10-Q/A: Quarterly report pursuant to Section 13 or 15(d)
Published on October 31, 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 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, every
Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit such
files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | o | No |
Rollins, Inc. had shares of its $1 par value Common Stock outstanding as of October 16, 2019.
ROLLINS, INC. AND SUBSIDIARIES
Explanatory Note
This Amendment No. 1 on Form 10-Q/A is being filed in order to correct certain inadvertent errors included in the pro forma financial information with respect to the Clark Pest Control acquisition appearing in Note 12 to the financial statements included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 as originally filed with the Securities and Exchange Commission on October 25, 2019.
No other changes have been made to the Form 10–Q. This Amendment No. 1 speaks as of the original filing date of the Form 10–Q, does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way other disclosures made in the original Form 10–Q.
ROLLINS, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 2019, AND DECEMBER 31, 2018
(in thousands except share data)
| September 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 $ |
||||||||
| Benefit plan assets | ||||||||
| 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 | ||||||||
| Deferred income tax liability | ||||||||
| 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.
2
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(in thousands except per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| REVENUES | ||||||||||||||||
| Customer services | $ | $ | $ | $ | ||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Cost of services provided | ||||||||||||||||
| Depreciation and amortization |
|
|||||||||||||||
| Pension settlement loss | ||||||||||||||||
| Sales, general and administrative | ||||||||||||||||
| Gain on sale of assets, net | ( |
) | ( |
) | ( |
) | ||||||||||
| Interest 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.
3
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(in thousands)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| Other comprehensive earnings (loss) | ||||||||||||||||
| Pension settlement | ||||||||||||||||
| Change in derivative values | ( |
) | ( |
) | ||||||||||||
| Foreign currency translation adjustments | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other comprehensive earnings (loss) | ( |
) | ( |
) | ||||||||||||
| Comprehensive earnings | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(In thousands) (unaudited)
|
Common Stock |
Paid-in-capital | Accumulated Other Comprehensive income/ (loss) |
Retained Earnings |
Total | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balance at June 30, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( |
) | ( |
) | |||||||||||||||||||
| Cash dividends | — | ( |
) | ( |
) | |||||||||||||||||||
| Stock compensation | ( |
) | ( |
) | ||||||||||||||||||||
| Employee stock buybacks | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Balance at September 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 September 30, 2018 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
Common Stock |
Paid-in-capital | Accumulated Other Comprehensive income/ (loss) |
Retained Earnings |
Total | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Pension settlement | — | |||||||||||||||||||||||
| Change in derivatives | — | ( |
) | ( |
) | |||||||||||||||||||
| Foreign currency translation adjustments | — | ( |
) | ( |
) | |||||||||||||||||||
| Cash dividends | — | ( |
) | ( |
) | |||||||||||||||||||
| Stock compensation | ( |
) | ( |
) | ||||||||||||||||||||
| Employee stock buybacks | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Balance at September 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 | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Pension settlement | — | |||||||||||||||||||||||
| Change in derivatives | — | ( |
) | ( |
) | |||||||||||||||||||
| Foreign currency translation adjustments | — | ( |
) | ( |
) | |||||||||||||||||||
| Cash dividends | — | ( |
) | ( |
) | |||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||
| Employee stock buybacks | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ROLLINS, INC. AND SUBSIDIARIES
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 | ||||||||
| (in thousands) | ||||||||
| (unaudited) | ||||||||
| Nine Months Ended | ||||||||
| September 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 | ( |
) | ( |
) | ||||
| Benefit settlement | ||||||||
| 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 | ( |
) | ( |
) | ||||
| Repayment of Term Loan | ( |
) | ||||||
| Repayment of Revolving Commitment | ( |
) | ||||||
| Borrowings under Term Loan | ||||||||
| Borrowings under Revolving Commitment | ||||||||
| Net cash provided by/(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.
6
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 nine month periods ended September 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 risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
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.
