction or waiver of a number of customary conditions, including:  (1) the approval of the Merger Agreement by our stockholders; (2) approval of the transactions contemplated by the Merger Agreement and other related matters by Rentokil’s shareholders; (3) the absence of any law or order prohibiting consummation of the Mergers; (4) Rentokil’s registration statement on Form F-4 having been declared effective by the U.S. Securities and Exchange Commission; (5) Rentokil’s shareholder circular and prospectus having been approved by the U.K. Financial Conduct Authority; (6) the Rentokil ADSs issuable in the Mergers (and the Rentokil Ordinary Shares represented thereby) having been approved for listing on the New York Stock Exchange; (7) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); (8) accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Merger Agreement; and (9) compliance by the other party in all material respects with such other party’s obligations under the Merger Agreement. In addition, the obligation of Rentokil to consummate the Mergers is subject to completion by the Company of the sale or disposition of certain of its existing businesses. If these conditions are not satisfied (or waived, if applicable) by certain dates specified in the Merger Agreement, either company will have a right to terminate the Merger Agreement in certain circumstances.

The governmental authorities from which authorizations under antitrust and foreign investment laws, including the HSR Act are required have broad discretion in administering the governing laws and regulations, and may take into account various facts and circumstances in their consideration of the Mergers, including other potential transactions in our industry or other industries. These governmental authorities may initiate proceedings seeking to prevent, or otherwise seek to prevent, the Mergers. As a condition to authorization of the Mergers or related transactions, these governmental authorities also may seek to impose requirements, limitations or costs, require divestitures or place restrictions on the conduct of Rentokil’s business after completion of the Mergers.

We can provide no assurance that all required consents and approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable) in a timely manner or at all, and, if all required consents and approvals are obtained and all closing conditions are timely satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such consents and approvals or the timing of the completion of the Mergers. Many of the conditions to completion of the Mergers are not within either our or Rentokil’s control, and neither company can predict when or if these conditions will be satisfied (or waived, if applicable). Any delay in completing the Mergers could cause us not to realize some or all of the benefits that we expect to achieve if the Mergers are successfully completed within its expected timeframe.

Failure to complete the merger could negatively impact our stock price and future business and financial results.

If the Mergers are not completed for any reason, including as a result of our stockholders failing to adopt the Merger Agreement or Rentokil shareholders failing to approve the transactions contemplated by the Merger Agreement, we will remain an independent public company. Our ongoing business may be materially and adversely affected and we would be subject to a number of risks, including the following:

we may experience negative reactions from the financial markets, including negative impacts on trading prices of our common stock, and from our customers, suppliers, regulators and teammates;

we may be required to pay Rentokil a termination fee of $200 million if the Merger Agreement is terminated in certain circumstances, including because (1) Rentokil has terminated the Merger Agreement due to the fact that our board of directors has changed its recommendation in favor of the Mergers, (2) we have terminated the Merger Agreement in order to enter into an agreement providing for a Company Superior Proposal (as defined in the Merger Agreement) or (3) the Company has entered into an agreement providing for a Company Superior Proposal within twelve months following the termination of the Merger Agreement, in certain circumstances;

we may be required to make a payment to Rentokil equal to $50 million if the Merger Agreement is terminated because our stockholders fail to adopt the Merger Agreement;

the Merger Agreement places certain restrictions on the conduct of our business prior to completion of the Mergers, and such restrictions, the waiver of which is subject to the consent of Rentokil, may prevent us from making certain acquisitions, entering into or amending certain contracts, taking certain other specified actions or otherwise pursuing business opportunities during the pendency of the Mergers that we would have made, taken or pursued if these restrictions were not in place; and

matters relating to the Mergers (including integration planning) will require substantial commitments of time and resources by our management and the expenditure of significant funds in the form of fees and expenses, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company.

If any of these risks materialize, they may materially and adversely affect our business, financial condition, financial results and stock prices.

Combining Rentokil and the Company may be more difficult, costly or time consuming than expected and the Company may fail to realize the anticipated benefits of the Mergers.

The success of the Mergers will depend, in part, on the ability to realize the anticipated synergies, operating efficiencies, and cost savings from combining the businesses of Rentokil and the Company. To realize the anticipated benefits and cost savings from the Mergers, Rentokil and the Company must integrate and combine their businesses in a manner that permits those cost savings to be realized, without adversely affecting current revenues and future growth. If Rentokil and the Company are not able to successfully achieve these objectives, the anticipated benefits of the Mergers may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings of the Mergers could be less than anticipated, the costs associated with effecting the Mergers may be more than anticipated, and integration may result in additional and unforeseen expenses.

