10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on July 26, 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the
quarterly period ended
or
For the transition period from to
Commission File
Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Zip Code)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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 and posted on its corporate Web site, if any, 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 and post 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.
| x | Accelerated filer | o | |
| Non-accelerated filer | o | Smaller reporting company | |
| Emerging growth company |
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | o | No |
Rollins, Inc. had shares of its $1 par value Common Stock outstanding as of July 16, 2019.
ROLLINS, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF June 30, 2019 AND DECEMBER 31, 2018
(in thousands except share data)
| June 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables, net of allowance for doubtful accounts of $ |
||||||||
| Financed receivables, short-term, net of allowance for doubtful accounts of $ |
||||||||
| Materials and supplies | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Equipment and property, net | ||||||||
| Goodwill | ||||||||
| Customer contracts, net | ||||||||
| Trademarks & tradenames, net | ||||||||
| Other intangible assets, net | ||||||||
| Operating lease, right-of-use assets | ||||||||
| Financed receivables, long-term, net of allowance for doubtful accounts of $ |
||||||||
| Prepaid Pension | ||||||||
| Deferred income taxes | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued insurance | ||||||||
| Accrued compensation and related liabilities | ||||||||
| Unearned revenues | ||||||||
| Operating lease liabilities - current | ||||||||
| Current portion of long-term debt | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Accrued insurance, less current portion | ||||||||
| Operating lease liabilities, less current portion | ||||||||
| Long-term debt | ||||||||
| Long-term accrued liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock, without par value; shares authorized, shares issued | ||||||||
| Common stock, par value $ per share; and shares authorized, and shares issued and outstanding, respectively | ||||||||
| Paid in capital | ||||||||
| Accumulated other comprehensive loss | ( |
) | ( |
) | ||||
| Retained earnings | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(in thousands per except share data)
(unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| REVENUES | ||||||||||||||||
| Customer services | $ | $ | $ | $ | ||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Cost of services provided | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Sales, general and administrative | ||||||||||||||||
| Gain on sale of assets, net | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest (income)/expense, net | ||||||||||||||||
| INCOME BEFORE INCOME TAXES | ||||||||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| NET INCOME PER SHARE - BASIC AND DILUTED | $ | $ | $ | $ | ||||||||||||
| DIVIDENDS PAID PER SHARE | $ | $ | $ | $ | ||||||||||||
| Weighted average participating shares outstanding - basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(in thousands)
(unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| Other comprehensive (loss) earnings | ||||||||||||||||
| Change in derivative | ( |
) | ( |
) | ||||||||||||
| Foreign currency translation adjustments | ( |
) | ( |
) | ||||||||||||
| Other comprehensive (loss) earnings | ( |
) | ( |
) | ||||||||||||
| Comprehensive earnings | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(In thousands) (unaudited)
|
Common Stock |
Paid-in-capital | Accumulated Other Comprehensive income/ (loss) |
Retained Earnings |
Total | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balance at March 31, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( |
) | ( |
) | |||||||||||||||||||
| Cash dividends | — | ( |
) | ( |
) | |||||||||||||||||||
| Stock compensation | ( |
) | ||||||||||||||||||||||
| Employee stock buybacks | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Balance at June 30, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
Common Stock |
Paid-in-capital | Accumulated Other Comprehensive income/ (loss) |
Retained Earnings |
Total | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balance at December 31, 2017 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( |
) | ( |
) | |||||||||||||||||||
| Cash dividends | — | ( |
) | ( |
) | |||||||||||||||||||
| Stock compensation | ( |
) | ||||||||||||||||||||||
| Employee stock buybacks | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Balance at June 30, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
Common Stock |
Paid-in-capital | Accumulated Other Comprehensive income/ (loss) |
Retained Earnings |
Total | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balance at March 31, 2019 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Change in derivatives | — | — | — | (257 | ) | — | (257 | ) | ||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Cash dividends | — | ( |
) | ( |
) | |||||||||||||||||||
| Stock compensation | ( |
) | ( |
) | ||||||||||||||||||||
| Employee stock buybacks | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
Common Stock |
Paid-in-capital | Accumulated Other Comprehensive income/ (loss) |
Retained Earnings |
Total | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Impact of adoption of ASC 842 | — | — | — | — | 212 | 212 | ||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Change in derivatives | — | — | — | (257 | ) | — | (257 | ) | ||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Cash dividends | — | ( |
) | ( |
) | |||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||
| Employee stock buybacks | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
ROLLINS, INC. AND SUBSIDIARIES
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018 | ||||||||
| (in thousands) | ||||||||
| (unaudited) | ||||||||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision for deferred income taxes | ||||||||
| Provision for bad debts | ||||||||
| Stock - based compensation expense | ||||||||
| Other, net | ( |
) | ( |
) | ||||
| Changes in operating assets and liabilities | ( |
) | ( |
) | ||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Cash used for acquisitions of companies, net of cash acquired | ( |
) | ( |
) | ||||
| Purchases of equipment and property | ( |
) | ( |
) | ||||
| Proceeds from sales of franchises | ||||||||
| Other | ||||||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| FINANCING ACTIVITIES | ||||||||
| Cash paid for common stock purchased | ( |
) | ( |
) | ||||
| Dividends paid | ( |
) | ( |
) | ||||
| Repayments of long-term debt | ( |
) | ||||||
| Borrowings under Term Loan | ||||||||
| Borrowings under Revolving Commitment | ||||||||
| Net cash used in financing activities | ( |
) | ||||||
| Effect of exchange rate changes on cash | ( |
) | ( |
) | ||||
| Net increase/(decrease) in cash and cash equivalents | ( |
) | ( |
) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Non-cash additions to operating lease right-of-use assets | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
ROLLINS, INC. AND SUBSIDIARIES
NOTE 1. BASIS OF PREPARATION AND OTHER
Basis of Preparation -The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. There has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Rollins, Inc. (the “Company”) for the year ended December 31, 2018 other than updates related to Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842) as noted below. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2018 Annual Report on Form 10-K.
