Rentokil(US:RTO)2024-03-27 10:05PART I Key Information This section outlines the most significant risks to the company's business, operations, and financial performance Risk Factors The company identifies material risks including acquisition integration, cybersecurity, termite claims, and a material weakness in internal controls - The company's growth strategy includes significant acquisition activity, having acquired 41 new businesses in 2023, which presents substantial integration risks33 - In 2023, the company encountered seven cybersecurity incidents, and while only one had an immaterial financial impact, this highlights the increasing prevalence of cyber threats40 - The legacy Terminix business is subject to a significant number of damage claims related to its termite control services, which could materially affect financial results69 - A material weakness in internal control over financial reporting was identified, stemming from a failure to design and maintain effective IT general controls8284 - As of December 31, 2023, the company had approximately £3.1 billion in aggregate outstanding indebtedness, governed by agreements that contain restrictive covenants90 Information on the Company This section provides an overview of the company's history, business operations, organizational structure, and physical assets History and Development of the Company This subsection details key historical milestones, including the 1996 BET plc acquisition and the 2022 Terminix acquisition - The company became Rentokil Initial in 1996 after acquiring BET plc and significantly expanded its U.S. presence in 2022 by acquiring Terminix Global Holdings, Inc97 Property, Plants and Equipment This subsection provides a geographical breakdown of the company's 1,933 owned and leased facilities across 77 countries Number of Facilities by Region (as of Dec 31, 2023) | Region | Number of Facilities | | :--- | :--- | | North America | 707 | | Europe (incl. LATAM) | 377 | | UK and Sub-Saharan Africa | 107 | | Asia and MENAT | 687 | | Pacific | 55 | | Total | 1,933 | Operating and Financial Review and Prospects This section notes the company's major R&D facilities and the opening of a new North American Innovation Centre in March 2024 - The company's major research and development facilities are located in the UK and the U.S., with a new Rentokil Terminix North America Innovation Centre opened in March 2024119 Directors, Senior Management and Employees This section details the company's leadership, employee base, and share ownership structures Group Employees by Region | Region | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | North America | 21,965 | 21,309 | 10,316 | | Europe (incl. LATAM) | 12,959 | 11,451 | 9,386 | | UK & Sub-Saharan Africa | 5,703 | 4,889 | 7,833 | | Asia & MENAT | 19,609 | 18,457 | 16,216 | | Pacific | 2,695 | 2,486 | 2,280 | | Total | 62,931 | 58,592 | 46,031 | - Following a revision to the 2022 financial statements, the Remuneration Committee concluded that no incentive compensation was erroneously awarded, and therefore no recovery was required163164 Share Ownership This subsection provides detailed information on the shareholdings of the company's Directors and Executive Leadership Team as of March 2024 Directors' Share Interests (as of March 25, 2024) | Director | Number of ordinary shares | | :--- | :--- | | Richard Solomons | 84,900 | | Andy Ransom | 1,752,689 | | Stuart Ingall-Tombs | 195,408 | | David Frear | 8,125 | | Sally Johnson | 3,527 | | Sarosh Mistry | 1,850 | | John Pettigrew | 55,000 | | Julie Southern (as of May 10, 2023) | 9,891 | | Cathy Turner | 24,736 | | Linda Yueh | 1,590 | Major Shareholders and Related Party Transactions This section identifies the company's major shareholders, with The Capital Group Companies, Inc holding the largest declared interest Disclosed Major Shareholdings (as of Dec 31, 2023) | Shareholder | Interest (%) | | :--- | :--- | | The Capital Group Companies, Inc. | 5.12% | | GIC Private Limited | 3.01% | | The Goldman Sachs Group, Inc. | 2.50% | Additional Information This section covers material contracts, exchange controls, and taxation, including details on the Terminix acquisition financing - The acquisition of Terminix was financed in part by a $700 million term facility and the issuance of New Senior Notes with maturities from 2027 to 2032187188193 - There are no UK governmental laws restricting the remittance of dividends to non-resident holders of ordinary shares or ADSs, subject to economic sanctions199 Description of Securities Other Than Equity Securities This section details the fees payable by American Depositary Share (ADS) holders and reimbursements from the depositary to the company ADS Holder Fees and Charges | Category | Associated fee or charge | | :--- | :--- | | Issuances upon deposits of shares | Up to $5.00 per 100 ADSs | | Distributions (stock or cash) | Up to $0.05 per ADS | | Exercise of rights | Up to $5.00 per 100 ADSs | | Surrendering ADSs for cancellation | Up to $5.00 per 100 ADSs | | Depositary services fee (annual) | Up to $0.05 per ADS | - The company received or is due to receive approximately $6.45 million from the Depositary (BNY Mellon) for the year ended December 31, 2023250 PART II Controls and Procedures This section reports that both disclosure controls and internal controls were not effective as of year-end 2023 due to a material weakness - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of December 31, 2023, due to a material weakness256 - Management concluded that internal control over financial reporting was not effective due to a material weakness in IT general controls over user access and change management258259 - The company successfully remediated a previously identified material weakness related to a lack of sufficient technical accounting resources262263 Corporate Governance and Other Matters This part covers governance topics, including accountant fees, share repurchases, and differences between UK and NYSE governance standards Principal Accountant Fees (PricewaterhouseCoopers LLP) | Fee Type | 2023 (£ million) | 2022 (£ million) | | :--- | :--- | :--- | | Audit fees | 8 | 7 | | Audit-related fees | 3 | 2 | | Tax fees | — | — | | All other fees | — | 3 | | Total | 11 | 12 | - The company made no repurchases of its own shares during the year ended December 31, 2023, despite shareholder authorization274 - As a foreign private issuer, the company follows the UK Corporate Governance Code, which has significant differences from NYSE standards for domestic companies276280282 PART III Financial Statements This section contains the audited consolidated financial statements for fiscal years 2021-2023 and the auditor's report Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting - The auditor issued an adverse opinion on the Group's internal control over financial reporting as of December 31, 2023, because of a material weakness in IT general controls305306 - Critical Audit Matters identified were the impairment assessment of goodwill (£5,016 million) and the valuation of the termite damage claims provision (£260 million)312313316 Consolidated Financial Statements The financial statements show significant growth in 2023, with revenue reaching £5.4 billion and profit for the year rising to £381 million Consolidated Statement of Profit or Loss Highlights (in £m) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | 5,375 | 3,714 | 2,957 | | Operating profit | 625 | 317 | 347 | | Profit for the year | 381 | 232 | 263 | | Basic EPS (pence) | 15.14p | 11.57p | 14.16p | Consolidated Balance Sheet Highlights (in £m) | Metric | 2023 | 2022 (adjusted) | | :--- | :--- | :--- | | Total Non-current assets | 8,430 | 8,705 | | Total Current assets | 2,697 | 3,237 | | Total assets | 11,127 | 11,942 | | Total liabilities | (7,039) | (7,844) | | Total equity | 4,088 | 4,098 | Consolidated Cash Flow Highlights (in £m) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 737 | 600 | 563 | | Net cash from investing activities | (416) | (1,197) | (441) | | Net cash from financing activities | (361) | 1,323 | (417) | | Net (decrease)/increase in cash | (40) | 726 | (295) | Notes to the Consolidated Financial Statements The notes detail key accounting estimates, segment performance, business combinations, and the company's net debt position Revenue and Adjusted Operating Profit by Region (2023, in £m) | Region | Revenue | Adjusted Operating Profit | | :--- | :--- | :--- | | North America | 3,306 | 617 | | Europe (incl. LATAM) | 1,081 | 215 | | UK & Sub-Saharan Africa | 390 | 94 | | Asia & MENAT | 339 | 45 | | Pacific | 249 | 55 | - The provision for termite damage claims, a significant liability from the Terminix acquisition, stood at £260 million as of December 31, 2023429431 - In 2023, the Group acquired 41 companies for a total consideration of £261 million, adding £173 million in goodwill503504 - As of December 31, 2023, the company's net debt was £3,146 million, a slight decrease from £3,279 million at year-end 2022570