7
ROLLINS, INC. AND SUBSIDIARIES
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.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The updated accounting guidance modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements. The standard in this update is effective for the Companys financial statements issued for fiscal years beginning in 2020. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
8
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 | Nine Months Ended | |||||||||||||||
| September 30, | September 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 | Nine Months Ended | |||||||||||||||
| September 30, | September 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 | Nine Months Ended | |||||||||||||||
| September 30, | September 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.
9
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.
At September 30, the Company had $21.0 million of earnout liability with the former owners of acquired companies. The earnouts were discounted on the Company's books at $21.0 million and are considered level 3 liabilities. The table below presents a summary of the changes in fair value for level 3 assets and liabilities.
| Recurring Fair Value Measurements | |||||||||||||||||||||||||||||||
| Quoted Prices in Active | |||||||||||||||||||||||||||||||
| Markets for Identical | Significant Other | Significant Unobservable | |||||||||||||||||||||||||||||
| Assets and Liabilities | Observable Inputs | Inputs | |||||||||||||||||||||||||||||
| at September 30, | at September 30, | at September 30, | Total Fair Value | ||||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | at September 30, | ||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||
| Acquisition earnouts | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
The table below shows the rollforward activity for the level 3 liabilities in the summary table above.
| Nine Months Ended | ||||||||
| September 30, 2019 | ||||||||
| (in thousands) | 2019 | 2018 | ||||||
| Acquisition earnouts: | ||||||||
| Beginning balance | $ | $ | ||||||
| New acquisition earnouts | ||||||||
| Adjustments and Accrued Interest | ||||||||
| Earnout payments | ( |
) | ( |
) | ||||
| Ending balance | $ | $ | ||||||
10
ROLLINS, INC. AND SUBSIDIARIES
NOTE 7. UNEARNED REVENUE
Changes in unearned revenue were as follows:
| For the period ended | September 30, | December 31 | September 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 nine months ended September 30, 2019 and 2018 were $
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 September 30, 2019 or December 31, 2018.
At September
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 September 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.
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 | Nine Months Ended September 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 | ||||||
11
ROLLINS, INC. AND SUBSIDIARIES
Lease Commitments
Future minimum lease payments at September 30, 2019 were as follows:
| (in thousands) | Operating Leases |
|||
| 2019 (excluding the nine months ended September 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 were 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.
NOTE 9. DEBT
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 $
NOTE 10. STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2019, the Company paid $103.1 million or $0.315 per share in cash dividends compared to $91.7 million or $ per share during the same period in 2018.
During the third quarter ended September 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 September 30, 2019, approximately million shares of the Company's common stock were reserved for issuance.
12
ROLLINS, INC. AND SUBSIDIARIES
Time Lapse Restricted Shares and Restricted Stock Units
| Three Months Ended | Nine months ended | |||||||||||||||
| September 30, | September 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 September 30, 2019:
| Number of Shares |
Average Grant- Date Fair Value |
|||||||
| Unvested Restricted Stock at December 31, 2018 | $ | |||||||
| Forfeited | ( |
) | ||||||
| Vested | ( |
) | ||||||
| Granted | ||||||||
| Unvested Restricted Stock at September 30, 2019 | $ | |||||||
At September 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.
NOTE 11. PENSION AND POST RETIREMENT BENEFIT PLAN
During
September 2019, the Company settled its fully-funded pension plan through a combination of lump sum payments to
participants, payments to the Pension Benefit Guaranty Corporation (PBGC), and the purchase of a group annuity contract. With
the completed funding of the plan payout settlements, the Company had approximately $31.8 million of pension assets
remaining. The remaining assets were the result of the funded status of the plan, higher take rate of lump sum payment
election by participants and optimal pricing of the group annuity contract. The Company has evaluated the ERISA allowable
opportunities for utilization of the excess pension assets including funding other employee benefits. The Company used $5.2
million of the $31.8 million to fund its 401(k) match obligation during the quarter ended September 30, 2019, and plans to
continue funding future benefit plan obligations, with a possible reversion of any remaining pension assets to the Company
per ERISA regulations. The Company recognized a $49.9 million non-cash pension settlement expense from this transition, which
is the accounting treatment of the accumulated sum of unrealized losses due to change in actuarial assumptions over the life
of the plan. Net of tax, the expense was $26.6 million. As of September 30, 2019, the Company had approximately $
Components of Net Pension Benefit Loss/(Gain)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Interest and service cost | $ | $ | $ | $ | ||||||||||||
| Expected return on plan assets | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Amortization of net loss | ||||||||||||||||
| Pension settlement loss | ||||||||||||||||
| Net periodic loss | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||
During the nine months ended September 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.