An inability to realize the full extent of the anticipated benefits of the Mergers and the other transactions contemplated by the Merger Agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating results and financial condition of the combined company, which may adversely affect the value of the common stock of the combined company after the completion of the Mergers.

Rentokil and the Company have operated and, until the completion of the Mergers, must continue to operate, independently. It is possible that the integration process could result in the loss of key associates, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect each company’s ability to maintain relationships with clients, customers and other business parties or to achieve the anticipated benefits and cost savings of the Mergers. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on Rentokil and/or the Company during this transition period and for an undetermined period after completion of the Mergers on the combined company.

Because the Merger Consideration will include a fixed number of American depositary shares of Rentokil, each such share represents a beneficial interest in five Rentokil ordinary shares and the market price of Rentokil ordinary shares has fluctuated and will continue to fluctuate, our stockholders cannot be sure of the value of the Merger Consideration they will receive in the Mergers.

The market value of the consideration our stockholders will receive in the Mergers will fluctuate with the market price of Rentokil’s ordinary shares. Based on Rentokil’s five-day average daily volume weighted share price and the five-day average of the Sterling-US Dollar exchange rate, in each case, over the period spanning December 6, 2021 to December 10, 2021, inclusive, the implied value of the merger consideration to our stockholders was approximately $55.00 per share of our common stock, and such implied value has fluctuated since the date of the announcement of the Mergers and will continue to fluctuate from the date of this Annual Report on Form 10-K until the date the Mergers are completed, which could occur a considerable amount of time after the date hereof. Rentokil’s ordinary share price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in Rentokil’s and the Company’s respective businesses, operations and prospects, risks inherent in the respective businesses, changes in market assessments of the likelihood that the Mergers will be completed and/or the value that may be generated by the Mergers, and changes with respect to expectations regarding the timing of the Mergers and regulatory considerations. Many of these factors are beyond our control.

In addition, upon completion of the Mergers, certain holders of our common stock who receive Rentokil ADSs in the Mergers will become holders of shares of Rentokil ordinary shares. The businesses of Rentokil differ from those of the Company in important respects, and, accordingly, the results of operations of Rentokil after the Mergers, as well as the market price of Rentokil ordinary shares, may be affected by factors different from those currently affecting the results of operations of the Company.

While the Mergers are pending, we are subject to business uncertainties and contractual restrictions that could materially adversely affect our operating results, financial position and/or cash flows or result in a loss of teammates, customers, collaborators or suppliers.

The Merger Agreement includes restrictions on the conduct of our business until the earlier of the completion of the Mergers or termination of the Merger Agreement. For example, unless we obtain Rentokil’s prior written consent (which consent may not be unreasonably withheld, conditioned or delayed), we may not, subject to certain exceptions and aggregate limitations, incur additional indebtedness, issue additional shares of our common stock outside of our equity incentive plans, repurchase our common stock, pay dividends, acquire assets, securities or property, dispose of businesses or assets, enter into material contracts or make certain additional capital expenditures. We may find that these and other contractual restrictions in the Merger Agreement delay or prevent us from responding, or limit our ability to respond, effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management believes they may be advisable. The pendency of the Mergers may also divert management’s attention and our resources from ongoing business and operations.

Our teammates, customers, and suppliers may experience uncertainties about the effects of the Mergers. It is possible that some customers, suppliers and other parties with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the Mergers. Similarly, current and prospective teammates may experience uncertainty about their future roles with us following completion of the Mergers, which may materially adversely affect our ability to attract and retain key teammates. If any of these effects were to occur, it could materially and adversely impact our operating results, financial position and/or cash flows and/or our stock price.

Lawsuits may be filed against us and/or Rentokil challenging the transactions contemplated by the Merger Agreement. An adverse ruling in any such lawsuit may delay or prevent the proposed Mergers from being completed.

Lawsuits arising out of or relating to the Merger Agreement, Rentokil’s registration statement on Form F-4 (which will include a document that serves as a prospectus of Rentokil and a proxy statement of the Company) and/or the proposed acquisition of us by Rentokil may be filed in the future. One of the conditions to completion of the Mergers is the absence of any injunction or other order being in effect that prohibits completion of the Mergers. Accordingly, if a plaintiff is successful in obtaining an injunction, then such order may prevent the proposed Mergers from being completed, or from being completed within the expected timeframe.

We may have difficulty attracting, motivating and retaining executives and other key teammates in light of the Mergers.

Uncertainty about the effect of the Mergers on our teammates may have an adverse effect on our business. This uncertainty may impair our ability to attract, retain and motivate key teammates. Teammate retention may be particularly challenging during the pendency of the Mergers, as our teammates may experience uncertainty about their future roles in the combined business. No assurance can be given that we will be able to attract or retain key teammates to the same extent that we have been able to attract or retain teammates in the past.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease our corporate headquarters in Memphis, Tennessee. We also own or lease a variety of facilities, predominantly in the U.S., for branches, offices, storage, data processing and training. We believe that these facilities are suitable and adequate to support the current needs of our business.