The preparation of interim financial statements requires management to make estimates and assumptions for the amounts reported in the condensed consolidated financial statements. Specifically, the Company makes estimates in its interim condensed consolidated financial statements for the termite accrual, which includes future costs including termiticide life expectancy and government regulations, the insurance accrual, which includes self-insurance and worker's compensation, inventory adjustments, discounts and volume incentives earned, among others.
In the opinion of management, all adjustments necessary for a fair presentation of the Company's financial results for the interim periods have been made. These adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2019 are not necessarily indicative of results for the entire year.
The Company
has only
Derivative Instruments and Hedging Activities
Accounting Policy for Derivative Instruments and Hedging Activities
FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company's objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
| 6 |
ROLLINS, INC. AND SUBSIDIARIES
In accordance with the FASB's fair value measurement guidance [in ASU 2011-04], the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Three-for-Two Stock Split
All share and per share data presented have been adjusted to account for the three-for-two stock split effective December 10, 2018.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting standards
The Company
adopted ASU 2016-02, Leases (ASC 842), on January 1, 2019 using the modified retrospective approach and did not restate comparative
periods as permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements. We have elected the transition package of practical
expedients, which permitted us not to reassess our prior conclusions regarding lease identification, lease classification and
initial direct cost. Upon adoption, the Company recognized operating lease right-of-use assets and liabilities of $
The Company adopted ASU 2018-02, “Income Statement—Reporting Comprehensive Income (ASC 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”). The Company adopted ASU 2018-02 effective January 1, 2019 and elected not to recognize a cumulative-effect adjustment.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (ASC 815), which provides new guidance intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. This ASU was adopted by the Company in 2019. The adoption of this ASU did not have an impact on the Company's consolidated financial statements.
Recently issued accounting standards to be adopted in 2020 or later
In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (ASC 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on the current Step 1). The standard in this update is effective for the Company's financial statements issued for fiscal years beginning in 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
| 7 |
ROLLINS, INC. AND SUBSIDIARIES
NOTE 3. REVENUE
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.
The following tables present our revenues disaggregated by revenue source (in thousands).
Sales and usage-based taxes are excluded from revenues. No sales to an individual customer or in a country other than the United States accounted for more than 10% of the sales for the periods listed on the following table. Revenue, classified by the major geographic areas in which our customers are located, was as follows:
| (In thousands) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Other countries | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
Revenue from external customers, classified by significant product and service offerings, was as follows:
| (In thousands) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Residential revenue | $ | $ | $ | $ | ||||||||||||
| Commercial revenue | ||||||||||||||||
| Termite completions, bait monitoring, & renewals | ||||||||||||||||
| Franchise revenues | ||||||||||||||||
| Other revenues | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
The Company follows ASC 260, Earnings Per Share (ASC 260) that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to participating common stockholders by the weighted average number of participating common shares outstanding for the period.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Basic and diluted earnings per share | ||||||||||||||||
| Common stock | $ | $ | $ | $ | ||||||||||||
| Restricted shares of common stock | $ | $ | $ | $ | ||||||||||||
NOTE 5. CONTINGENCIES
In the normal course of business, certain of the Company's subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the subsidiaries' services caused damage. In addition, the Company defends employment related cases and claims from time to time. We are involved in certain environmental matters primarily arising in the normal course of business. We are actively contesting each of these matters.
Management does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate will have a material adverse effect on the Company's financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual quarter or year.
| 8 |
ROLLINS, INC. AND SUBSIDIARIES
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company's financial instruments consist of cash and cash equivalents, trade receivables, notes receivable,
accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their
respective fair values. The Company entered into a new Credit Agreement with SunTrust Bank and Bank of America, N.A. for an
unsecured Revolving Commitment of up to $
At June 30, the Company had a $26.9 million of earnout liability with the former owners of acquired companies. The earnouts were discounted on the Company's books using the Monte-Carlo simulation valuation model at $26.9 million of level 3 liabilities.
| Recurring Fair Value Measurements | |||||||||||||||||||||||||||||||
| Quoted Prices in Active | |||||||||||||||||||||||||||||||
| Markets for Identical | Significant Other | Significant Unobservable | |||||||||||||||||||||||||||||
| Assets and Liabilities | Observable Inputs | Inputs | |||||||||||||||||||||||||||||
| at June 30, | at June 30, | at June 30, | Total Fair Value | ||||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | at June 30, | ||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||
| Acquisition earnouts | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Level 3 Rollforward The table below presents a summary of the changes in fair value for level 3 assets and liabilities.
The table below disaggregates, by product type, the information for assets and liabilities included in the summary table above.
| Six Months Ended | ||||||||
| June 30, 2019 | ||||||||
| (in thousands) | 2019 | 2018 | ||||||
| Acquisition earnouts booked using the Monte-Carlo Simulation Model | ||||||||
| Beginning balance | $ | $ | ||||||
| New acquisition earnouts | ||||||||
| Adjustments and Accrued Interest | ||||||||
| Earnout payments | ( |
) | ( |
) | ||||
| Ending balance | $ | $ | ||||||
NOTE 7. UNEARNED REVENUE
Changes in unearned revenue were as follows:
| For the period ended | June 30, | December 31 | June 30, | |||||||||
| (in thousands) | 2019 | 2018 | 2018 | |||||||||
| Balance at beginning of year | $ | $ | $ | |||||||||
| Deferral of unearned revenue | ||||||||||||
| Recognition of unearned revenue | ( |
) | ( |
) | ( |
) | ||||||
| Balance at end of period | $ | $ | $ | |||||||||
Deferred
revenue recognized in the three and six months ended June 30, 2019 and 2018 were $40.5 million and $
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes both unearned revenue and revenue that will be invoiced and recognized in future periods. The Company has no material contracted not recognized revenue as of June 30, 2019 or December 31, 2018.
At June
30, 2019 and December 31, 2018, the Company had long-term unearned revenue of $
NOTE 8. LEASES
The Company leases certain buildings, vehicles, and equipment in order to reduce the risk associated with ownership. The Company elected the practical expedient approach permitted under ASC 842 not to include short-term leases with a duration of 12 months or less on the balance sheet. As of June 30, 2019 and December 31, 2018, all leases were classified as operating leases. Building leases generally carry terms of 5 to 10 years with annual rent escalations at fixed amounts per the lease. Vehicle leases generally carry a fixed term of one year with renewal options to extend the lease on a monthly basis resulting in lease terms up to 5 years depending on the class of vehicle. The exercise of renewal options is at the Company's sole discretion. It is reasonably certain that the Company will exercise the renewal options on its vehicle leases. The measurement of right-of-use assets and liabilities for vehicle leases includes the fixed payments associated with such renewal periods. We separate lease and nonlease components of contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants.
| 9 |
ROLLINS, INC. AND SUBSIDIARIES
The Company uses the rate implicit in the lease when available; however, most of our leases do not provide a readily determinable implicit rate. Accordingly, we estimate our incremental borrowing rate based on information available at lease commencement.
| (in thousands) | ||||||
| Lease Classification | Financial Statement Classification | Six Months Ended June 30, 2019 |
||||
| Short-term lease cost | Cost of services provided, Sales, general, and administrative expenses | $ | ||||
| Operating lease cost | Cost of services provided, Sales, general, and administrative expenses | |||||
| Total lease expense | $ | |||||
| Other Information | ||||||
| Weighted-average remaining lease term - operating leases | ||||||
| Weighted-average discount rate - operating leases | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||
| Operating cash flows for operating leases | ||||||
Lease Commitments
Future minimum lease payments at June 30, 2019 were as follows:
| (in thousands) | Operating Leases |
|||
| 2019 (excluding the six months ended June 30, 2019) | $ | |||
| 2020 | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total future minimum lease payments | ||||
| Less: Amount representing interest | ||||
| Total future minimum lease payments, net of interest | $ | |||
Total
future minimum lease payments for operating leases, including the amount representing interest, are comprised of $
Future commitments under operating leases as of December 31, 2018 are as summarized:
| (in thousands) | Operating Leases |
|||
| 2019 | $ | |||
| 2020 | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| Thereafter | ||||
| Total future minimum lease payments, net of interest | $ | |||
Future commitments presented in the table above exclude lease payments in renewal periods for which it is reasonably certain that the Company will exercise the renewal option.
| 10 |
ROLLINS, INC. AND SUBSIDIARIES
NOTE 9. STOCKHOLDERS' EQUITY
During the six months ended June 30, 2019, the Company paid $68.7 million or $ per share in cash dividends compared to $61.1 million or $ per share during the same period in 2018.
During the second quarter ended June 30, 2019 and during the same period in 2018 the Company did not repurchase shares on the open market.
The Company
repurchases shares from employees for the payment of taxes on restricted shares that have vested. The Company repurchased $
As more fully discussed in Note 17 of the Company's notes to the consolidated financial statements in its 2018 Annual Report on Form 10-K, time-lapse restricted shares and restricted stock units have been issued to officers and other management employees under the Company's Employee Stock Incentive Plans. The Company issues new shares from its authorized but unissued share pool. At June 30, 2019, approximately million shares of the Company's common stock were reserved for issuance.
Time Lapse Restricted Shares and Restricted Stock Units
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Time lapse restricted stock: | ||||||||||||||||
| Pre-tax compensation expense | $ | $ | $ | $ | ||||||||||||
| Tax benefit | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Restricted stock expense, net of tax | $ | $ | $ | $ | ||||||||||||
The following table summarizes information on unvested restricted stock outstanding as of June 30, 2019:
| Number of Shares |
Average Grant- Date Fair Value |
|||||||
| Unvested Restricted Stock at December 31, 2018 | $ | |||||||
| Forfeited | ( |
) | ||||||
| Vested | ( |
) | ||||||
| Granted | ||||||||
| Unvested Restricted Stock at March 31, 2019 | $ | |||||||
At June 30, 2019 and December 31, 2018, the Company had $ million and $ million of total unrecognized compensation cost, respectively, related to time-lapse restricted shares that are expected to be recognized over a weighted average period of approximately years and years, respectively.
| 11 |
ROLLINS, INC. AND SUBSIDIARIES
NOTE 10. PENSION AND POST RETIREMENT BENEFIT PLAN
The following table represents the net periodic pension benefit costs and related components in accordance with FASB ASC 715 “Compensation Retirement Benefits”:
Components of Net Pension Benefit Loss/(Gain)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (in thousands) | 2019 | 2018 | 2018 | 2017 | ||||||||||||
| Interest and service cost | $ | $ | $ | $ | ||||||||||||
| Expected return on plan assets | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Amortization of net loss | ||||||||||||||||
| Net periodic loss/(benefit) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
During the six months ended June 30, 2019 and the same period in 2018 the Company made no contributions to its defined benefit retirement plans (the “Plans”). The Company made no contributions for the year ended December 31, 2018. The Company is adequately funded on its Plans and is not expecting to make further contributions in 2019.
The Company has initiated the process to transition its Pension Plan to an insurance provider. The process should be completed by the end of September 30, 2019. The Company's Pension Plan is currently more than 100% funded.
NOTE 11. BUSINESS COMBINATIONS
The Company
made
Acquisition of Clark Pest Control:
On April 30,
2019, the Company announced it had acquired
Clark Pest
Control has a customer base of approximately
The Company
engaged an independent valuation firm to determine the allocation of the purchase price to Goodwill and identifiable Intangible
assets. The preliminary valuation resulted in the allocation of $191.9 million to goodwill, $112.7 million to customer contracts, and $49.8
million to other intangible assets, principally tradenames. The Company is in the process of analyzing the estimated values of
assets and liabilities acquired, evaluating third-party valuations of certain tangible and intangible assets and finalizing
its operating plans and, thus, the allocation of the purchase price is subject to material revision in its future financial statements.
The finite-lived intangible assets, principally customer contracts, are being amortized over periods principally ranging from
| 12 |
ROLLINS, INC. AND SUBSIDIARIES
The preliminary fair values of Clark Pest Control's assets and liabilities, at the date of acquisition, were as follows:
| at April 30 | ||||
| (dollars in thousands) | 2019 | |||
| Assets and liabilities: | ||||
| Trade accounts receivables | $ | |||
| Materials and supplies | ||||
| Other current assets | ||||
| Equipment and property, net | ||||
| Goodwill | ||||
| Customer contracts | ||||
| Trademarks & tradenames | ||||
| Non-compete agreements | ||||
| Accounts payable | ( |
) | ||
| Accrued compensation and related liabilities | ( |
) | ||
| Unearned revenues | ( |
) | ||
| Contingent Consideration, short-term | ( |
) | ||
| Other current liabilities | ( |
) | ||
| Accrued insurance, less current portion | ( |
) | ||
| Other long-term accrued liabilities | ( |
) | ||
| Contingent Consideration, long-term | ( |
) | ||
| $ | ||||
The unaudited pro forma financial information presented below gives effect to the Clark Pest Control acquisition as if it had occurred as of the beginning of our fiscal year 2018. The information presented below is for illustrative purposes only and is not necessarily indicative of results that would have been achieved if the acquisition actually had occurred as of the beginning of such years or results which may be achieved in the future.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| REVENUES | ||||||||||||||||
| Customer services | $ | $ | $ | $ | ||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| INCOME BEFORE INCOME TAXES | ||||||||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| NET INCOME PER SHARE - BASIC AND DILUTED | $ | $ | $ | $ | ||||||||||||
| DIVIDENDS PAID PER SHARE | $ | $ | $ | $ | ||||||||||||
| Weighted average participating shares outstanding - basic and diluted | ||||||||||||||||
The preliminary values of major classes of assets acquired and liabilities assumed recorded at the date of acquisition, as adjusted during the valuation period, are included in the reconciliation of the total consideration for all 14 acquisitions as follows (in thousands):
| June 30, 2019 | ||||
| Accounts receivable, net | $ | |||
| Materials & supplies | ||||
| Equipment and property | ||||
| Goodwill | ||||
| Customer contracts and other intangible assets | ||||
| Current liabilities | ( |
) | ||
| Other assets and liabilities, net | ( |
) | ||
| Total cash purchase price | $ | |||
| Less: Contingent consideration liability | ( |
) | ||
| Total cash purchase price | $ | |||
| 13 |
ROLLINS, INC. AND SUBSIDIARIES
Goodwill from
acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying
amount of goodwill was $563.1 million and $368.5 million at June 30, 2019 and December 31, 2018, respectively. Goodwill
generally changes due to the timing of acquisitions, finalization of allocation of purchase prices of previous acquisitions and
foreign currency translations. The carrying amount of goodwill in foreign countries was $
The Company completed its most recent annual impairment analysis as of September 30, 2018. Based upon the results of this analysis, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.
The carrying
amount of customer contracts was $
Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives. The following table sets forth the components of intangible assets as of June 30, 2019 (in thousands):
| Intangible Asset | Carrying Value |
Useful Life in Years |
||||||
| Customer contracts | $ | |||||||
| Trademarks and tradenames | N/A- |
|||||||
| Non-compete agreements | ||||||||
| Patents | ||||||||
| Other assets | ||||||||
| Internet domains | N/A | |||||||
| Total customer contracts and other intangible assets | $ | |||||||
NOTE 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. To manage this risk, the Company enters into derivative financial instruments from time to time. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in terms of the Company's functional currency. The Company enters into derivative financial instruments from time to time to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.
Cash Flow Hedges of Interest Rate Risk
The Company's objectives in using interest rate derivatives are to add stability to interest and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2019, such derivatives were used to hedge the cash flows associated with existing unsecured variable rate debt.
| 14 |
ROLLINS, INC. AND SUBSIDIARIES
For
derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is
recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense/income in the same
period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge
components excluded from the assessment of effectiveness are recognized currently in earnings recognized over the life of
the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting
policy election. The earnings recognition of excluded components is presented in interest expense/income. Amounts reported in
accumulated other comprehensive income related to derivatives will be reclassified to interest expense/income as interest
payments are made/received on the Company's variable-rate debt/assets. During 2019, the Company estimates that an additional
$
As of June 30, 2019, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):
| Number of | Notional | |||||||
| Interest Rate Derivative | Instruments | Amount | ||||||
| Interest Rate Floors | $ | |||||||
The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income as of June 30, 2019 and June 30 2018.
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
| Derivatives in Subtopic | Amount of Gain or (Loss) | Amount of Gain or (Loss) | ||||||||||||||
| 815-20 Hedging | Recognized in | Reclassified from Accumulated OCI | ||||||||||||||
| Relationships | OCI on Derivative | into Income | ||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Interest Rate Products | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Hedges of Foreign Exchange Risk
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the U.S. dollar. The Company uses foreign currency derivatives, specifically vanilla foreign currency forwards, to manage its exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in U.S. dollars for their fair value at or close to their settlement date.
The Company
does not currently designate any of these foreign exchange forwards under hedge accounting, but rather reflects the changes in
fair value immediately in earnings. Derivatives not designated as hedges are not speculative and are used to manage the Company's
exposure to foreign exchange rates. Changes in the fair value of derivatives not designated in hedging relationships are recorded
directly in earnings and were equal to a net loss of $
| Non-Designated Derivative Summary | ||||||||||||
| FX Forward Contracts | Number of Instruments |
Sell Notional |
Buy Notional |
|||||||||
| Sell AUD/Buy USD Fwd Contract | $ | $ | ||||||||||
| Sell CAD/Buy USD Fwd Contract | $ | $ | ||||||||||
| Total | $ | |||||||||||
| 15 |
ROLLINS, INC. AND SUBSIDIARIES
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the balance sheet as of June 30, 2019 and December 31, 2018 (in thousands):
| Tabular Disclosure of Fair Values of Derivative Instruments | ||||||||||||||||
| Derivatives Asset | Derivative Liabilities | |||||||||||||||
| Fair Value as of: | ||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | June 30, 2019 |
December 31, 2018 |
June 30, 2019 |
December 31, 2018 |
||||||||||||
| FX Forward Contracts | ||||||||||||||||
| Balance Sheet Location | Other Assets |
Other Assets |
Other Current Liabilities |
Other Current Liabilities |
||||||||||||
| Sell AUD/Buy USD Fwd Contract | $ | $ | $ | — | $ | ( |
) | |||||||||
| Sell CAD/Buy USD Fwd Contract | ( |
) | ( |
) | ||||||||||||
| Total | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||
Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated
as Hedging Instruments for the Three and Six Months Ended June 30, 2019 and 2018
| Amount of Gain or (Loss) | Amount of Gain or (Loss) | |||||||||||||||||
| Derivatives Designated | Location of Gain or (Loss) | Recognized in Income | Recognized in Income | |||||||||||||||
| as Hedging Instruments | Recognized in Income | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||
| Swap | $ | $ | $ | $ | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||
| Amount of Gain or (Loss) | Amount of Gain or (Loss) | |||||||||||||||||
| Derivatives Not Designated | Location of Gain or (Loss) | Recognized in Income | Recognized in Income | |||||||||||||||
| as Hedging Instruments | Recognized in Income | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||
| Sell AUD/Buy USD Fwd Contract | $ | $ | $ | $ | ||||||||||||||
| Sell CAD/Buy USD Fwd Contract | ( |
) | ( |
) | ||||||||||||||
| Total | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||
The table below presents the total fair value classification within the fair value hierarchy for the complete portfolio of derivative transactions at June 30, 2019 (in thousands):
| Recurring Fair Value Measurements | ||||||||||||||||||||||||||||||||
| Quoted Prices in Active | ||||||||||||||||||||||||||||||||
| Markets for Identical | Significant Other | Significant Unobservable | ||||||||||||||||||||||||||||||
| Assets and Liabilities | Observable Inputs | Inputs | ||||||||||||||||||||||||||||||
| at June 30, | at June 30, | at June 30, | Total Fair Value | |||||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | at June 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Derivative Financial Instruments | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Derivative Financial Instruments | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||
| 16 |
ROLLINS, INC. AND SUBSIDIARIES
As of June 30, 2019, the fair value of derivatives in a net liability position was nine thousand dollars inclusive of counterparty credit risk. As of the balance sheet date, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2019, it could have been required to settle its obligations under the agreements at their termination value of nine thousand dollars.
NOTE 13. DEBT
The Company's financial instruments consist of cash and cash equivalents, trade receivables, notes receivable, accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their respective fair values. The Company entered into a new Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured Revolving Commitment of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $25.0 million swingline subfacility and an unsecured variable rate $250.0 million Term Loan with SunTrust Bank and Bank of America, N.A. Both the Revolving Commitment and the Term Loan have five year durations commencing on April 29, 2019. In addition, the agreement has provisions to extend the duration beyond the Revolving Commitment Termination date as well optional prepayments rights to at any time and from time to time prepay any borrowing, in whole or in part, without premium or penalty. As of June 30, 2019, the Revolving Commitment had outstanding borrowings of $101.0 million and the Term Loan had outstanding borrowings of $246.9 million. As of December 31, 2018, there were no outstanding borrowings. In order to comply with applicable debt covenants, the Company will maintain at all times a Leverage Ratio of not greater than 3.00:1.00. The Leverage ratio is calculated as of the last day of the fiscal quarter most recently ended. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance through 2019. The credit agreement is included as Exhibit 10.1.
NOTE 14. SUBSEQUENT EVENTS
On July 23, 2019, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $ per share payable September 10, 2019 to stockholders of record at the close of business August 9, 2019.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On July 23, 2019, the Company reported second quarter revenues of $524.0 million, an increase of 9.1% over the prior year's second quarter revenue of $480.5 million. Rollins' net income decreased 1.9% to $64.3 million or $0.20 per diluted share for the second quarter ended June 30, 2019, compared with $65.5 million or $0.20 per diluted share for the same period in 2018.
Rollins revenues rose 7.2% to $953.0 million for the first six months of 2019 compared to $889.2 million for the prior year. Net income decreased 4.9% to $108.5 million or $0.33 per diluted share for the first six months of 2019 compared to $114.1 million or $0.35 per diluted share in 2018.
On April 30, 2019, the Company announced that it had completed the purchase of Clark Pest Control of Stockton, Inc. Clark is a family owned company established by Charlie Clark in 1950 and is headquartered in Lodi, CA. It is the leading pest management company in California and the nation's 8th largest pest management company according to PCT 100 rankings. Additionally included in this acquisition are real estate properties and Geotech Supply. Currently, the company operates in 26 locations and offers both residential and commercial pest control throughout California and northwestern Nevada. Clark's Robert Baker will stay on to run day to day operations in California.
Results of Operations:
THREE MONTHS ENDED JUNE 30, 2019 COMPARED TO THREE MONTHS ENDED JUNE 30, 2018
Revenue
Revenues for the second quarter ended June 30, 2019 increased $43.5 million or 9.1% to $524.0 million compared to $480.5 million for the second quarter ended June 30, 2018. Growth occurred across all service lines. Approximately 5.5 percentage points of the 9.1% increase in revenues came from acquisitions while growth in customers and pricing made up the remaining 3.6 percentage points.
The Company has three primary service offerings: commercial pest control, residential pest control and termite, including ancillary services. During the second quarter ended June 30, 2019, commercial pest control revenue approximated 37% of the Company's revenues, residential pest control approximated 43% of the Company's revenues, and termite and ancillary service revenue approximated 20% of the Company's revenues. Comparing the second quarter of 2019 to second quarter 2018, the Company's commercial pest control revenue increased 7.7%, residential pest control revenue grew 11.1%, and termite and ancillary services revenue grew 9.2%. Foreign operations accounted for approximately 7% and 8% of total revenues during the second quarters of 2019 and 2018, respectively.
| 17 |
ROLLINS, INC. AND SUBSIDIARIES
Revenues are impacted by the seasonal nature of the Company's pest and termite control services. The increase in pest activity, as well as the metamorphosis of termites in the spring and summer (the occurrence of which is determined by the change in seasons), has historically resulted in an increase in the Company's revenues as evidenced by the following chart:
| Consolidated Net Revenues | ||||||||||||
| (in thousands) | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| First Quarter | $ | 429,069 | $ | 408,742 | $ | 375,247 | ||||||
| Second Quarter | 523,957 | 480,461 | 433,555 | |||||||||
| Third Quarter | — | 487,739 | 450,442 | |||||||||
| Fourth Quarter | — | 444,623 | 414,713 | |||||||||
| Year ended December 31, | $ | 953,026 | $ | 1,821,565 | $ | 1,673,957 | ||||||
Revenues are also impacted by the Company's acquisitions. For the second quarters ended June 30, 2019, 2018, and 2017, acquisitions increased revenues by $26.2 million, $23.4 million, and $2.5 million, respectively. For the six months ended June 30, 2019, 2018, and 2017, acquisitions increased revenues by $30.6 million, $39.5 million, and $6.0 million, respectively. The chart above does not highlight any one acquisition.
Cost of Services Provided
Cost of Services provided for the second quarter ended June 30, 2019 increased $22.6 million or 9.8% to $253.3 million, compared to $230.8 million for the prior year quarter. Gross Margin for the quarter was 51.7%, down 0.3 percentage points from 52.0% prior years' quarter. The quarter experienced increases in most expenses due to acquisitions as well as in administrative salaries due to amortization of the employee special restricted share grants to long-term employees from the prior year and increased salaries. Service salaries, materials and supplies and fleet increased with production for the period.
Depreciation and Amortization
Depreciation and amortization expense for the second quarter ended June 30, 2019 increased $3.8 million to $20.1 million, an increase of 23.0%. Depreciation increased $1.5 million due to acquisitions and equipment purchases while amortization of intangible assets increased $2.2 million due to the amortization of customer contracts from several acquisitions.
Sales, General and Administrative
Sales, General and Administrative Expenses for the second quarter ended June 30, 2019 increased $18.5 million or 12.9%, to $161.9 million or 30.9% of revenues, up 1.1 percentage points from $143.4 million or 29.8% of revenues for the second quarter ended June 30, 2018. The Company experienced increases in most expenses due to acquisitions as well as increases in amortization of restricted shares from the 2018 special grant to long-tenured employees, increases in 401k expenses, acquisition expenses and maintenance and repairs contract expenses.
Income Taxes
The effective tax rate was 26.1% for the second quarter ended June 30, 2019 and 27.3% for the second quarter ended June 30, 2018. The decrease to the effective tax rate for second quarter ended June 30, 2019 was primarily due to an increase to certain beneficial tax adjustments.
SIX MONTHS ENDED JUNE 30, 2019 COMPARED TO SIX MONTHS ENDED JUNE 30, 2018
Revenue
Revenues for the six months ended June 30, 2019 increased $63.8 million or 7.2% to $953.0 million compared to $889.2 million for the six months ended June 30, 2018. Growth occurred across all service lines. Approximately 3.5 percentage points of the 7.2% increase in revenues came from acquisitions while growth in customers and pricing made up the remaining 3.7 percentage points.
During the six months ended June 30, 2019, commercial pest control revenue approximated 38% of the Company's revenues, residential pest control approximated 42% of the Company's revenues, and termite and ancillary service revenue approximated 19% of the Company's revenues. Comparing the first six months of 2019 to first six months 2018, the Company's commercial pest control revenue increased 6.2%, residential pest control revenue grew 8.4%, and termite and ancillary services revenue grew 7.2%. Foreign operations accounted for approximately 7% and 8% of total revenues during the first six months of 2019 and 2018, respectively.
| 18 |
ROLLINS, INC. AND SUBSIDIARIES
Cost of Services Provided
Cost of Services provided for the six months ended June 30, 2019 increased $33.7 million or 7.7% to $470.6 million, compared to $436.9 million for the six months ended June 30, 2018. Gross Margin for the first six months of 2019 was 50.6%, down 0.3 percentage points from 50.9% prior year. The first six months of 2019 experienced increases in most expenses due to acquisitions as well as in administrative salaries due to amortization of the employee special restricted share grants to long-term employees from the prior year and increased salaries. Service salaries, materials and supplies and fleet increased with production for the period.
Depreciation and Amortization
Depreciation and Amortization expenses for the six months ended June 30, 2019 increased $3.5 million to $36.8 million, an increase of 10.6%. Depreciation increased $1.9 million due to acquisitions and equipment purchases while amortization of intangible assets increased $1.6 million due to the amortization of customer contracts from several acquisitions.
Sales, General and Administrative
Sales, General and Administrative Expenses for the first six months ended June 30, 2019 increased $31.6 million or 11.7%, to $301.4 million or 31.6% of revenues, up 1.3 percentage points from $269.9 million or 30.3% of revenues for the six months ended June 30, 2018. The Company experienced increases in most expenses due to acquisitions as well as increases in amortization of restricted shares from the 2018 special grant to long-tenured employees, increases in 401k expenses, acquisition expenses and maintenance and repairs contract expenses.
Income Taxes
The effective tax rate was 24.1% for the six months ended June 30, 2019 and 23.6% for the six months ended June 30, 2018. The increase to the effective tax rate for six months ended June 30, 2019 was primarily due to an increase to certain non-deductible expenses and inclusion of new tax provisions enacted under the Tax Cuts and Jobs Act of 2017 (the Tax Act).
Liquidity and Capital Resources
The Company believes its current cash and cash equivalents balances, future cash flows expected to be generated from operating activities and available borrowings under its $175.0 million credit facility and $250.0 million Term Loan agreement will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future. The Company's operating activities generated net cash of $136.9 million and $130.5 million for the six months ended June 30, 2019, and 2018, respectively. During the six months ended June 30, 2019 and the same period in 2018, the Company made no contribution to its defined benefit retirement plans. The Company is adequately funded on its Plans and is not expecting to make further contributions in 2019. The Company has initiated the process to transition its Pension Plan to an insurance provider. The transition should be complete by September 30, 2019. The Company's Pension Plan is currently more than 100% funded.
The Company invested approximately $13.4 million in capital expenditures, exclusive of expenditures for business acquisitions, during the six months ended June 30, 2019, compared to $14.2 million during the same period in 2018, and expects to invest approximately $10.0 million for the remainder of 2019. Capital expenditures for the first six months consisted primarily of the purchase of operating equipment replacements and technology related projects. During the six months ended June 30, 2019, the Company made expenditures for acquisitions totaling $410.1 million, compared to $54.6 million during the same period in 2018. A total of $68.7 million was paid in cash dividends ($0.21 per share), compared to $61.1 million or ($0.19 per share) during the same period in 2018. On July 23, 2019, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $0.105 per share payable September 10, 2019 to stockholders of record at the close of business August 9, 2019 to be funded with existing cash balances. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company did not repurchase shares of its common stock on the open market during the first six months of 2019 and during the same period in 2018. The Company has had a buyback program in place for a number of years and has routinely purchased shares when it felt the opportunity was desirable. The Board authorized the purchase of 11.25 million additional shares of the Company's common stock in July 2012. These authorizations enable the Company to continue the purchase of Company common stock when appropriate, which is an important benefit resulting from the Company's strong cash flows. The stock buy-back program has no expiration date. In total, 7.6 million additional shares may be purchased under the share repurchase program. The Company repurchased $9.8 million and $9.3 million of common stock for the first six months ended June 30, 2019 and 2018, respectively, from employees for the payment of taxes on vesting restricted shares. The Company borrowed $250.0 million under the Term Loan and borrowed $118.0 million under the Revolving Commitment. The Company repaid $20.1 million. The acquisitions, capital expenditures, share repurchases and cash dividends were funded through existing cash balances, borrowings on our line of credit, a term loan, and operating activities.
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ROLLINS, INC. AND SUBSIDIARIES
The Company's balance sheet as of June 30, 2019 and December 31, 2018 includes short-term unearned revenues of $133.7 million and $116.0 million, respectively, representing approximately 7% and 6% of our annual revenue, respectively. This represents cash paid to the Company by its customers in advance of services that will be recognized over the next twelve months. The Company's $98.5 million of total cash and cash equivalents at June 30, 2019, is held at various banking institutions. Approximately $67.8 million is held in cash accounts at foreign bank institutions and the remaining balance is primarily held in non-interest-bearing accounts at various domestic banks. The Company's international business is expanding and we intend to continue to grow the business in foreign markets in the future through acquisitions of unrelated companies, reinvestment of foreign deposits and future earnings. Repatriation of cash from the Company's foreign subsidiaries is not a part of the Company's current business plan. The Company maintains a large cash position in the United States. The Company maintains adequate liquidity and capital resources that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future without regard to its foreign deposits.
The Company closed the acquisition of Clark Pest Control of Stockton, Inc. located in Lodi, California during the second quarter of 2019 for approximately $400 million. The Company funded the purchase price of the acquisition with a combination of cash on hand, use of its revolving credit agreement for $100 million and a term loan of $250 million tied to LIBOR. The Company plans to repay these loans within two years of the acquisition.
Litigation
In the normal course of business, certain of the Company's subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the subsidiaries' services caused damage. In addition, the Company defends employment related cases and claims from time to time. We are involved in certain environmental matters primarily arising in the normal course of business. We are actively contesting each of these matters.
Management does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate will have a material adverse effect on the Company's financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual quarter or year.
Critical Accounting Policies
There have been no changes to the Company's critical accounting policies since the filing of its Form 10-K for the year ended December 31, 2018, other than ASC 842.
New Accounting Standards
See Note 2 of the Notes to Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
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ROLLINS, INC. AND SUBSIDIARIES
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, the effect of the future adoption of recent accounting pronouncements on the Company's financial statements; statements regarding management's expectation regarding the effect of the ultimate resolution of pending claims, proceedings or litigation on the Company's financial position, results of operation and liquidity; the Company's reasonable certainty that it will exercise the renewal options on its vehicle leases; the Company's expectation that it will repay the loans related to the Clark Pest Control acquisition within two years of closing; the Company's belief that the exposure of certain of its foreign operations expose it to foreign interest and exchange rate fluctuations that may impact the value of the Company's cash receipts payments in terms of the Company's functional currency; the Company's belief that its current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings under its $175.0 million Revolving Commitment and $250.0 million Term Loan agreement will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future; our expectation that the Company will continue to pay cash dividends to common stockholders, subject to earnings and financial condition of the Company; our intention to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies and that repatriation of cash is not a part of the Company's current business plan; the expectation of no defined benefit retirement plan contributions for the remainder of 2019; the Company's ability to complete the transition of the pension plan to the insurance provider, including the ability to meet the proposed timeline by September 30, 2019; the Company's expectation that it will invest $22.0 million in capital expenditure for the remainder of 2019; the Company's expectation to maintain compliance with debt covenants and the Company's belief that foreign exchange rate risk will not have a material effect on the Company's results of operations going forward; the Company's belief that it maintains adequate liquidity and capital resources that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future without regard to its foreign deposits; and the Company's estimation regarding the reclassification of accumulated other comprehensive income related to derivatives. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, the possibility of an adverse ruling against the Company in pending litigation; general economic conditions; actions taken by our franchisees, subcontractors or vendors that may harm our business; market risk; changes in industry practices or technologies; a breach of data security; the degree of success of the Company's termite process and pest control selling and treatment methods; damage to our brands or reputation; our ability to protect our intellectual property and other proprietary rights; the Company's ability to identify and successfully integrate potential acquisitions; climate and weather conditions; competitive factors and pricing practices; our ability to attract and retain skilled workers, and potential increases in labor costs; changes in various government laws and regulations, including environmental regulations; and the existence of certain anti-takeover provisions in our governance documents, which could make a tender offer, change in control or takeover attempt that is opposed by the Company's Board of Directors more difficult or expensive. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. A more detailed discussion of potential risks facing the Company can be found in the Company's Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2018. The Company does not undertake to update its forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2019, the Company maintained an investment portfolio (included in cash and cash equivalents) subject to short-term interest rate risk exposure. The Company is subject to interest rate risk exposure through its Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured Revolving Commitment of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $250.0 million swingline subfacility and an unsecured variable rate $250.0 million Term Loan with SunTrust Bank and Bank of America, N.A. The Company is also exposed to market risks arising from changes in foreign exchange rates. See Note 12 to Part I, Item 1 for a discussion of the Company's investments in derivative financial instruments to manage risks of fluctuations in foreign exchange rates. The Company believes that this foreign exchange rate risk will not have a material impact upon the Company's results of operations going forward. There have been no material changes to the Company's market risk exposure since the end of fiscal year 2018.
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ROLLINS, INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2019 (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation Date to ensure that the information required to be included in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
In addition, management's quarterly evaluation identified no changes in our internal control over financial reporting during the first quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As of June 30, 2019, we did not identify any material weaknesses in our internal controls, and therefore no corrective actions were taken.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 to Part I, Item 1 for discussion of certain litigation.
Item 1A. Risk Factors
See the Company's risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
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ROLLINS, INC. AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Shares repurchased by Rollins and affiliated purchases during the second quarter ended June 30, 2019 were as follows:
| Total number of shares | Maximum number of | |||||||||||||||
| Total number | Weighted-Average | purchased as part | shares that may yet | |||||||||||||
| of shares | price paid | of publicly announced | be purchased under | |||||||||||||
| Period | Purchased (1) | per share | repurchases (2) | repurchase plan | ||||||||||||
| April 1 to 30, 2019 | 16,973 | $ | 41.99 | — | 7,610,416 | |||||||||||
| May 1 to 31, 2019 | — | — | — | 7,610,416 | ||||||||||||
| June 1 to 30, 2019 | — | — | — | 7,610,416 | ||||||||||||
| Total | 16,973 | $ | 41.99 | — | 7,610,416 | |||||||||||
| (1) | Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts: April 2019: 16,973; May 2019: 0; and June 2019: 0. |
| (2) | The Company has a share repurchase plan, adopted in 2012, to repurchase up to 11.25 million shares of the Company's common stock. The plan has no expiration date. |
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ROLLINS, INC. AND SUBSIDIARIES
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ROLLINS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ROLLINS, INC. | ||||
| (Registrant) | ||||
| Date: July 26, 2019 | By: | /s/ Gary W. Rollins | ||
| Gary W. Rollins | ||||
| Vice Chairman and Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| Date: July 26, 2019 | By: | /s/ Paul E. Northen | ||
| Paul E. Northen | ||||
| Senior
Vice President, Chief Financial Officer and Treasurer |
||||
| (Principal Financial and Accounting Officer) | ||||
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