13
ROLLINS, INC. AND SUBSIDIARIES
NOTE 12. BUSINESS COMBINATIONS
The Company
made
Acquisition of Clark Pest Control:
On April 30,
2019, the Company 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 5 to 10 years on a straight-lined basis.
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 | ( |
) | ||
| Other long term liabilities | ( |
) | ||
| Accrued insurance, less current portion | ( |
) | ||
| Contingent Consideration, long-term | ( |
) | ||
| $ | ||||
14
ROLLINS, INC. AND SUBSIDIARIES
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 | Nine Months Ended | |||||||||||||||
| September 30, | September 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 as follows (in thousands):
| September 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 purchase price | $ | |||
| Less: Contingent consideration liability | ( |
) | ||
| Total cash purchase price | $ | |||
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 $570.8 million and $368.5 million at September 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, 2019. 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 $
15
ROLLINS, INC. AND SUBSIDIARIES
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 September 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 13. 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.
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
$
16
ROLLINS, INC. AND SUBSIDIARIES
As of September 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 September 30, 2019 and September 30, 2018.
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income:
| Derivatives in Subtopic | ||||||||||||||||
| 815-20 Hedging | Amount of Gain or (Loss) | |||||||||||||||
| Relationships | Recognized in OCI on Derivative | |||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 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 gain 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 | $ | |||||||||||
17
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 September 30, 2019 and December 31, 2018 (in thousands):
| Tabular Disclosure of Fair Values of Derivative Instruments | ||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||
| Fair Value as of: | ||||||||||||||||
| Derivatives Not Designated as Hedging Instruments |
September 30, 2019 |
December 31, 2018 |
September 30, 2019 |
December 31, 2018 |
||||||||||||
| FX Forward Contracts | ( |
|||||||||||||||
| Balance Sheet Location | Other Current Assets |
Other Current Assets |
Other Current Liabilities |
Other Current Liabilities |
||||||||||||
| Sell AUD/Buy USD Fwd Contract | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||
| Sell CAD/Buy USD Fwd Contract | ( |
) | ( |
) | ||||||||||||
| Total | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||
The table below presents the effect of the Companys derivative financial instruments on the income statement as of September 30, 2019 and September 30, 2018 (in thousands):
Effect of Derivative Instruments on the Income Statement for Derivatives Designated as Hedging Instruments
| Amount of Gain or (Loss) Recognized in Income | ||||||||||||||||||
| Derivatives Designated as Hedging Instruments |
Location of Gain or (Loss) Recognized in Income |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||
| Swap | $ | $ | $ | $ | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||
Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated as Hedging Instruments
| Amount of Gain or (Loss) Recognized in Income | ||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments |
Location of Gain or (Loss) Recognized in Income |
Three Months Ended September 30, |
Nine Months Ended September 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 September 30, 2019 and September 30, 2018 (in thousands):
| Recurring Fair Value Measurements | ||||||||||||||||||||||||||||||||
| Quoted Prices in Active | ||||||||||||||||||||||||||||||||
| Markets for Identical | Significant Other | Significant Unobservable | ||||||||||||||||||||||||||||||
| Assets and Liabilities | Observable Inputs | Inputs | ||||||||||||||||||||||||||||||
| at September 30, | at September 30, | at September 30, | Total Fair Value | |||||||||||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | at September 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Derivative Financial Instruments | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Derivative Financial Instruments | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||
18
ROLLINS, INC. AND SUBSIDIARIES
As of September 30, 2019, the fair value of derivatives in a net asset 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 September 30, 2019, it could have been required to settle its instruments under the agreements at their termination value and yielded nine thousand dollars.
NOTE 14. SUBSEQUENT EVENTS
On October 23, 2019, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $ per share plus a special year-end dividend of $0.05 per share both payable December 10, 2019 to stockholders of record at the close of business November 11, 2019.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
On October 23, 2019, the Company reported third quarter revenues of $556.5 million, an increase of 14.1% over the prior year’s third quarter revenue of $487.7 million. Rollins’ net income decreased 33.9% to $44.1 million or $0.13 per diluted share for the third quarter ended September 30, 2019 reflecting the expenses related to the retirement of its pension plan, compared with $66.6 million or $0.20 per diluted share for the same period in 2018.
Rollins revenues rose 9.6% to $1.509 billion for the first nine months of 2019 compared to $1.377 billion for the same period in the prior year. Net income decreased 15.6% to $152.6 million or $0.47 per diluted share for the first nine months of 2019 compared to $180.7 million or $0.55 per diluted share for the first nine months of 2018.
On April 30, 2019, the Company completed the purchase of Clark Pest Control. Clark Pest Control 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, a pest control materials distribution company. Currently, Clark Pest Control operates in 26 locations and offers both residential and commercial pest control throughout California and northwestern Nevada. Clark Pest Control’s President, Robert Baker, has remained on to run day to day operations in California.
Results of Operations:
THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2018
Revenue
Revenues for the third quarter ended September 30, 2019 increased $68.7 million or 14.1% to $556.5 million compared to $487.7 million for the third quarter ended September 30, 2018. Growth occurred across all service lines. Approximately 7.7 percentage points of the 14.1% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining 6.4 percentage points.
The Company has three primary service offerings: commercial pest control, residential pest control and termite, including ancillary services. During the third quarter ended September 30, 2019, commercial pest control revenue approximated 37% of the Company’s revenues, residential pest control approximated 45% of the Company’s revenues, and termite and ancillary service revenue approximated 17% of the Company’s revenues. Comparing the third quarter of 2019 to third quarter 2018, the Company’s commercial pest control revenue increased 9.2%, residential pest control revenue grew 17.6%, and termite and ancillary services revenue grew 15.4%. Foreign operations accounted for approximately 7% and 8% of total revenues during the third quarters of 2019 and 2018, respectively.
19
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 | 556,466 | 487,739 | 450,442 | |||||||||
| Fourth Quarter | — | 444,623 | 414,713 | |||||||||
| Year ended December 31, | $ | 1,509,492 | $ | 1,821,565 | $ | 1,673,957 | ||||||
Revenues are also impacted by the Company’s acquisitions. For the third quarters ended September 30, 2019, 2018, and 2017, acquisitions increased revenues by $37.4 million, $14.2 million, and $10.1 million, respectively.
For the nine months ended September 30, 2019, 2018, and 2017, acquisitions increased revenues by $68.0 million, $55.4 million, and $16.2 million, respectively. The chart above does not highlight any one acquisition.
Cost of Services Provided
Cost of Services provided for the third quarter ended September 30, 2019 increased $32.4 million or 13.7% to $268.7 million, compared to $236.3 million for the third quarter of the prior year. Gross Margin for the third quarter of 2019 was 51.7%, up 0.1 percentage points from 51.6% for the third quarter of 2019. The quarter experienced increases in most expenses due to acquisitions as well as in professional services associated with automation initiatives, credit card fees from increased auto-pay percentages, 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 third quarter ended September 30, 2019 increased $4.8 million to $21.7 million, an increase of 28.6% from the same period in the prior year. Depreciation increased $1.7 million due to acquisitions and equipment purchases while amortization of intangible assets increased $3.1 million due to the amortization of customer contracts from several acquisitions.
Sales, General and Administrative
Sales, General and Administrative Expenses for the third quarter ended September 30, 2019 increased $22.1 million or 15.2%, to $167.2 million or 30.0% of revenues, up 0.3 percentage points from $145.1 million or 29.7% of revenues for the third quarter ended September 30, 2018. The Company experienced increases in most expenses due to acquisitions as well as increases in sales compensation, enhanced 401(k) participation expenses, professional services and maintenance and repairs contract expenses.
| 20 |
ROLLINS, INC. AND SUBSIDIARIES
Pension Settlement Expense
The Company completed the transfer of $198.3 million of its pension obligations through a full termination of its fully-funded pension plan during the third quarter ended September 30, 2019. Based on participant elections, the pension obligations were distributed through a combination of lump sum payments to participants, the purchase of a group annuity contract, and payments to the Pension Benefit Guaranty Corporation. With the completed funding of the plan payout settlements, the Company had approximately $31.8 million of pension assets remaining. The remaining assets were the result of the funded status of the plan, higher take rate of lump sum payment election by participants and optimal pricing of the group annuity contract. The Company has evaluated the allowable opportunities for utilization of the excess pension assets including funding other employee benefits. The Company used $5.2 million of the $31.8 million to fund its 401(k) match obligation during the quarter ended September 30, 2019, and plans to continue funding future benefit plan obligations, with a possible reversion of any remaining pension assets to the Company per ERISA regulations. The Company recognized a $49.9 million non-cash pension settlement expense from this transition, which is the accounting treatment of the accumulated sum of unrealized losses due to change in actuarial assumptions over the life of the plan. Net of tax, the expense was $26.6 million.
Income Taxes
The effective tax rate was 4.5% for the third quarter ended September 30, 2019 and 25.9% for the third quarter ended September 30, 2018. The decrease to the effective tax rate for third quarter ended September 30, 2019 was primarily due to the beneficial tax adjustments for the pension settlement.
NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2018
Revenue
Revenues for the nine months ended September 30, 2019 increased $132.6 million or 9.6% to $1.509 billion compared to $1.377 billion for the nine months ended September 30, 2018. Growth occurred across all service lines. Approximately 4.9 percentage points of the 9.6% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining 4.7 percentage points.
During the nine months ended September 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 18% of the Company’s revenues. Comparing the first nine months of 2019 to the first nine months of 2018, the Company’s commercial pest control revenue increased 7.3%, residential pest control revenue grew 11.7%, and termite and ancillary services revenue grew 9.9%. Foreign operations accounted for approximately 8% of total revenues during the first nine months of both 2019 and 2018.
Cost of Services Provided
Cost of Services provided for the nine months ended September 30, 2019 increased $66.1 million or 9.8% to $739.3 million, compared to $637.2 million for the nine months ended September 30, 2018. Gross Margin for the first nine months of 2019 was 51.0%, down 0.1 percentage points from 51.1% prior year. During the first nine months of 2019 the Company experienced increases in most expenses due to acquisitions as well as in administrative salaries due to amortization of restricted shares from the 2018 special grant to long-term employees 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 nine months ended September 30, 2019 increased $8.4 million to $58.5 million, an increase of 16.7%. Depreciation increased $3.6 million due to acquisitions and equipment purchases while amortization of intangible assets increased $4.8 million due to the amortization of customer contracts from several acquisitions.
| 21 |
ROLLINS, INC. AND SUBSIDIARIES
Sales, General and Administrative
Sales, General and Administrative Expenses for the first nine months ended September 30, 2019 increased $53.6 million or 12.9%, to $468.6 million or 31.0% of revenues, up 0.9 percentage points from $414.9 million or 30.1% of revenues for the nine months ended September 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, enhanced 401(k) participation expenses, sales compensation, acquisition-related professional services and maintenance and repairs contract expenses.
Pension Settlement Expense
As described above, the Company completed the transfer of $198.3 million of its pension obligations through a full termination of its fully-funded pension plan during the first nine months ended September 30, 2019. The Company recognized a $49.9 million non-cash pension settlement expense from this transition, which is the accounting treatment of the accumulated sum of unrealized losses due to change in actuarial assumptions over the life of the plan. Net of tax, the expense was $26.6 million.
Income Taxes
The effective tax rate was 19.3% for the nine months ended September 30, 2019 and 24.5% for the nine months ended September 30, 2018. The decrease to the effective tax rate for nine months ended September 30, 2019 was primarily due to the beneficial tax adjustments for the pension settlement.
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 revolving credit facility and $250.0 million term loan facility 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 $230.3 million and $213.3 million for the nine months ended September 30, 2019, and 2018, respectively. The Company made no contributions to its defined benefit retirement plans during the nine months ending September 2019 and 2018 as the plans had remained adequately funded through the settlement that occurred this quarter. With the completed funding of the plan payout settlements, the Company had approximately $25.9 million of pension assets remaining.
The Company invested approximately $18.7 million in capital expenditures, exclusive of expenditures for business acquisitions, during the nine months ended September 30, 2019, compared to $19.6 million during the same period in 2018, and expects to invest approximately $4.7 million for the remainder of 2019. Capital expenditures for the first nine months consisted primarily of the purchase of operating equipment replacements and technology related projects. During the nine months ended September 30, 2019, the Company made expenditures for acquisitions totaling $431.2 million, compared to $71.8 million during the same period in 2018. A total of $103.1 million was paid in cash dividends ($0.315 per share), compared to $91.7 million or ($0.28 per share) during the same period in 2018. On October 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 plus a special year-end dividend of $0.05 per share both payable December 10, 2019 to stockholders of record at the close of business November 11, 2019 to be funded with existing cash balances and available credit facilities. 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 nine months of 2019 or 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 $9.9 million and $9.5 million of common stock for the first nine months ended September 30, 2019 and 2018, respectively, from employees for the payment of taxes on vesting restricted shares. 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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The Company’s balance sheet as of September 30, 2019 and December 31, 2018 includes short-term unearned revenues of $132.9 million and $116.0. million, respectively, representing approximately 7% of our annual revenue. 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 total cash and cash equivalents of $104.4 million at September 30, 2019 is held at various banking institutions. Approximately $71.0 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 facility 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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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 and guidance 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 operating 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 allocation of the purchase price is subject to material revision in its future financial statements; 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 credit facility and $250.0 million term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future; the Company’s expectation that its leverage ratio will remain in compliance with its debt covenants through 2019; 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 from the company’s foreign subsidiaries is not a part of the Company’s current business plan; the Company’s plan to continue funding future benefit plan obligations with a possible reversion of any remaining pension assets to the Company in compliance with ERISA regulations; the Company’s expectation that it will invest $4.7 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 September 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 borrowings on its $175.0 million revolving credit facility and $250 million term loan facility. The Company is also exposed to market risks arising from changes in foreign exchange rates. See Note 13 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.
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 September 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 third quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As of September 30, 2019, we did not identify any material weaknesses in our internal controls, and therefore no corrective actions were taken.
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ROLLINS, INC. AND SUBSIDIARIES
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 third quarter ended September 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 | ||||||||||||
| July 1 to 30, 2019 | — | $ | — | — | 7,610,416 | |||||||||||
| August 1 to 31, 2019 | 2,847 | 35.77 | — | 7,610,416 | ||||||||||||
| September 1 to 30, 2019 | — | — | — | 7,610,416 | ||||||||||||
| Total | 2,847 | $ | 35.77 | — | 7,610,416 | |||||||||||
| (1) | Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts: July 2019: 0; August 2019: 2,847; and September 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
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: October 31, 2019 | By: | /s/ Gary W. Rollins | ||
| Gary W. Rollins | ||||
| Vice Chairman and Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| Date: October 31, 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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