ITEM 3. LEGAL PROCEEDINGS

Information with respect to certain legal proceedings is set forth in Note 9 to the Consolidated Financial Statements (included in Part II, Item 8 of this Form 10-K) and is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “TMX” (formerly under the ticker “SERV” until October 5, 2020). Our common stock began trading on the NYSE on June 26, 2014. As of February 24, 2022, there were two registered holders of our common stock and we estimate in excess of 50,000 beneficial stockholders.

The graph below presents our cumulative total stockholder returns relative to the performance of the Standard & Poor’s 500 Composite Stock Index and Standard & Poor’s 400 Consumer Services Index over the past five years. The graph assumes $100 invested at the opening price of our common stock on NYSE and each index on December 31, 2016. On October 1, 2018, we completed the previously announced separation of our American Home Shield business. The separation was effectuated through a tax-free, pro rata dividend (the “Distribution”) to our stockholders of approximately 80.2 percent of the outstanding shares of common stock of frontdoor, inc. (“Frontdoor”), which was formed as a wholly owned subsidiary of the Company to hold our American Home Shield business. Our stockholders received one share of Frontdoor common stock for every two shares of Terminix common stock held as of the close of business on the record date. The graph below assumes, similar to a cash dividend, that the shares of Frontdoor that were distributed on October 1, 2018, were sold and the proceeds from such sale were reinvested into additional shares of Terminix common stock.

Dividends

We did not pay any cash dividends in 2019, 2020 or 2021. As a result of the spin-off of American Home Shield, in 2018, each Terminix stockholder as of the record date, received a dividend of one share of Frontdoor common stock for every two shares of Terminix common stock held. The Company distributed 67,781,527 shares of common stock of Frontdoor in the Distribution. Stockholders received cash in lieu of fractional shares they would have otherwise received in the Distribution.

Given the proposed acquisition by Rentokil, we do not intend to pay any dividends in the foreseeable future. We currently intend to use our future earnings, if any, to fund our growth, to develop our business, repay debt, make acquisitions, and for working capital needs and general corporate purposes. Any future determination to pay dividends on our common stock will be at the sole discretion of our board of directors after taking into account various factors, including general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. Our ability to pay cash dividends to holders of our common stock may be restricted by the Credit Facilities, insofar as we may seek to pay dividends out of funds made available to us by our subsidiaries. See “Liquidity—Limitations on Distributions and Dividends by Subsidiaries” for a description of the impact of our restrictions under our debt instruments on our ability to pay dividends.

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Share Repurchase Program

On September 25, 2020, our board of directors approved a three-year $400 million share repurchase program, which funds were exhausted in the second 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 December 31, 2021, 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.

Issuer Purchases of Equity Securities

ITEM 6. [RESERVED]

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. 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” and “Risk Factors.”

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.

Sale of ServiceMaster Brands

On October 1, 2020, we completed the sale of the ServiceMaster Brands Divestiture Group for $1,541 million to Roark, resulting in a gain of $494 million, net of income taxes. The ServiceMaster Brands Divestiture Group is classified as discontinued operations for all periods presented. A portion of the proceeds was used to retire $750 million of our 5.125% Notes due 2024. We also entered into a transition services agreement and sublease agreement with Roark. See Note 7 to the Consolidated Financial Statements for further discussion of these agreements.

COVID-19 and Outlook

Since March 11, 2020, when the World Health Organization designated COVID-19 as a global pandemic, we have experienced increased demand in our residential pest management and termite and home services service lines as customers are spending more time at home. We have also experienced disruptions in our business, primarily in the commercial pest management service line, driven by temporary business closures and service postponements, and in our product sales and other service line. We expect the commercial pest market to continue to stabilize to more normalized growth levels into 2022.

Over the course of 2021, we experienced an increase in medical expenses and short-term disability claims related to COVID-19 infections in our workforce, which we expect to continue in the short-term, and we have experienced increased turnover and labor shortages as a result of the pandemic. We continue to focus on initiatives to ensure the safety and productivity of our teammates, including personal protective equipment and safety policies and measures for field teammates, and technology to facilitate remote working, with most back-office and all customer care center teammates continuing to work remotely and field support teammates working remotely where possible. We continue to evaluate the benefits, opportunities and risks identified from our remote working experiences to sustain and identify ways to reduce ongoing operating costs while balancing operational performance.

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 American depositary shares of Rentokil (each representing a beneficial interest in five ordinary shares of Rentokil) equal to (A) 1.0619 plus (B) the quotient of $11.00 and the volume weighted average price (measured in U.S. dollars) of Rentokil American depositary shares (measured using the volume weighted average price of Rentokil ordinary shares as a proxy) for the trading day that is two trading days prior to the Effective Time (or such other date as may be mutually agreed to by Rentokil and the Company); or

an amount in cash, without interest, and in USD equal to the sum of (A) the Per Share Cash Amount plus (B) the product of the Exchange Ratio and the Rentokil ADS Price,

in each case at the election of the holder of such share of our common stock, subject to certain allocation and proration provisions of the Merger Agreement. Immediately following such conversion, our shares of common stock will be automatically cancelled and cease to exist. The aggregate Cash Consideration and the aggregate Stock Consideration that will be issued in the Mergers will not vary as a result of individual election preferences.

The respective obligations of the Company and Rentokil to consummate the Mergers are subject to the satisfaction or waiver of a number of conditions, including, among others the approval of the Merger Agreement by the Company’s stockholders, approval of the transactions contemplated by the Merger Agreement and other related matters by Rentokil’s shareholders, and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

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.

Key Business Metrics

We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of our business. These metrics include:

revenue,

operating expenses,

net income (loss),

earnings (loss) 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, acquisition-related costs (adjustments), restructuring, foreign currency impacts and other charges that management believes are not indicative of the ongoing 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. In 2021, approximately 94 percent of our revenue was generated by sales in the U.S.

Operating Expenses. In addition to the impact of changes in our revenue results, our profitability (Net Income (Loss) and Adjusted EBITDA) 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, self-insurance costs and other insurance premiums, as well as various regulatory compliance costs.

Net Income (Loss) and Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and RSUs are reflected in diluted earnings per share by applying the treasury stock method.

Adjusted EBITDA. We evaluate performance based primarily on Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before: depreciation and amortization expense; amortization of cloud-based software, acquisition-related costs (adjustments); Mobile Bay Formosan termite settlement; termite damage claims reserve adjustment; non-cash stock-based compensation expense; restructuring and other charges; goodwill impairment charges; fumigation related matters; realized (gain) loss on investment in frontdoor, inc.; net earnings (loss) from discontinued operations; provision (benefit) for income taxes; loss on extinguishment of debt; and interest expense. We believe Adjusted EBITDA is useful for investors, analysts and other interested parties as it facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives, consulting agreements, acquisition activities and equity-based, long-term incentive plans.

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 evaluate organic revenue growth to track performance, including the impacts of sales, pricing, new service offerings 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 our 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 and 2020, the percentage of our annual total revenue and Adjusted EBITDA earned by quarter was as follows:

2021

2020

Effect of Weather Conditions

The demand for our services and our results of operations are also affected by weather conditions, including increasing pest populations driven by the increasing temperatures of climate change and 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.

Repurchase of Notes

On September 30, 2020, we closed on an amendment to our Term Loan B credit agreement that permits proceeds from the sale of ServiceMaster Brands to be used to retire subordinated debt or pay shareholder returns. In conjunction with the amendment, we made an approximately $51 million advance amortization payment on the Term Loan B, set to mature in November of 2026, and terminated $4 million of the interest rate swap. In connection with the repayment, we recorded a loss on extinguishment of debt of $1 million, which includes the write-off of debt issuance costs. On November 16, 2020, we used a portion of the proceeds from the sale of ServiceMaster Brands and retired all $750 million of our existing 5.125% Notes due 2024, plus applicable accrued interest. In connection with the retirement, we recorded a loss on extinguishment of debt of $25 million, which included a $19 million prepayment penalty and the write-off of debt issuance costs. As a result of this repurchase and Term Loan B advanced amortization payment, interest expense decreased approximately $38 million in 2021.

Results of Operations

The following table shows the results of operations for continuing operations for the years ended December 31, 2021, 2020 and 2019, which reflects the results of acquired businesses from the relevant acquisition dates.

___________________________________

*not meaningful

Revenue

We reported revenue of $2,045 million, $1,961 million and $1,819 million for the years ended December 31, 2021, 2020 and 2019, respectively. Revenue by service line is as follows:

Revenue growth was $84 million year over year, or four percent. Foreign currency fluctuations contributed $9 million, or less than one percent, of total organic revenue growth.

European pest management revenue is now presented within Commercial Pest Management, and prior periods have been reclassified to conform to the current period presentation.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Residential pest management revenue growth was five percent, reflecting organic revenue growth of three percent. Organic revenue growth was driven by improved price realization and improved trailing 12-month customer retention rates. Residential pest management revenue also increased one percent from acquisitions completed during the year.

Commercial pest management revenue growth was five percent, reflecting growth from acquisitions of three percent and organic revenue growth of two percent. The commercial pest management organic revenue growth was driven by improved price realization in the domestic commercial business as well as strong growth internationally. Foreign currency fluctuations contributed $9 million or two percent, of the commercial pest management organic revenue growth.

Termite revenue growth was three percent. Termite completions increased six percent, driven by increased demand for termite services. 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 eight percent, primarily as a result of increased cross selling to existing customers. Termite renewals growth was flat, with growth from increased volume and improved price realization, offset by approximately $8 million impact from the change in the timing of revenue recognition in our monthly subscription-based termite offering. Excluding the impact of the monthly subscription-based termite offering, termite renewal growth would have been three percent and total termite growth would have been five percent.

In the year ended December 31, 2021, termite renewal revenue comprised 44 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 favorable weather conditions and consumer awareness of termite swarms.

Sales of products and other revenue grew four percent due to increased product demand as we lap the impacts of COVID-19 on twelve months ended December 31, 2020 revenue. The sale of products was negatively impacted by product availability and supply channel slowdowns stemming from COVID-19.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Residential pest management revenue growth was three percent. The organic residential pest management growth of two percent was driven by strong customer demand, retention gains and increased price realization, offset by the impact of temporary service postponements in recurring pest services driven by COVID-19, lower new summer sales units, which were initially suspended at the outset of the COVID-19 pandemic, bed bug and other one-time sales. Residential pest management revenue also increased one percent from acquisitions completed during the year.

Commercial pest management revenue growth was 18 percent, reflecting growth from acquisitions of 20 percent, offset by organic revenue declines of one percent. The commercial pest management organic revenue decline was driven by service postponements and cancellations due to business closures from COVID-19 and lower sales of non-recurring services, partially offset by price increases. Gregory and McCloud, which were acquired during the fourth quarter of 2019, contributed to organic revenue growth beginning in the fourth quarter of 2020. We also acquired Nomor and Pelias on September 6, 2019. Beginning in September of 2020 their results contributed to organic revenue growth. Foreign currency fluctuations contributed $3 million to commercial pest management organic revenue growth.

Termite and home services revenue, including wildlife exclusion, crawl space encapsulation and attic insulation, which are managed as a component of our termite line of business, growth was four percent, primarily reflecting retention gains, an increase in both core termite and home services new unit sales and improved price realization. In the year ended December 31, 2020, we recorded a reduction of termite revenue of $4 million related to the Mobile Bay Formosan termite settlement.

In the year ended December 31, 2020, termite renewal revenue comprised 45 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 favorable weather conditions and consumer awareness of termite swarms.

Cost of Services Rendered and Products Sold

We reported cost of services rendered and products sold of $1,193 million, $1,155 million and $1,069 for the years ended December 31, 2021, 2020 and 2019, respectively.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

For the year ended December 31, 2021 compared to December 31, 2020, costs of services rendered and products sold increased three percent overall but decreased one percent as a percentage of revenue, primarily attributable to the flowthrough from higher revenue. Production labor increased $11 million representing increased labor costs, primarily due to increased turnover year-over-year and labor market driven cost inflation. Direct cost productivity improved $22 million, including lower chemical costs, improvements in fleet management, lower fuel prices primarily related to favorable fuel hedge rates and subcontractor productivity from the insourcing of Copesan national accounts customers. Termite damage claims expenses decreased $2 million, driven by lower Non-litigated termite damage claims counts, offset by higher cost per Non-litigated Claim due, in part, to inflationary pressure on building materials and contractor costs, primarily in the Mobile Bay Area. Medical claims due to COVID-19 represents $13 million of increased medical claims and short-term disability costs as a result of the COVID-19 pandemic. The $7 million decrease in insurance program expense is driven by favorable adjustments in our automobile, general liability and workers’ compensation program of $8 million in the year ended December 31, 2021 as compared to favorable adjustments of $1 million in the year ended December 31, 2020.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

For the year ended December 31, 2020 compared to December 31, 2019, costs of services rendered and products sold increased eight percent, primarily due to increased revenues. Production labor decreased $14 million driven, in part, by improved teammate retention and labor management, partially offset by labor inefficiencies incurred in the first quarter of 2020 due to the impact of COVID-19. Vehicle and fuel costs decreased $9 million driven by improvements in fleet management and lower fuel prices. The increase in termite damage claims of $21 million was driven by increased Non-litigated Claims and Litigated Claims, primarily in the Mobile Bay Area, as well as the costs of the termite damage claim mitigation program in the Mobile Bay Area. Travel decreased $2 million driven by the impact of COVID-19 and limited travel in 2020. The increase in costs related to our insurance program of $5 million was driven by favorable adjustments in our automobile, general liability and workers’ compensation program of $1 million in the year ended December 31, 2020 as compared to favorable adjustments of $6 million in the year ended December 31, 2019.

Selling and Administrative Expenses

For the years ended December 31, 2021, 2020 and 2019, we reported selling and administrative expenses of $561 million, $559 million, and $527 million, respectively. The following table provides a summary of selling and administrative expenses:

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Selling and administrative expenses increased $1 million compared to the year ended December 31, 2020, primarily due to higher marketing spend. General and administrative costs increased $1 million in the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to $8 million of investments in the Customer Experience Platform (“CxP”) and Terminix Way. This increase was partially offset by back-office reductions as we align ourself as a singularly focused pest management business.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Selling and administrative expenses increased $32 million. Incentive compensation increased $19 million driven by 2020 financial performance. The $6 million decrease in travel was driven by the impact of COVID-19 and limited travel in 2020. The decrease in corporate administrative expenses of $5 million was driven by actions taken to reduce the cost of our corporate headquarters operations. We also incurred incremental selling and administrative expenses of $12 million as a result of domestic acquisitions completed in the last 12 months.

Amortization Expense

Amortization expense was $40 million, $36 million and $25 million in the years ended December 31, 2021, 2020, and 2019, respectively. The increase in amortization expense primarily reflects the effect of increased acquisitions.

Acquisition-Related Costs (Adjustments)

We recognized income related to acquisitions of $1 million and less than $1 million and $16 million of acquisition-related costs in the years ended December 31, 2021, 2020 and 2019, respectively. In the year ended December 31, 2021, we adjusted previously accrued contingent consideration related to acquisitions of approximately $4 million as the contingencies were not met. This offset approximately $3 million of acquisition-related costs incurred in the year ended December 31, 2021. The decrease in acquisition-related costs for the year ended December 31, 2020 compared to 2019 primarily reflects the effect of decreased acquisition activity in 2020 compared to 2019.

Mobile Bay Formosan Termite Settlement

We recorded a charge of $49 million in the year ended December 31, 2020 for the Mobile Bay Formosan termite settlement (as defined below). We incurred $4 million of additional costs related to the Mobile Bay Formosan termite settlement in the year ended December 31, 2021, related to an increase in the projected customer response regarding certain remedies mandated by the Settlement. See Note 9 to the consolidated financial statements for more details.

Termite Damage Claims Reserve Adjustment

We recorded a charge of $53 million in the year ended December 31, 2019 for an adjustment of our reserves for termite damage claims. The adjustment is the result of a change in our estimation technique based on a detailed statistical assessment of claims history and case results. See Note 9 to the Consolidated Financial Statements for more details.

Fumigation Related Matters

We recorded charges of $2 million in the year ended December 31, 2021, for fumigation related matters. No similar charge was recorded in the years ended December 31, 2020 or 2019. See Note 9 to the Consolidated Financial Statements for more details.

Realized (Gain) Loss on Investment in frontdoor, inc.

We recorded a realized gain of $40 million related to the sale of our retained investment in Frontdoor in the year ended December 31, 2019.

Restructuring and Other Charges

We incurred restructuring charges of $19 million, $16 million and $12 million for the years ended December 31, 2021, 2020, and 2019, respectively. Restructuring Charges in 2021 primarily included costs related to the proposed acquisition by Rentokil and for 2021 and 2020 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. Other charges represent professional fees incurred that are not closely associated with our ongoing operations. Other charges were $2 million for the year ended December 31, 2019. We incurred no other charges for the years ended December 31, 2021 or 2020.

Interest Expense

Interest expense was $45 million, $83 million and $87 million for the years ended December 31, 2021, 2020 and 2019, respectively. The decrease in interest expense in 2021 and 2020 was principally driven by the retirement of all $750 million of our existing 5.125% Notes on November 15, 2020, using proceeds from the sale of the ServiceMaster Brands Divestiture Group.

Interest and Net Investment Income

Interest and net investment income was $2 million, $4 million and $5 million for the years ended December 31, 2021, 2020 and 2019, respectively, and comprised interest income on cash balances.

Loss on Extinguishment of Debt

A loss on extinguishment of debt of $26 million was recorded in the year ended December 31, 2020. We recorded a $1 million loss on extinguishment of debt related to an advanced amortization payment made on our Term Loan Facility, and a prepayment penalty of $19 million and write-off of debt issuance costs of $7 million on the retirement and repayment of our $750 million 5.125% Notes due 2024. A loss on extinguishment of debt of $8 million was recorded in the year ended December 31, 2019, related to the refinancing of our old Term Loan Facility on November 5, 2019. See Note 11 to the Consolidated Financial Statements for more details. There was no loss on extinguishment of debt for the year ended December 31, 2021.

Income from Continuing Operations before Income Taxes

Income from continuing operations before income taxes was $180 million, $41 million and $64 million for the years ended December 31, 2021, 2020 and 2019, respectively. The increase for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily driven by a reduction in Mobile Bay Formosan termite settlement costs, interest expense and not incurring any loss on extinguishment of debt.

The decrease for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily driven by the Mobile Bay Formosan termite settlement and a loss on the extinguishment of debt. The year ended December 31, 2019 also included a termite damage claims reserve adjustment and a realized gain on our investment in Frontdoor. There were no similar items in 2020.

Provision for Income Taxes

The effective tax rate on income from continuing operations was 31.4 percent, 58.1 percent and 7.3 percent for the years ended December 31, 2021, 2020 and 2019, respectively. The effective tax rate on income from continuing operations for the year ended December 31, 2021 was higher than expected primarily due to foreign deferred tax adjustments, additional costs related to the Rentokil transaction, penalties, and limits to the deductibility of compensation of certain executive officers as set forth by Section 162(m) of the Internal Revenue Code. The effective tax rate on income from continuing operations for the year ended December 31, 2020 was primarily unfavorably impacted by the Mobile Bay Formosan termite settlement as described in Note 9 to the Consolidated Financial Statements, the majority of which is not deductible for income tax purposes. Additional information on income taxes, including our effective tax rate reconciliation and liabilities for uncertain tax positions, can be found in Note 5 to the Consolidated Financial Statements.

Equity in Earnings of Joint Ventures

Equity in earnings of joint ventures were $2 million and $3 million in the years ended December 31, 2021 and 2020, primarily reflecting earnings from joint ventures entered into in 2019. Earnings from joint ventures in the year ended December 31, 2019 was less than $1 million.

Income from Continuing Operations

Income from continuing operations was $126 million, $20 million and $60 million for the years ended December 31, 2021, 2020 and 2019, respectively. The increase for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily driven by a $139 million increase in income from continuing operations before income taxes, resulting from a reductions in Mobile Bay Formosan termite settlement costs, interest expense and not incurring any loss on extinguishment of debt.

The decrease for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily driven by a $24 million decrease in income from continuing operations before income taxes, resulting from the $49 million Mobile Bay Formosan termite settlement and a $26 million loss on extinguishment of debt, both in 2020, offset in part by the $53 million termite damage claims reserve adjustment and $40 million realized gain on our investment in frontdoor inc., both from 2019.

Net Earnings (Loss) from Discontinued Operations

Net earnings (loss) from discontinued operations was $(1) million, $531 million and $69 million for the years ended December 31, 2021, 2020 and 2019, respectively, reflecting the operations of the ServiceMaster Brands Divestiture Group for each year, through September 30, 2020. The year ended December 31, 2020 includes the gain on the sale of the ServiceMaster Brands Divestiture Group of $494 million, net of income taxes.

Net Income (Loss)

Net income (loss) was $125 million, $551 million and $128 million for the years ended December 31, 2021, 2020 and 2019, respectively. The decrease for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily driven by $531 million lower net earnings from discontinued operation offset by a $106 million increase in income from continuing operations. The increase for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily driven by the gain recognized on the ServiceMaster Brands Divestiture Group, offset by a decrease in income from continuing operations of $40 million, driven by the Mobile Bay Formosan termite settlement and higher debt extinguishment costs.

Adjusted EBITDA

We use Adjusted EBITDA to facilitate operating performance comparisons from period to period. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities or any other measures of our cash flow or liquidity. Adjusted EBITDA means net income (loss) before: depreciation and amortization expense; amortization of cloud-based software, acquisition-related costs (adjustments); Mobile Bay Formosan termite settlement; termite damage claims reserve adjustment; non-cash stock-based compensation expense; restructuring and other charges; goodwill impairment charges; fumigation related matters; realized (gain) loss on investment in frontdoor, inc.; net earnings (loss) from discontinued operations; provision (benefit) for income taxes; loss on extinguishment of debt; and interest expense.

We believe Adjusted EBITDA facilitates company-to-company operating performance comparisons by excluding potential differences caused by variations in capital structures (affecting net interest income and expense), taxation, the age and book depreciation of facilities and equipment (affecting relative depreciation expense), restructuring initiatives, acquisition activities (affecting amortization and acquisition-related costs (adjustments)) and equity-based, long-term incentive plans, which may vary for different companies for reasons unrelated to operating performance.

Adjusted EBITDA is not necessarily comparable to other similarly titled financial measures of other companies due to the potential inconsistencies in the methods of calculation.

Adjusted EBITDA 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. Some of these limitations are:

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;

Adjusted EBITDA does not reflect historical capital expenditures or future requirements for capital expenditures or contractual commitments;

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

Other companies in our industries may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

The following table sets forth Adjusted EBITDA and reconciles Net Income (Loss) to Adjusted EBITDA for the periods presented, which we consider to be the most directly comparable GAAP financial measure:

(a)Represents incremental legal, accounting and other expenses associated with completed or contemplated acquisitions, cash retention bonuses and adjustments to contingent consideration recorded in connection with completed acquisitions. We exclude these charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(b)Represents a charge of $49 million and the prior period portion of a reduction of revenue of $2 million related to the Mobile Bay Formosan termite settlement as described in Note 9 to the consolidated financial statements. We also incurred $4 million of additional costs related to the Mobile Bay Formosan termite settlement in the year ended December 31, 2021, related to an increase in the projected customer response regarding certain remedies mandated by the Settlement. We have excluded this from Adjusted EBITDA because we believe it does not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(c)Represents an adjustment of the Company’s reserves for termite damage claims as described in Note 9 to the consolidated financial statements. The adjustment is the result of a change in estimation technique based on the outputs of a detailed statistical analysis of our recent termite damage claims history and case results. We have excluded this discrete fourth quarter 2019 adjustment from Adjusted EBITDA because we believe it does not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(d)Represents the non-cash expense of our equity-based compensation. We exclude this expense from Adjusted EBITDA primarily because it is a non-cash expense and because it is not used by management to assess ongoing operational performance. We believe excluding this expense from Adjusted EBITDA is useful to investors in aiding period-to-period comparability.

(e)For 2021, 2020, and 2019, represents restructuring and other charges described in Note 8 to the consolidated financial statements. We exclude these restructuring and other charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(f)Represents charges for fumigation related matters described in Note 9 to the consolidated financial statements. We exclude these charges from Adjusted EBITDA because we believe they do not reflect our ongoing operations and because we believe doing so is useful to investors in aiding period-to-period comparability.

(g)Represents a remeasurement gain and loss, respectively, related to our retained 19.8% investment in Frontdoor subsequent to the Distribution and driven by the change in Frontdoor’s stock price in the respective periods. We exclude these amounts from Adjusted EBITDA because this charge is not part of our ongoing operations and we believe doing so is useful to investors in aiding period-to-period comparability.

(h)Represents the historical results of the ServiceMaster Brands Divestiture Group which was sold on October 1, 2020 and is presented as discontinued operations herein. See Note 7 to the consolidated financial statements. We exclude these amounts from Adjusted EBITDA because these charges are not part of our ongoing operations and we believe doing so is useful to investors in aiding period-to-period comparability.

(i)For 2020 and 2019, represents a non-cash loss on extinguishment of debt as described in Note 11 to the consolidated financial statements.

The following table provides a summary of changes in Adjusted EBITDA from December 31, 2019 to December 31, 2021:

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Production labor increased $11 million, primarily due to increased turnover year-over-year as the labor markets improve. Direct productivity reduced costs $22 million year over year, including lower chemical costs, improvements in fleet management, lower fuel prices primarily related to favorable fuel hedge rates and subcontractor productivity from the insourcing of Copesan national accounts customers. Termite damage claims expenses decreased $2 million due to lower Non-litigated Claims counts in 2021, offset, in part, by higher cost per Non-litigated Claim due, in part, to inflationary pressure on building materials and contractor costs, primarily in the Mobile Bay Area. Medical costs increased $13 million due to increased medical claims and short-term disability costs as a result of the COVID-19 pandemic. Investments in CxP and Terminix Way increased $8 million as we prepare to launch the Terminix Way initiative and a phased deployment of CxP. The $7 million increase in insurance program was driven by additional favorable adjustments in our automobile, general liability and workers’ compensation program.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

The decrease in production labor was driven, in part, by improved teammate retention and labor management, partially offset by labor inefficiencies incurred in the first quarter of 2020 due to the impact of COVID-19. The decrease in vehicle and fuel was driven by improvements in fleet management and lower fuel prices. The increase in termite damage claims was driven by increased Non-litigated Claims and Litigated Claims, primarily in the Mobile Bay Area, as well as the costs of the termite damage claim mitigation program in the Mobile Bay Area. The increase in incentive compensation is driven by 2020 financial performance. The decrease in travel was driven by the impact of COVID-19 and limited travel in 2020. The decrease in corporate administrative expenses was driven by actions taken to reduce the cost of our corporate headquarters operations. The decrease in insurance program was driven by fewer favorable adjustments in our automobile, general liability and workers’ compensation program.

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 from continuing operations, less property additions, net of government grant fundings for 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 from continuing operations, which we consider to be the most directly comparable GAAP measure, to Free Cash Flow using data derived from our consolidated financial statements for the periods indicated: