What changed in this filing

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Item 1. Financial Statements

2022-08-04 compared with 2022-05-06 · 82 added, 57 removed, 403 unchanged (26% of the section changed)

3 unchanged sentences

Three Months Ended

Six Months Ended

Cost of services rendered

3 unchanged sentences

Interest expense

Interest and net investment income

Loss on extinguishment of debt

12 unchanged sentences

Receivables, less allowance of $ 3 and $ 2 , respectively

Contract asset

Prepaid expenses and other assets

24 unchanged sentences

2,000,000,000 shares authorized;

85,980,791 shares issued and 82,303,166 shares outstanding at March 31, 2022 and 85,798,765 shares issued and 83,232,481 shares outstanding as of December 31, 2021

86,048,827 shares issued and 81,487,995 shares outstanding at June 30, 2022 and 85,798,765 shares issued and 83,232,481 shares outstanding as of December 31, 2021

Additional paid-in capital

2 unchanged sentences

Less common stock held in treasury, at cost;

3,677,625 shares at March 31, 2022 and 2,566,284 shares as of December 31, 2021

Total (Deficit) Equity

4,560,832 shares at June 30, 2022 and 2,566,284 shares as of December 31, 2021

Total Liabilities and Shareholders'

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Changes in Deficit (Unaudited)

Condensed Consolidated Statement of Changes in Equity (Unaudited)

(In millions)

Three Months Ended

Six Months Ended

Balance at beginning of period

3 unchanged sentences

Exercise of stock options

Issuance of common stock

Taxes paid related to net share settlement of equity awards

12 unchanged sentences

Balance at end of period

Total Deficit

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

1 unchanged sentence

(In millions)

Three Months Ended

Six Months Ended

Cash and Cash Equivalents at Beginning of Period

2 unchanged sentences

Depreciation and amortization expense

Deferred income tax provision

Stock-based compensation expense

14 unchanged sentences

Cash Flows from Financing Activities:

Borrowings of debt, net of discount

Payments of debt and finance lease obligations

Debt issuance cost paid

Call premium paid on retired debt

Repurchase of common stock

1 unchanged sentence

Net Cash Used for Financing Activities

Cash Decrease During the Period

Cash Increase (Decrease) During the Period

Cash and Cash Equivalents at End of Period

7 unchanged sentences

Our operations also include our ProConnect on-demand home services business and Streem, a technology platform that uses augmented reality, computer vision and machine learning to, among other things, help home service professionals more quickly and accurately diagnose breakdowns and complete repairs.

At March 31, 2022, we had 2.2 million active home service plans across all 50 states and the District of Columbia.

At June 30, 2022, we had 2.2 million active home service plans across all 50 states and the District of Columbia.

We recommend that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2021 Form 10-K.

4 unchanged sentences

While these macroeconomic conditions generally impact the United States as a whole, we believe our nationwide presence limits the risk of poor economic conditions in any particular region of the United States.

During the first three months of 2022, our financial condition and results of operations were adversely impacted by the following:

 The challenging seller’s market, driven, in part, by extremely low home inventory levels, continued to constrain demand for home service plans in the first-year real estate channel.

During the first six months of 2022, our financial condition and results of operations were adversely impacted by the following:

 The challenging home seller’s market, driven, in part, by extremely low home inventory levels, continued to constrain demand for home service plans in the first-year real estate channel.

 Our contractors continued to be impacted by inflation, including higher labor, fuel and parts and equipment costs.

4 unchanged sentences

The implications of the ongoing COVID-19 pandemic on our results of operations and overall financial performance remain uncertain.

In response to the COVID-19 pandemic, we have taken a number of steps to protect the well-being of our employees, customers and contractors, and we continue to respond to the real-time needs of our business.

The COVID-19 situation remains very fluid, and we continue to adjust our response in real time.

Given the emergence of COVID-19 variants and surges in COVID-19 cases, a significant number of people may continue to spend greater time at home, which may result in a continued increase in usage of home systems and appliances and demand for our services and a resulting increase in service-related costs.

We also expect that industry-wide supply chain challenges may continue to contribute to increased costs and impact the customer experience, which may affect customer retention.

Accordingly, the COVID-19 situation remains very fluid, and we continue to adjust our response in real time.

It remains difficult to predict the overall continuing impact the COVID-19 pandemic will have on our business.

Significant Accounting Policies

Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in our 2021 Form 10-K.

There have been no material changes to the significant accounting policies for the three months ended March 31, 2022.

There have been no material changes to the significant accounting policies for the six months ended June 30, 2022.

The majority of our revenue is generated from annual home service plan agreements entered into with our customers.

10 unchanged sentences

Three Months Ended

Six Months Ended

(In millions)

14 unchanged sentences

We capitalize the incremental costs of obtaining a contract with a customer, primarily sales commissions, and recognize the expense using the input method in proportion to the costs expected to be incurred in performing services under the contract, over the expected customer relationship period.

Deferred customer acquisition costs were $ 18 million and $ 16 million as of March 31, 2022 and December 31, 2021, respectively.

Amortization of these deferred acquisition costs was $ 4 million for each of the three months ended March 31, 2022 and 2021.

Deferred customer acquisition costs were $ 18 million and $ 16 million as of June 30, 2022 and December 31, 2021, respectively.

Amortization of these deferred acquisition costs was $ 6 million for each of the three months ended June 30, 2022 and 2021 and $ 10 million for each of the six months ended June 30, 2022 and 2021.

There were no impairment losses in relation to these capitalized costs.

6 unchanged sentences

As a result, a contract asset is created when revenue is recognized on monthly-pay customers before being billed.

As of June 30, 2022, a contract asset of $ 12 million was recorded related to the recognition of monthly-pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

Deferred revenue represents a contract liability and is recognized when cash payments are received in advance of the performance of services, including when the amounts are refundable.

Amounts are recognized as revenue in proportion to the costs expected to be incurred in performing services under our contracts.

Deferred revenue was $ 190 million and $ 155 million as of March 31, 2022 and December 31, 2021, respectively, and, as of March 31, 2022, included a net contract liability of $ 45 million related to the recognition of monthly pay customer revenue on an other-than-straight-line basis to match the timing of cost recognition.

Changes in deferred revenue for the three months ended March 31, 2022 were as follows:

Deferred revenue was $ 126 million and $ 155 million as of June 30, 2022 and December 31, 2021, respectively.

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

(In millions)

2 unchanged sentences

Recognition of deferred revenue

Balance as of March 31, 2022

There was approximately $ 60 million of revenue recognized in the three months ended March 31, 2022, that was included in the deferred revenue balance as of December 31, 2021.

Deferred revenue increased during the three months ended March 31, 2022, reflecting the net contract liability discussed above, offset, in part, by a decline in the number of first-year real estate home service plans.

Balance as of June 30, 2022

There was approximately $ 62 million and $ 122 million of revenue recognized in the three and six months ended June 30, 2022, respectively, that was included in the deferred revenue balance as of December 31, 2021.

Deferred revenue decreased during the six months ended June 30, 2022, reflecting a decline in the number of first-year real estate home service plans.

Goodwill and Intangible Assets

1 unchanged sentence

An assessment for impairment is performed on October 1 of every year.

The balance of goodwill was $ 512 million as of March 31, 2022 and December 31, 2021.

There were no goodwill or trade name impairment charges recorded in the three months ended March 31, 2022 and 2021.

There were no accumulated impairment losses recorded as of March 31, 2022 and December 31, 2021.

The balance of goodwill was $ 512 million as of June 30, 2022 and December 31, 2021.

There were no goodwill or trade name impairment charges recorded in the six months ended June 30, 2022 and 2021.

There were no accumulated impairment losses recorded as of June 30, 2022 and December 31, 2021.

The table below summarizes the other intangible asset balances:

As of March 31, 2022

As of June 30, 2022

As of December 31, 2021

7 unchanged sentences

(1) Not subject to amortization.

Amortization expense was $ 2 million and $ 3 million for the three months ended March 31, 2022 and 2021, respectively.

Amortization expense was $ 2 million and $ 3 million for the three months ended June 30, 2022 and 2021, respectively, and $ 4 million and $ 6 million for the six months ended June 30, 2022 and 2021, respectively.

The following table outlines expected amortization expense for existing intangible assets for the remainder of 2022 and the next five years :

9 unchanged sentences

Weighted-average discount rate

We recognized operating lease expense of $ 1 million for each of the three months ended March 31, 2022 and 2021.

We recognized operating lease expense of $ 1 million for each of the three months ended June 30, 2022 and 2021 and $ 2 million for each of the six months ended June 30, 2022 and 2021 .

These expenses are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

Supplemental cash flow information related to operating leases is as follows:

Three Months Ended

Six Months Ended

(In millions)

9 unchanged sentences

Total operating lease liabilities

The following table presents maturities of our operating lease liabilities as of March 31, 2022.

The following table presents maturities of our operating lease liabilities as of June 30, 2022.

(In millions)

2 unchanged sentences

Less imputed interest

Sublease of Company Headquarters

It is the intent of the company to sublease our corporate headquarters facility in Memphis, Tennessee.

As a result of us exiting the facility on June 27, 2022, with intent to sublease, we incurred a non-cash impairment charge of $ 11 million for the three and six months ended June 30, 2022.

As required by ASC 740, we compute interim period income taxes by applying an anticipated annual effective tax rate to our year-to-date income or loss from operations before income taxes, except for significant unusual or infrequently occurring items.

Our estimated tax rate is adjusted each quarter in accordance with ASC 740.

The effective tax rate on income was 51.1 percent and 9.8 percent for the three months ended March 31, 2022 and 2021, respectively.

The increase in the effective tax rate for the three months ended March 31, 2022 compared to 2021 is primarily due to share-based awards, offset, in part, by a reduction in state income taxes and an increase in income tax credits.

The effective tax rate on income was 23.2 percent and 26.0 percent for the three months ended June 30, 2022 and 2021, respectively, and 25.1 percent and 24.5 percent for six months ended June 30, 2022 and 2021, respectively .

The decrease in the effective tax rate for the three months ended June 30, 2022 compared to 2021 is primarily due to share-based awards and income tax credits, offset, in part, by an increase in state income taxes.

The increase in the effective tax rate for the six months ended June 30, 2022 compared to 2021 is primarily due to share-based awards and state income taxes, offset, in part, by an increase in income tax credits.

We are subject to taxation in the United States, various states and foreign jurisdictions.

Pursuant to the terms of the tax matters agreement entered into with Terminix in connection with the Spin-off, we are not subject to federal examination by the IRS or examination by state taxing authorities where a unitary or combined state income tax return is filed for the years prior to 2018.

We are not subject to state and local income tax examinations by tax authorities in jurisdictions where separate income tax returns are filed for the years prior to 2017.

Substantially all of our income before income taxes for the three months ended March 31 , 2022 and 2021 was generated in the United States.

Substantially all of our income before income taxes for the six months ended June 30 , 2022 and 2021 was generated in the United States.

Restructuring Charges

We incurred restructuring charges of $ 12 million ($ 9 million, net of tax) and $ 1 million (less than $ 1 million, net of tax) for the three months ended June 30, 2022 and 2021, respectively, and $ 12 million ($ 9 million, net of tax) and $ 2 million ($ 1 million, net of tax) for the six months ended June 30, 2022 and 2021, respectively.

For the three and six months ended June 30, 2022, restructuring charges primarily comprised an $ 11 million impairment charge related to our Memphis headquarters facility operating lease right-of-use asset and leasehold improvements and $ 1 million of severance and other costs.

The impairment was the result of vacating the facility with the intent to sublease.

For the three months ended June 30, 2021 , restructuring charges primarily comprised accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities.

For the six months ended June 30, 2021, restructuring charges comprised $ 1 million of accelerated depreciation of certain technology systems driven by efforts to enhance our technological capabilities and $ 1 million of severance and other costs.

The pre-tax charges discussed above are reported in “Restructuring charges” in the accompanying consolidated statements of operations and comprehensive income.

As of December 31, 2021, there were less than $ 1 million of restructuring charges accrued, which were paid or otherwise settled during the six months ended June 30, 2022.

As of June 30, 2022, there were $ 1 million in accrued restructuring charges in the accompanying condensed consolidated statements of financial position.

Commitments and Contingencies

14 unchanged sentences

Stock-Based Compensation

We recognized stock-based compensation expense of $ 6 million ($ 6 million, net of tax) and $ 6 million ($ 4 million, net of tax) for the three months ended March 31, 2022 and 2021, respectively .

We recognized stock-based compensation expense of $ 6 million ($ 4 million, net of tax) and $ 8 million ($ 6 million, net of tax) for the three months ended June 30, 2022 and 2021, respectively, and $ 12 million ($ 10 million, net of tax) and $ 13 million ($ 10 million, net of tax) for the six months ended June 30, 2022 and 2021, respectively.

These charges are included in Selling and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

A summary of awards granted under the Omnibus Plan during the three months ended March 31, 2022 is presented below:

A summary of awards granted under the Omnibus Plan during the six months ended June 30, 2022 is presented below:

Weighted Avg.

2 unchanged sentences

Stock options

Performance options (1)

Restricted stock units

1 unchanged sentence

_____________________________

(1) The number of performance shares granted during the three months ended March 31, 2022 represents the target value of the awards.

(1) The number of performance options granted during the six months ended June 30, 2022 represents the target value of the awards.

The performance options contain a market condition that is based on our share price target, and the ultimate number of performance options to be earned depends on the achievement of this market condition.

(2) The number of performance shares granted during the six months ended June 30, 2022 represents the target value of the awards.

The performance shares contain a performance condition that is based on our revenue target, and the ultimate number of performance shares to be earned depends on the achievement of this performance condition.

As of March 31, 2022 , there was $ 73 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, restricted stock units (“RSUs”), performance shares and restricted stock awards (“RSAs”).

As of June 30, 2022 , there was $ 57 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, restricted stock units (“RSUs”), performance shares and restricted stock awards (“RSAs”).

These remaining costs are expected to be recognized over a weighted-average period of 2.48 years.

8 unchanged sentences

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(1) As of March 31, 2022 , and December 31, 2021, each presented net of $ 2 million in unamortized debt issuance costs.

(2) As of March 31, 2022 , and December 31, 2021, each presented net of $ 3 million in unamortized debt issuance costs and $ 2 million in unamortized original issue discount.

(1) As of June 30, 2022 , and December 31, 2021, each presented net of $ 2 million in unamortized debt issuance costs.

(2) As of June 30, 2022 , and December 31, 2021, each presented net of $ 3 million in unamortized debt issuance costs and $ 2 million in unamortized original issue discount.

Scheduled Long-term Debt Payments

As of March 31, 2022, future scheduled long - term debt payments are $ 13 million for the remainder of 2022, $ 17 million for each of the years ending December 31, 2023 through 2025, $ 205 million for the year ending December 31, 2026 and $ 4 million for the year ending December 31, 2027.

As of June 30, 2022, future scheduled long - term debt payments are $ 8 million for the remainder of 2022, $ 17 million for each of the years ending December 31, 2023 through 2025, $ 205 million for the year ending December 31, 2026 and $ 4 million for the year ending December 31, 2027.

Supplemental Cash Flow Information

Supplemental information relating to the accompanying condensed consolidated statements of cash flows is presented in the following table:

Three Months Ended

Six Months Ended

(In millions)

15 unchanged sentences

Net current period other comprehensive income (loss)

Balance as of March 31, 2022

Balance as of June 30, 2022

Balance as of December 31, 2020

6 unchanged sentences

Net current period other comprehensive income (loss)

Balance as of March 31, 2021

Balance as of June 30, 2021

___________________________________

4 unchanged sentences

Other Comprehensive Income (Loss)

Three Months Ended

Six Months Ended

Condensed Consolidated Statements of

19 unchanged sentences

See Note 13 to the accompanying condensed consolidated financial statements for the effective portion of the gain or loss on derivative instruments recorded in AOCI and for the amounts reclassified out of AOCI and into earnings.

As the underlying forecasted transactions occur during the next 12 months, the unrealized hedging loss in AOCI expected to be recognized in earnings is $ 3 million, net of tax, as of March 31, 2022 .

As the underlying forecasted transactions occur during the next 12 months, the unrealized hedging loss in AOCI expected to be recognized in earnings is less than one million, net of tax, as of June 30, 2022 .

The amounts that are ultimately reclassified into earnings will be based on actual interest rates at the time the positions are settled and may differ materially from the amount noted above.

7 unchanged sentences

The period-end carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments.

The carrying amount of total debt was $ 621 million and $ 625 million, and the estimated fair value was $ 626 million and $ 630 million as of March 31, 2022 and December 31, 2021, respectively.

The carrying amount of total debt was $ 617 million and $ 625 million, and the estimated fair value was $ 613 million and $ 630 million as of June 30, 2022 and December 31, 2021, respectively.

The fair value of our debt is estimated based on available market prices for the same or similar instruments that are considered significant other observable inputs (Level 2) within the fair value hierarchy.

The fair values presented reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

The fair value estimates presented in this report are based on information available to us as of March 31, 2022 and December 31, 2021.

The fair value estimates presented in this report are based on information available to us as of June 30, 2022 and December 31, 2021.

We value our interest rate swap contract using a forward interest rate curve obtained from a third-party market data provider.

1 unchanged sentence

The expected future settlements are determined by comparing the contract interest rate to the expected forward interest rate as of each settlement date and applying the difference between the two rates to the notional amount of debt in the interest rate swap contract.

We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the three months ended March 31, 2022 .

We did not change our valuation techniques for measuring the fair value of any financial assets and liabilities during the six months ended June 30, 2022 .

Transfers between levels, if any, are recognized at the end of the reporting period.

There were no transfers between levels during the three months ended March 31, 2022 and 2021.

There were no transfers between levels during the six months ended June 30, 2022 and 2021.

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

4 unchanged sentences

‎ Unobservable

As of March 31, 2022:

As of June 30, 2022:

Financial Liabilities:

13 unchanged sentences

Three Months Ended

Six Months Ended

(In millions, except per share data)

6 unchanged sentences

Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period.

Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued.

The dilutive effect of stock options, RSUs , performance shares and RSAs are reflected in diluted earnings per share by applying the treasury stock method.

2 unchanged sentences

Three Months Ended

Six Months Ended

(In millions, except per share data)

6 unchanged sentences

___________________________________

(1) RSUs of 0.4 million shares for the three months ended March 31, 2022 were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

There were no such anti-dilutive RSUs for the three months ended March 31, 2021.

(2) Options to purchase 1.2 million shares for the three months ended March 31, 2022 were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

There were no such anti-dilutive options for the three months ended March 31, 2021.

(1) RSUs of 1.0 million and 0.2 million shares for the three months ended June 30, 2022 and 2021, respectively, and 0.9 million and 0.1 million shares for the six months ended June 30, 2022 and 2021, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

(2) Options to purchase 1.6 million and 0.2 million shares for the three months ended June 30, 2022 and 2021 , respectively, and 1.4 million and 0.1 million shares for the six months ended June 30, 2022 and 2021, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

12 unchanged sentences

Risk Factors in our 2021 Annual Report on Form 10-K filed with the SEC, in addition to the following other factors, risks, trends and uncertainties:

 changes in macroeconomic conditions, including inflation, global supply chain challenges and the persistence of the COVID-19 pandemic, especially as they may affect existing home sales, interest rates, consumer confidence or labor availability;

 increases in parts, appliance and home system prices, and other operating costs;

 risks related to the COVID-19 pandemic;

2 unchanged sentences

 our ability to attract, retain and maintain positive relations with third-party contractors and vendors;

 increases in parts, appliance and home system prices, and other operating costs;

 physical effects of climate change, adverse weather conditions and Acts of God, along with the increased focus on sustainability;

26 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements