UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,
20172018
Commission File Number 1-4422
(Exact name of registrant as specified in its charter)
Delaware |
| |
Delaware | 51-0068479 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2170 Piedmont Road, N.E., Atlanta, Georgia
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
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. Yesxý Noo 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). Yes xý No o 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.
|
| | | |
Large accelerated filer | xý | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | o |
| | Emerging growth company | o |
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).
Rollins, Inc. had 218,008,975218,187,939 shares of its $1 par value Common Stock outstanding as of April 15, 2017.16, 2018.
ROLLINS, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF MARCH 31, 20172018 AND DECEMBER 31, 2016
2017
(in thousands except share data) | | | | | | |
| | March 31, | | | December 31, | |
| | 2017 | | | 2016 | |
| | (unaudited) | | | | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 162,478 | | | $ | 142,785 | |
Trade receivables, net of allowance for doubtful accounts of $9,118 and $11,443, respectively | | | 85,178 | | | | 88,490 | |
Financed receivables, short-term, net of allowance for doubtful accounts of $1,717 and $1,727, respectively | | | 15,177 | | | | 15,968 | |
Materials and supplies | | | 14,736 | | | | 13,724 | |
Other current assets | | | 28,186 | | | | 29,204 | |
Total current assets | | | 305,755 | | | | 290,171 | |
Equipment and property, net | | | 132,101 | | | | 133,477 | |
Goodwill | | | 257,612 | | | | 255,665 | |
Customer contracts | | | 115,262 | | | | 117,466 | |
Other intangible assets | | | 43,784 | | | | 44,310 | |
Financed receivables, long-term, net of allowance for doubtful accounts of $1,430 and $1,430, respectively | | | 16,344 | | | | 16,748 | |
Deferred income taxes | | | 36,414 | | | | 41,877 | |
Other assets | | | 17,593 | | | | 16,824 | |
Total assets | | $ | 924,865 | | | $ | 916,538 | |
LIABILITIES | | | | | | | | |
Accounts payable | | $ | 31,946 | | | $ | 30,284 | |
Accrued insurance | | | 26,938 | | | | 26,201 | |
Accrued compensation and related liabilities | | | 60,338 | | | | 75,839 | |
Unearned revenues | | | 104,325 | | | | 99,820 | |
Other current liabilities | | | 43,968 | | | | 44,847 | |
Total current liabilities | | | 267,515 | | | | 276,991 | |
Accrued insurance, less current portion | | | 32,327 | | | | 32,023 | |
Accrued pension | | | 2,506 | | | | 2,880 | |
Long-term accrued liabilities | | | 38,966 | | | | 36,099 | |
Total liabilities | | | 341,314 | | | | 347,993 | |
Commitments and Contingencies | | | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | | |
Preferred stock, without par value; 500,000 shares authorized, zero shares issued | | | — | | | | — | |
Common stock, par value $1 per share; 375,000,000 shares authorized, 218,008,975 and 217,791,511 shares issued and outstanding, respectively | | | 218,009 | | | | 217,792 | |
Treasury stock, par value $1 per share; 0 and 0 shares, respectively | | | — | | | | — | |
Paid in capital | | | 73,022 | | | | 77,452 | |
Accumulated other comprehensive loss | | | (66,068 | ) | | | (70,075 | ) |
Retained earnings | | | 358,588 | | | | 343,376 | |
Total stockholders’ equity | | | 583,551 | | | | 568,545 | |
Total liabilities and stockholders’ equity | | $ | 924,865 | | | $ | 916,538 | |
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (unaudited) | | |
ASSETS | |
| | |
|
Cash and cash equivalents | $ | 84,319 |
| | $ | 107,050 |
|
Trade receivables, net of allowance for doubtful accounts of $10,536 and $11,814, respectively | 96,459 |
| | 97,802 |
|
Financed receivables, short-term, net of allowance for doubtful accounts of $1,581 and $1,535, respectively | 16,979 |
| | 17,263 |
|
Materials and supplies | 15,885 |
| | 14,983 |
|
Other current assets | 27,062 |
| | 25,697 |
|
Total current assets | 240,704 |
| | 262,795 |
|
Equipment and property, net | 136,272 |
| | 134,088 |
|
Goodwill | 364,606 |
| | 346,514 |
|
Customer contracts | 176,447 |
| | 152,869 |
|
Trademarks & Tradenames | 50,198 |
| | 49,998 |
|
Other intangible assets | 11,438 |
| | 11,550 |
|
Financed receivables, long-term, net of allowance for doubtful accounts of $1,406 and $1,357, respectively | 22,305 |
| | 20,414 |
|
Prepaid Pension | 18,237 |
| | 17,595 |
|
Deferred income taxes | 10,428 |
| | 18,420 |
|
Other assets | 20,061 |
| | 19,420 |
|
Total assets | $ | 1,050,696 |
| | $ | 1,033,663 |
|
LIABILITIES | |
| | |
|
Accounts payable | $ | 30,624 |
| | $ | 26,161 |
|
Accrued insurance | 28,462 |
| | 28,018 |
|
Accrued compensation and related liabilities | 64,610 |
| | 73,016 |
|
Unearned revenues | 117,934 |
| | 109,029 |
|
Other current liabilities | 57,443 |
| | 58,345 |
|
Total current liabilities | 299,073 |
| | 294,569 |
|
Accrued insurance, less current portion | 34,787 |
| | 34,245 |
|
Long-term accrued liabilities | 54,073 |
| | 50,925 |
|
Total liabilities | 387,933 |
| | 379,739 |
|
Commitments and Contingencies |
|
| |
|
|
STOCKHOLDERS’ EQUITY | |
| | |
|
Preferred stock, without par value; 500,000 shares authorized, zero shares issued |
|
| |
|
|
Common stock, par value $1 per share; 375,000,000 shares authorized, 218,186,439 and 217,992,177 shares issued and outstanding, respectively | 218,186 |
| | 217,992 |
|
Paid in capital | 75,079 |
| | 81,405 |
|
Accumulated other comprehensive loss | (48,908 | ) | | (45,956 | ) |
Retained earnings | 418,406 |
| | 400,483 |
|
Total stockholders’ equity | 662,763 |
| | 653,924 |
|
Total liabilities and stockholders’ equity | $ | 1,050,696 |
| | $ | 1,033,663 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 20172018 AND 2016
2017
(in thousands per except share data)
(unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
REVENUES | |
| | |
|
Customer services | $ | 408,742 |
| | $ | 375,247 |
|
COSTS AND EXPENSES | |
| | |
|
Cost of services provided | 206,143 |
| | 189,163 |
|
Depreciation and amortization | 16,916 |
| | 13,771 |
|
Sales, general and administrative | 126,487 |
| | 115,154 |
|
Gain on sale of assets, net | (56 | ) | | (26 | ) |
Interest expense / (income), net | 58 |
| | (73 | ) |
INCOME BEFORE INCOME TAXES | 59,194 |
| | 57,258 |
|
PROVISION FOR INCOME TAXES | 10,669 |
| | 16,988 |
|
NET INCOME | $ | 48,525 |
| | $ | 40,270 |
|
NET INCOME PER SHARE - BASIC AND DILUTED | $ | 0.22 |
| | $ | 0.18 |
|
DIVIDENDS PAID PER SHARE | $ | 0.14 |
| | $ | 0.12 |
|
Weighted average participating shares outstanding - basic and diluted | 218,163 |
| | 217,971 |
|
(unaudited) | | Three Months Ended | |
| | March 31, | |
| | 2017 | | | 2016 | |
REVENUES | | | | | | | | |
Customer services | | $ | 375,247 | | | $ | 352,736 | |
COSTS AND EXPENSES | | | | | | | | |
Cost of services provided | | | 189,163 | | | | 177,802 | |
Depreciation and amortization | | | 13,771 | | | | 11,640 | |
Sales, general and administrative | | | 115,154 | | | | 112,255 | |
Gain on sale of assets, net | | | (26 | ) | | | (89 | ) |
Interest income, net | | | (73 | ) | | | (50 | ) |
INCOME BEFORE INCOME TAXES | | | 57,258 | | | | 51,178 | |
PROVISION FOR INCOME TAXES | | | 16,988 | | | | 19,250 | |
NET INCOME | | $ | 40,270 | | | $ | 31,928 | |
NET INCOME PER SHARE - BASIC AND DILUTED | | $ | 0.18 | | | $ | 0.15 | |
DIVIDENDS PAID PER SHARE | | $ | 0.115 | | | $ | 0.10 | |
| | | | | | | | |
Weighted average participating shares outstanding -basic and diluted | | | 217,971 | | | | 218,686 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 20172018 AND 2016
2017
(in thousands)
(unaudited)
| | Three Months Ended | |
| | March 31, | |
| | 2017 | | | 2016 | |
NET INCOME | | $ | 40,270 | | | $ | 31,928 | |
Other comprehensive earnings (loss), net of tax | | | | | | | | |
Foreign currency translation adjustments | | | 4,007 | | | | 9,892 | |
Other comprehensive earnings (loss) | | | 4,007 | | | | 9,892 | |
Comprehensive earnings | | $ | 44,277 | | | $ | 41,820 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
NET INCOME | $ | 48,525 |
| | $ | 40,270 |
|
Other comprehensive earnings (loss), net of tax | |
| | |
|
Foreign currency translation adjustments | (2,952 | ) | | 4,007 |
|
Other comprehensive earnings (loss) | (2,952 | ) | | 4,007 |
|
Comprehensive earnings | $ | 45,573 |
| | $ | 44,277 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Rollins, Inc. and Subsidiaries
(In thousands) (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid- | | Accumulated Other Comprehensive | | Retained | | |
| Shares | | Amount | | In-Capital | | Income / (Loss) | | Earnings | | Total |
Balance at December 31, 2016 | 217,792 |
| | $ | 217,792 |
| | $ | 77,452 |
| | $ | (70,075 | ) | | $ | 343,376 |
| | $ | 568,545 |
|
Net Income | |
| | |
| | |
| | |
| | 179,124 |
| | $ | 179,124 |
|
Other Comprehensive Income, Net of Tax | |
| | |
| | |
| | |
| | |
| | |
Pension Liability Adjustment | — |
| | — |
| | — |
| | 14,159 |
| | — |
| | $ | 14,159 |
|
Foreign Currency Translation Adjustments | — |
| | — |
| | — |
| | 9,960 |
| | — |
| | $ | 9,960 |
|
Cash Dividends | — |
| | — |
| | — |
| | — |
| | (122,017 | ) | | $ | (122,017 | ) |
Stock Compensation | 434 |
| | 434 |
| | 11,965 |
| | — |
| | — |
| | $ | 12,399 |
|
Employee Stock Buybacks | (234 | ) | | (234 | ) | | (8,012 | ) | | — |
| | — |
| | $ | (8,246 | ) |
Balance at December 31, 2017 | 217,992 |
| | 217,992 |
| | 81,405 |
| | (45,956 | ) | | 400,483 |
| | 653,924 |
|
Net Income | |
| | |
| | |
| | |
| | 48,525 |
| | 48,525 |
|
Other Comprehensive Income, Net of Tax | |
| | |
| | |
| | |
| | |
| | |
|
Foreign Currency Translation Adjustments | — |
| | — |
| | — |
| | (2,952 | ) | | — |
| | (2,952 | ) |
Cash Dividends | — |
| | — |
| | — |
| | — |
| | (30,602 | ) | | (30,602 | ) |
Stock Compensation | 377 |
| | 377 |
| | 2,716 |
| | — |
| | — |
| | 3,093 |
|
Employee Stock Buybacks | (183 | ) | | (183 | ) | | (9,042 | ) | | — |
| | — |
| | (9,225 | ) |
Balance at March 31, 2018 | 218,186 |
| | 218,186 |
| | 75,079 |
| | (48,908 | ) | | 418,406 |
| | 662,763 |
|
| | | | | | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | | | | | | | | Other | | | | | | | |
| | Common Stock | | | Treasury | | | Paid- | | | Comprehensive | | | Retained | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | In-Capital | | | Income / (Loss) | | | Earnings | | | Total | |
Balance at December 31, 2015 | | | 218,753 | | | $ | 218,753 | | | | (200 | ) | | $ | (200 | ) | | $ | 69,762 | | | $ | (71,178 | ) | | $ | 306,892 | | | $ | 524,029 | |
Net Income | | | | | | | | | | | | | | | | | | | | | | | | | | | 167,369 | | | | 167,369 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Comprehensive Income, Net of Tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pension Liability Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,705 | | | | — | | | | 1,705 | |
Foreign Currency Translation Adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (602 | ) | | | — | | | | (602 | ) |
Cash Dividends | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (109,002 | ) | | | (109,002 | ) |
Common Stock Purchased (1) | | | (836 | ) | | | (836 | ) | | | — | | | | — | | | | — | | | | — | | | | (21,883 | ) | | | (22,719 | ) |
Common Stock Retired | | | (200 | ) | | | (200 | ) | | | 200 | | | | 200 | | | | | | | | | | | | | | | | — | |
Stock Compensation | | | 388 | | | | 388 | | | | — | | | | — | | | | 12,027 | | | | — | | | | — | | | | 12,415 | |
Employee Stock Buybacks | | | (313 | ) | | | (313 | ) | | | — | | | | — | | | | (8,036 | ) | | | — | | | | — | | | | (8,349 | ) |
Excess Tax Benefit on Share-based payments | | | — | | | | — | | | | — | | | | — | | | | 3,699 | | | | — | | | | — | | | | 3,699 | |
Balance at December 31, 2016 | | | 217,792 | | | | 217,792 | | | | — | | | | — | | | | 77,452 | | | | (70,075 | ) | | | 343,376 | | | | 568,545 | |
Net Income | | | | | | | | | | | | | | | | | | | | | | | | | | | 40,270 | | | | 40,270 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Comprehensive Income, Net of Tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign Currency Translation Adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,007 | | | | — | | | | 4,007 | |
Cash Dividends | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (25,058 | ) | | | (25,058 | ) |
Stock Compensation | | | 435 | | | | 435 | | | | — | | | | — | | | | 2,832 | | | | — | | | | — | | | | 3,267 | |
Employee Stock Buybacks | | | (218 | ) | | | (218 | ) | | | — | | | | — | | | | (7,262 | ) | | | — | | | | — | | | | (7,480 | ) |
Balance at March 31, 2017 | | | 218,009 | | | | 218,009 | | | | — | | | | — | | | | 73,022 | | | | (66,068 | ) | | | 358,588 | | | | 583,551 | |
(1) Charges to Retained Earnings are from purchases of the Company’s Common Stock.
The accompanying notes are an integral part of these consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 |
(in thousands) |
(unaudited) |
| | Three Months Ended | |
| | March 31, | |
| | 2017 | | | 2016 | |
OPERATING ACTIVITIES | | | | | | | | |
Net income | | $ | 40,270 | | | $ | 31,928 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 13,771 | | | | 11,640 | |
Provision for deferred income taxes | | | 5,462 | | | | 4,167 | |
Provision for bad debts | | | 61 | | | | 610 | |
Stock - based compensation expense | | | 3,267 | | | | 3,325 | |
Excess tax benefits from share-based payments | | | — | | | | (3,019 | ) |
Other, net | | | (130 | ) | | | 2 | |
Changes in operating assets and liabilities | | | (4,654 | ) | | | (7,309 | ) |
Net cash provided by operating activities | | | 58,047 | | | | 41,344 | |
INVESTING ACTIVITIES | | | | | | | | |
Cash used for acquisitions of companies, net of cash acquired | | | (3,020 | ) | | | (21,109 | ) |
Purchases of equipment and property | | | (5,454 | ) | | | (8,956 | ) |
Proceeds from sales of franchises | | | 168 | | | | 37 | |
Other | | | 61 | | | | 93 | |
Net cash used in investing activities | | | (8,245 | ) | | | (29,935 | ) |
FINANCING ACTIVITIES | | | | | | | | |
Cash paid for common stock purchased | | | (7,480 | ) | | | (8,779 | ) |
Dividends paid | | | (25,058 | ) | | | (21,855 | ) |
Excess tax benefits from share-based payments | | | — | | | | 3,019 | |
Net cash used in financing activities | | | (32,538 | ) | | | (27,615 | ) |
Effect of exchange rate changes on cash | | | 2,429 | | | | 12,870 | |
Net increase/(decrease) in cash and cash equivalents | | | 19,693 | | | | (3,336 | ) |
Cash and cash equivalents at beginning of period | | | 142,785 | | | | 134,574 | |
Cash and cash equivalents at end of period | | $ | 162,478 | | | $ | 131,238 | |
(in thousands)
(unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
OPERATING ACTIVITIES | |
| | |
|
Net income | $ | 48,525 |
| | $ | 40,270 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 16,916 |
| | 13,771 |
|
Provision for deferred income taxes | 4,101 |
| | 5,462 |
|
Provision for bad debts | 932 |
| | 61 |
|
Stock - based compensation expense | 3,093 |
| | 3,267 |
|
Other, net | (1,195 | ) | | (130 | ) |
Changes in operating assets and liabilities | 376 |
| | (5,930 | ) |
Net cash provided by operating activities | 72,748 |
| | 56,771 |
|
INVESTING ACTIVITIES | |
| | |
|
Cash used for acquisitions of companies, net of cash acquired | (43,154 | ) | | (3,020 | ) |
Purchases of equipment and property | (6,134 | ) | | (5,454 | ) |
Proceeds from sales of franchises | 177 |
| | 168 |
|
Other | 76 |
| | 61 |
|
Net cash used in investing activities | (49,035 | ) | | (8,245 | ) |
FINANCING ACTIVITIES | |
| | |
|
Cash paid for common stock purchased | (9,225 | ) | | (7,480 | ) |
Dividends paid | (30,602 | ) | | (25,058 | ) |
Net cash used in financing activities | (39,827 | ) | | (32,538 | ) |
Effect of exchange rate changes on cash | (6,617 | ) | | 3,705 |
|
Net increase/(decrease) in cash and cash equivalents | (22,731 | ) | | 19,693 |
|
Cash and cash equivalents at beginning of period | 107,050 |
| | 142,785 |
|
Cash and cash equivalents at end of period | $ | 84,319 |
| | $ | 162,478 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
NOTE 1. | BASIS OF PREPARATION AND OTHER |
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, 2016.2017 other than updates related to Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) as noted below. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 20162017 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 month period ended March 31,
20172018 are not necessarily indicative of results for the entire year.
The Company has only one reportable segment, its pest and termite control business. The Company’s results of operations and its financial condition are not reliant upon any single customer, or a few customers, or the Company’s foreign operations.
| NOTE 2. | RECENT ACCOUNTING PRONOUNCEMENTS |
Recently adopted accounting standards
In March 2016,
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Revenue
Service Revenue and Other Revenue
Rollins’ revenues are sourced primarily from the FASB issued ASU No. 2016-09, Improvementssale of pest control and other protection services to Employee Share-Based Payment Accounting,residential and commercial consumers.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which involve several aspectsare distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Goods and Services and Performance Obligations
The Company contracts with its customers to provide the following goods and services, each of which is a distinct performance obligation:
Pest control services - Rollins provides pest control services to protect residential and commercial properties from common pests, including rodents and insects. Pest control generally consists of assessing a customer’s property for conditions that invite pests, tackling current infestations, and stopping the life cycle to prevent future invaders. Revenue from pest control services is recognized as services are rendered.
The Company’s revenue recognition policies are designed to recognize revenues upon transfer of control at the time services are performed. For certain revenue types, because of the timing of billing and the receipt of cash versus the timing of performing services, certain accounting estimates are utilized. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. The Company defers recognition of advance payments and recognizes the revenue as the services are rendered. The Company classifies discounts related to the advance payments as a reduction in revenues.
Termite control services (including traditional and baiting) - Rollins provides both conventional and baiting termite protection services. Traditional termite protection uses “Termidor” liquid treatment and/or dry foam and Orkin foam to treat voids and spaces
ROLLINS, INC. AND SUBSIDIARIES
around the property, while baiting termite protection uses baits to disrupt the molting process termites require for share-based payment transactions, includinggrowth and offers ongoing protection. Revenue from initial termite treatment services is recognized as services are provided.
Maintenance/monitoring/inspection - In connection with the income tax consequences, classificationinitial service offerings, Rollins provides recurring maintenance, monitoring or inspection services to help protect consumer’s property for any future sign of awardstermite activities after the original treatment. This recurring service is a service-type warranty under ASC 606 as either equityit is routinely sold and purchased separately from the initial treatment services and is typically purchased or liabilities, and classificationrenewed annually.
Termite baiting revenues are recognized based on the statementtransfer of cash flows. Somecontrol of the areas for simplification apply only to nonpublic entities. The amendments in this update are effectiveindividual units of accounting. At the inception of a new baiting services contract, upon quality control review of the installation, the Company recognizes revenue for the Company’s financial statements issuedinstallation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring element. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue that depicts the Company's performance in transferring control of the service. The allocation of the purchase price to the two deliverables is based on the relative stand-alone selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual periods beginning after December 15, 2016,contract period on a straight-line basis that depicts the Company's performance in transferring control of the service.
Revenue received for conventional termite renewals is deferred and interim periods within annual periods.recognized on a straight-line basis over the remaining contract term that depicts the Company's performance in transferring control of the service; and, the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company adopted this standard duringaccrues for noticed claims. The costs of providing termite services upon renewal are compared to the quarterexpected revenue to be received and a provision is made for any expected losses.
Miscellaneous services (e.g., cleaning, etc.) - In certain agreements with customers, Rollins may offer other miscellaneous services, including restroom cleaning (e.g., eliminating foul odors, grease and grime which could attract pests), training (e.g., seminar covering Good Manufacturing Practices and product stewardship), etc. Revenue from miscellaneous services is recognized when services are provided.
Products - Depending on customer demand, Rollins may separately sell pest control and/or termite protection products, such as baits. Revenue from product sales is recognized upon transfer of control of the asset.
Equipment rental (or lease) - Depending on customer demand, Rollins may lease certain pest control and/or termite protection equipment. Revenue from equipment rentals are recognized over the period of the rental/lease. Revenue from equipment rentals are not material and represent less than 1.0% of the Company's revenues for each reported period.
Right to access intellectual property (Franchise) - The right to access Rollins’ intellectual property is an essential part of Orkin’s franchising agreements. These agreements provide the franchisee (the customer) a license to use the Rollins’ name and trademark when advertising and selling services to end customers in their normal course of business. Orkin Franchise agreements contain a clause allowing Orkin to purchase certain assets of the franchisee. This is only an offer for Orkin to re-purchase the assets originally provided by Orkin to the franchisee and is not a performance obligation or a form of consideration. International and domestic franchising revenue was less than 0.5% of the Company’s annual revenues.
All Orkin domestic franchises have a guaranteed repurchase clause that the Orkin franchise may be repurchased by Orkin at a later date once it has been established. Deferred Orkin franchise fees of $3.4 million at both March 31, 2018 and December 31, 2017 were not material to the Company's financial statements.
Royalties from Orkin franchises are accrued and recognized as revenues are earned on a monthly basis. Revenue from franchises was $2.4 million for each of the three month periods ended March 31, 2018 and 2017, respectively.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. The balance of long-term accounts receivable, net of allowance for doubtful accounts, was $22.3 million as of March 31, 2018. As of December 31, 2017, long-term accounts receivable, net of allowance for doubtful accounts, were $20.4 million and applied these provisions prospectively. See Management’s Discussionare included in financed receivables as a long-term asset on our consolidated statements of financial position.
ROLLINS, INC. AND SUBSIDIARIES
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and Analysisother currently available evidence. Activity in the allowance for a summarydoubtful accounts was as follows:
|
| | | |
(In thousands) |
Three Months ended March 31, 2018 |
Balance at December 31, 2017 | $ | 14,706 |
|
Charged to costs and expenses | 932 |
|
Net (deductions) recoveries | (2,115 | ) |
Balance at March 31, 2018 | $ | 13,523 |
|
Unearned revenue is comprised mainly of unearned revenue related to the Company’s termite baiting offering and year-in-advance pest control services for which we have been paid in advance and earn the revenue when we transfer control of the impactproduct or service.
Refer to Note 7 - Unearned Revenue for further information, including changes in unearned revenue during the period.
Payment terms and conditions vary by contract type, although terms generally include a requirement of
such adoption.payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Recently issued accounting standards to be adopted in
20172018 or later
REVENUE RECOGNITION:
In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The Financial Accounting Standards Boardupdated 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 International Accounting Standards Boardannual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In February 2016, the FASB issued
their converged standard on revenue recognition in May 2014. The standard provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries and significantly reduceASU 2016-02, Leases (Topic 842). In September 2017, the
complexity inherent in today’s revenue recognition guidance. The various ASUs related toFASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606)
have been listed below:· | ASU No. 2014-09. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five step process. |
· | ASU No. 2015-14. Deferred the effective date of ASU 2014-09 for all entities by one year to the first quarter of 2018 with early application permitted. |
· | ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments provide, Leases (Topic 840), and Leases (Topic 842), which provides additional implementation guidance on whether an entity is a principal or agent when providing services to a customer along with another party. |
· | ASU No. 2016-10, Identifying Performance Obligations and Licensing. The amendments clarify the earlier guidance on identifying performance obligations and licensing implementation. |
· | ASU No. 2016-11, Rescission of SEC Guidance Because of ASUs 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This ASU rescinds certain SEC guidance related to issues that are currently codified under various topics. |
· | ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments provide clarifying guidance on certain aspects of the five step process and practical expedients regarding the effect of modifications and status of completed contracts under legacy GAAP and disclosures related to the application of this guidance using the modified retrospective or retrospective transition method. |
ROLLINS, INC. AND SUBSIDIARIES
· | ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 and includes among others, loan guarantees, impairment testing of contract costs, performance obligations disclosures and accrual of advertising costs. |
| Current Status of implementation: |
| The Company is currently analyzing the effect of the standard across all of its revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. Most of the Company’s services are primarily short-term in nature, and the assessment at this stage is that the Company does not expect the adoption of the new revenue recognition standard to have a material impact on its financial statements. The Company plans to adopt the standard in the first quarter of 2018 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. The Company intends to engage a consultant to assist the Company with implementation of this standard. |
In February 2016, the FASBpreviously issued ASU No. 2016-02 Leases which require lessees(Topic 842). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with lease terms of moregreater than 12 months. The ASU also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods. Earlier adoption is permitted for any entity in any interim or annual reporting period. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The amendments in the update are effective for the Company’s financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s 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 today’s 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. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.
In February 2017, the FASB issued Accounting Standards Update No. 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), Employee Benefit Plan Master Trust Reporting (“ASU 2017-06”). ASU 2017-06 relates primarily to the reporting by an employee benefit plan (a plan) for its interest in a master trust. A master trust is a trust for which a regulated financial institution (bank, trust company, or similar financial institution that is regulated, supervised, and subject to periodic examination by a state or federal agency) serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. Under Topic 960, investments in master trusts are presented in a single line item in the statement of net assets available for benefits. Similar guidance is not provided in Topic 962 or 965, which has resulted in diversity in practice. For each master trust in which a plan holds an interest, the amendments in ASU 2017-06 require a plan’s interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in ASU 2017-06 are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. An entity should apply the amendments in ASU 2017-06 retrospectively to each period for which financial statements are presented. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.
ROLLINS, INC. AND SUBSIDIARIES
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-072016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017,2018, and early adoption is permitted. We doBased on a preliminary assessment, the Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition of right-of-use assets and lease liabilities on its consolidated balance sheets at the beginning of the earliest period presented. The Company is continuing its assessment, which may identify additional impacts this guidance will have on its consolidated financial statements and disclosures. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 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 is effective for the Company beginning in fiscal year 2020. The adoption of this ASU is not expect this standardexpected to have a material impact on the Company's consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
NOTE 3. REVENUE
Adoption of ASC Topic 606, "Revenue from Contracts with Customers" On January 1, 2018, and the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
There was no impact on the Company’s reported resultsfinancial statements as a result of operationsadopting Topic 606 for the three months ended March 31, 2018 and 2017, or financial position.the twelve months ended December 31, 2017.
The following tables present our revenues disaggregated by revenue source (in thousands, unaudited).
Sales and usage-based taxes are excluded from revenues. No sales to an individual customer or country other than the United States accounted for more than 10% of the three months ended March 31, 2018 and 2017, respectively. Revenue, classified by the major geographic areas in which our customers are located, was as follows:
|
| | | | | | | |
| (in thousands) |
| Three Months Ended |
| March 31, |
| 2018 |
| | 2017 |
|
United States | $ | 375,959 |
| | $ | 345,580 |
|
Other countries | 32,783 |
| | 29,667 |
|
Total Revenues | $ | 408,742 |
| | $ | 375,247 |
|
Revenue from external customers, classified by significant product and service offerings, was as follows:
|
| | | | | | | |
| (in thousands) |
| Three Months Ended |
| March 31, |
| 2018 |
| | 2017 |
|
Residential contract revenue | $ | 144,197 |
| | $ | 132,344 |
|
Commercial contract revenue | 132,079 |
| | 124,833 |
|
Termite completions, bait monitoring, & renewals | 76,491 |
| | 65,652 |
|
Other revenues | 55,975 |
| | 52,418 |
|
Total Revenues | $ | 408,742 |
| | $ | 375,247 |
|
NOTE
3.4. EARNINGS PER SHARE
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. Basic and diluted earnings per share attributable to common and restricted shares of common stock for the period were as follows:
| | Three Months Ended | |
| | March 31, | |
| | 2017 | | | 2016 | |
Basic and diluted earnings per share | | | | | | | | |
Common stock | | $ | 0.18 | | | $ | 0.15 | |
Restricted shares of common stock | | $ | 0.18 | | | $ | 0.15 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Basic and diluted earnings per share | |
| | |
|
Common stock | $ | 0.22 |
| | $ | 0.18 |
|
Restricted shares of common stock | $ | 0.22 |
| | $ | 0.18 |
|
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
ROLLINS, INC. AND SUBSIDIARIES
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.
On December 2, 2014, Plaintiff Killian Pest Control sued Rollins, Inc. and its subsidiary HomeTeam Pest Defense alleging that HomeTeam’s exclusive use of its “tubes in the walls” system violates the federal Sherman Antitrust Act, and California’s Cartwright Act and Business and Professions Code. Plaintiffs seek a declaratory judgment that the alleged misconduct violates the Sherman and Cartwright Acts, and the Business and Professions Code; a permanent injunction against continuing alleged violations; and monetary damages. The lawsuit is pending in the United States District Court, Northern District of California. Because discovery remains open and there are unresolved questions of fact and law, the Company cannot currently estimate the loss, if any, and intends to defend this matter vigorously.
On December 2, 2014, Plaintiff Jose Luis Garnica, on behalf of himself and a class of similarly situated customers, sued Rollins, Inc. and its subsidiary HomeTeam Pest Defense alleging that HomeTeam’s exclusive use of its “tubes in the walls” system violates the federal Sherman Antitrust Act. A second Plaintiff, Cora Potter, subsequently was added. Plaintiffs seek a declaratory judgment that the alleged misconduct violates the Sherman Act; a permanent injunction against continuing violations; and monetary damages. On February 3, 2017, the Court issued an order denying Plaintiffs’ Motion for Class Certification. At a hearing on February 9, 2017, the Court granted Plaintiffs leave to seek certification of a class of customers limited to their own geographic market, the Bakersfield, California area. The lawsuit is pending in the United States District Court, Northern District of California. Because discovery remains open and there are unresolved questions of fact and law, the Company cannot currently estimate the loss, if any, and intends to defend this matter vigorously.
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.
ROLLINS, INC. AND SUBSIDIARIES
| NOTE 5. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
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 fair values. The Company has a Revolving Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured line of credit of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $25.0 million swingline subfacility. There were no outstanding borrowings at March 31,
20172018 and December 31,
2016.2017.
NOTE 7. UNEARNED REVENUE
Changes in unearned revenue were as follows:
|
| | | |
(In thousands) |
Three Months ended March 31, 2018 |
Balance at December 31, 2017 | $ | 117,614 |
|
Deferral of unearned revenue | 47,725 |
|
Recognition of unearned revenue | (38,809 | ) |
Balance at March 31, 2018 | 126,530 |
|
| |
Year ended December 31, 2017 | |
Balance at December 31, 2016 | $ | 106,323 |
|
Deferral of unearned revenue | 140,019 |
|
Recognition of unearned revenue | (128,728 | ) |
Balance at December 31, 2017 | 117,614 |
|
Deferred revenue recognized in the three month period ended March 31, 2018 and March 31, 2017 were $38.8 million and $32.6 million, respectively.
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. The Company has no material contracted not recognized revenue as of March 31, 2018 or December 31, 2017.
At March 31, 2018 and December 31, 2017, the Company had long-term unearned revenue of $8.6 million. Unearned short-term revenue is recognized over the next 12 month period. The majority of unearned long-term revenue is recognized over a period of five years or less with immaterial amounts recognized through 2025.
| NOTE 6. | STOCKHOLDERS’ EQUITY |
NOTE 8. STOCKHOLDERS' EQUITY
During the three months ended March 31,
20172018, the Company paid
$25.0$30.6 million or
$0.115$0.14 per share in cash dividends compared to
$21.9$25.1 million or
$0.10$0.115 per share during the same period in
2016.The2017.
During the first quarter ended March 31, 2018 and during the same period in 2017 the Company did not repurchase shares of its common stock fromon the open market duringmarket.
The Company also repurchases shares from employees for the
first three monthspayment of
2017 compared to the repurchase of approximately 54,000 shares at a weighted average price of $24.77 during the first three months of 2016.taxes on vesting restricted shares. The Company repurchased $7.5$9.2 million and $7.4$7.5 million of common stock for the three monthsquarter ended March 31, 20172018 and 2016,2017, respectively, from employees for the payment of taxes on vesting restricted shares.
ROLLINS, INC. AND SUBSIDIARIES
As more fully discussed in Note 15 of the Company’s notes to the consolidated financial statements in its
20162017 Annual Report on Form 10-K, stock options, time lapse restricted shares
(TLRS’s) 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 March 31,
2017,2018, approximately
4.33.9 million shares of the Company’s common stock were reserved for issuance.
Time Lapse Restricted Shares and Restricted Stock Units
The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense:
| | Three Months Ended | |
| | March 31, | |
(in thousands) | | 2017 | | | 2016 | |
Time lapse restricted stock: | | | | | | | | |
Pre-tax compensation expense | | $ | 3,267 | | | $ | 3,325 | |
Tax benefit | | | (1,264 | ) | | | (1,287 | ) |
Restricted stock expense, net of tax | | $ | 2,003 | | | $ | 2,038 | |
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2018 | | 2017 |
Time lapse restricted stock: | |
| | |
|
Pre-tax compensation expense | $ | 3,093 |
| | $ | 3,267 |
|
Tax benefit | (786 | ) | | (1,264 | ) |
Restricted stock expense, net of tax | $ | 2,307 |
| | $ | 2,003 |
|
The Company adopted the amendments of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accountingduring its first quarter of 2017. Accordingly, the Company did not recognize a deferred tax benefit for the first quarter of 2017. A deferred tax benefit of $3.0 million was recognized during the 1st quarter ended March 31, 2016 and a deferred tax benefit of approximately $3.7 million was recognized for the year ended December 31, 2016, related to the vesting of restricted shares which have been recorded as increases to paid-in capital.The following table summarizes information on unvested restricted stock outstanding as of March 31, 2017:
| | Number of Shares | | | Weighted-Average Grant-Date Fair Value | |
Unvested Restricted Stock Units at December 31, 2016 | | | 2,261 | | | $ | 20.21 | |
Forfeited | | | (13 | ) | | | 22.03 | |
Vested | | | (626 | ) | | | 16.87 | |
Granted | | | 448 | | | | 33.80 | |
Unvested Restricted Stock Units at March 31, 2017 | | | 2,070 | | | $ | 24.15 | |
2018:
|
| | | | | | |
| Number of Shares | | Average Grant- Date Fair Value |
Unvested Restricted Stock at December 31, 2017 | 2,017 |
| | $ | 24.50 |
|
Forfeited | (5 | ) | | 18.68 |
|
Vested | (586 | ) | | 19.69 |
|
Granted | 384 |
| | 47.88 |
|
Unvested Restricted Stock at March 31, 2018 | 1,810 |
| | $ | 31.00 |
|
At March 31,
20172018 and December 31,
2016,2017, the Company had
$41.6$48.1 million and
$29.9$32.9 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
4.14.5 years and
3.83.9 years, respectively.
ROLLINS, INC. AND SUBSIDIARIES
| NOTE 7. | PENSION AND POST RETIREMENT BENEFIT PLANS |
NOTE 9. PENSION AND POST RETIREMENT BENEFIT PLANS
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 Gain | | | | | | |
| | Three Months Ended | |
| | March 31, | |
(in thousands) | | 2017 | | | 2016 | |
Interest and service cost | | $ | 2,138 | | | $ | 2,350 | |
Expected return on plan assets | | | (3,342 | ) | | | (3,305 | ) |
Amortization of net loss | | | 830 | | | | 816 | |
Net periodic benefit | | $ | (374 | ) | | $ | (139 | ) |
Components of Net Pension Benefit Gain
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2018 | | 2017 |
Interest and service cost | $ | 1,995 |
| | $ | 2,138 |
|
Expected return on plan assets | (3,443 | ) | | (3,342 | ) |
Amortization of net loss | 826 |
| | 830 |
|
Net periodic benefit | $ | (622 | ) | | $ | (374 | ) |
During the three months ended March 31,
20172018 and the same period
in 20162017 the Company made no contributions
respectively to its defined benefit retirement plans (the “Plans”). The Company made
$3.3 million inno contributions for the year ended December 31,
2016.2017. The Company is
planningadequately funded on
makingits Pension Plans and is not expecting to make further contributions
to the Plans during the fiscal year ending December 31, 2017 of approximately $5.5 million.in 2018.
| NOTE 8. | BUSINESS COMBINATIONS |
NOTE 10. BUSINESS COMBINATIONS
The Company made
five16 acquisitions during the three month period ended March 31,
2017,2018, and
3423 acquisitions for the year ended December 31,
2016,2017, respectively,
assome of which have been disclosed on various press releases and related
Current Reports on Form
8-Ks.8-K.
On August 1, 2017, the Company completed the acquisition of Northwest Exterminating Co., Inc. Northwest has 23 offices in 5 southeastern states and was the nation’s 17th largest pest management company. Northwest performs services for approximately
ROLLINS, INC. AND SUBSIDIARIES
120,000 customers and will continue to operate as a separate business, as one of Rollins’ Specialty Brands, along with HomeTeam Pest Defense, Western Pest Services and Waltham Pest Services.
On February 28, 2018, the Company announced that it has purchased the stock of AMES Group Limited and Kestrel Pest Control Limited, both companies operating in the UK. AMES Group Limited is a long established pest control company, with a rich history of providing superior pest control, bird control, and specialist services to commercial customers throughout the midlands and including London. Kestrel Pest Control provides superior commercial pest control to customers in South Hampton and surrounding areas of the Southwest. Kestrel Pest Control will merge with our Safeguard UK brand.
On March 1, 2018, the Company announced that it had completed its acquisition of OPC Services. OPC Services will continue to operate as a separate business, and one of Rollins' Specialty Brands, along with HomeTeam Pest Defense, Northwest Exterminating, Western Pest Services and Waltham Pest Services.
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):
| | March 31, | |
| | 2017 | |
Accounts receivable | | $ | 136 | |
Materials and supplies | | | 78 | |
Equipment and property | | | 185 | |
Customer contracts | | | 3,291 | |
Other intangible assets | | | 9 | |
Current liabilities | | | (700 | ) |
Other assets and liabilities, net | | | 21 | |
Total cash purchase price | | $ | 3,020 | |
|
| | | |
| March 31, 2018 |
Accounts Receivable | $ | 1,536 |
|
Current Assets | 273 |
|
Equipment and property | 3,591 |
|
Goodwill | 33,613 |
|
Customer Contracts and other intangible assets | 18,225 |
|
Current liabilities | (9,310 | ) |
Long-term liabilities | (490 | ) |
Total consideration paid | $ | 47,438 |
|
Less: Contingent consideration liability | (4,284 | ) |
Total cash purchase price | $ | 43,154 |
|
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
$257.6$364.6 million and
$255.7$346.5 million at March 31,
20172018 and December 31,
2016,2017, 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
$44.6$46.5 million at March 31,
20172018 and
$42.7$46.3 million at December 31,
2016.2017.
The Company completed its most recent annual impairment
analysesanalysis as of September 30,
2016.2017. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.
The carrying amount of customer contracts was
$115.3$176.4 million and
$117.5$152.9 million at March 31,
20172018 and December 31,
2016, respectively,2017, respectively. The carrying amount of trademarks and
thetradenames was $50.2 million and $50.0 million at March 31, 2018 and December 31, 2017, respectively. The carrying amount of other intangible assets was
$43.8$11.4 million and
$44.3$11.6 million at March 31,
20172018 and December 31,
2016,2017, respectively. The carrying amount of customer contracts in foreign countries was
$30.9$33.0 million and
$29.7$29.8 million at March 31,
20172018 and December 31,
2016, respectively2017, respectively. The carrying amount of trademarks and
thetradenames in foreign countries was $1.7 million at March 31, 2018 and December 31, 2017, respectively. The carrying amount of other intangible assets in foreign countries was
$3.8$1.6 million and $1.7 million at
both March 31,
20172018 and December 31,
2016.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 March 31,
20172018 (in thousands):
| | Carrying | | | Useful Life | |
Intangible Asset | | Value | | | in Years | |
Customer contracts | | $ | 115,262 | | | | 3 - 12.5 | |
Trademarks and tradenames | | | 32,607 | | | | 0 - 20 | |
Non-compete agreements | | | 4,383 | | | | 3 - 20 | |
Patents | | | 2,950 | | | | 15 | |
Other assets | | | 1,617 | | | | 10 | |
Internet domains | | | 2,227 | | | | n/a | |
Total customer contracts and other intangible assets | | $ | 159,046 | | | | | |
|
| | | | | | | |
Intangible Asset | | Carrying Value | | Useful Life in Years |
Customer contracts | | $ | 176,447 |
| | 3 - 12 |
|
Trademarks and tradenames | | 50,198 |
| | 0 - 20 |
|
Non-compete agreements | | 4,054 |
| | 3 - 20 |
|
Patents | | 2,405 |
| | 3 - 15 |
|
Other assets | | 2,752 |
| | 10 |
|
Internet domains | | 2,227 |
| | n/a |
|
Total customer contracts and other intangible assets | | $ | 238,083 |
| | |
|
ROLLINS, INC. AND SUBSIDIARIES
NOTE
9.11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain
riskrisks 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
USU.S. dollar.
Hedges of Foreign Exchange Risk
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the
USU.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
USU.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 gain of
$30,000$147,000 for the quarter ended March 31,
20172018 and a
lossgain of
$469,000$30,000 for the
three months ended March 31, 2016.same quarter in the prior year. As of March 31,
2017,2018, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (in thousands except for number of instruments):
Non-Designated Derivative Summary |
| | Number of Instruments | | | Sell Notional | | | Buy Notional | |
FX Forward Contracts | | | | | | | | | | | | |
Sell AUD/Buy USD Fwd Contract | | | 6 | | | $ | 1,275 | | | $ | 960 | |
Sell CAD/Buy USD Fwd Contract | | | 8 | | | $ | 8,150 | | | $ | 6,179 | |
Total | | | 14 | | | | | | | $ | 7,139 | |
|
| | | | | | | | | | |
Non-Designated Derivative Summary |
| Number of Instruments | | Sell Notional | | Buy Notional |
FX Forward Contracts | |
| | |
| | |
|
Sell AUD/Buy USD Fwd Contract | 3 |
| | $ | 550 |
| | $ | 425 |
|
Sell CAD/Buy USD Fwd Contract | 6 |
| | $ | 4,800 |
| | $ | 3,808 |
|
Total | 9 |
| | $ | — |
| | $ | 4,233 |
|
ROLLINS, INC. AND SUBSIDIARIESThe table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 20172018 and December 31, 20162017 (in thousands):
| | Tabular Disclosure of Fair Values of Derivative Instruments | |
| | Derivatives Asset | | | Derivative Liabilities | |
| | Fair Value as of: | |
| | March 31, | | | December 31, | | | March 31, | | | December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Designated as Hedging Instruments | | | | | | | | | | | | | | | | |
FX Forward Contracts | | | | | | | | | | | | | | | | |
Balance Sheet Location | | | Other Assets | | | | Other Assets | | | | Other Current Liabilities | | | | Other Current Liabilities | |
Sell AUD/Buy USD Fwd Contract | | $ | 0 | | | $ | 0 | | | $ | 8 | | | $ | 0 | |
Sell CAD/Buy USD Fwd Contract | | $ | 36 | | | $ | 0 | | | $ | 13 | | | $ | 0 | |
Total | | $ | 36 | | | $ | 0 | | | $ | 21 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | |
| Tabular Disclosure of Fair Values of Derivative Instruments |
| Derivatives Asset | | Derivative Liabilities |
| | | Fair Value as of: | | |
| March 31, 2018 | | December 31, 2017 | | March 31, 2018 | | December 31, 2017 |
Derivatives Not Designated as Hedging Instruments | | | | | | | |
FX Forward Contracts | | | | | | | |
Balance Sheet Location | | | | | | | |
| Other Assets | | Other Assets | | Other Current Liabilities | | Other Current Liabilities |
Sell AUD/Buy USD Fwd Contract | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | (9 | ) |
Sell CAD/Buy USD Fwd Contract | $ | 73 |
| | $ | — |
| | $ | — |
| | $ | (61 | ) |
Total | $ | 75 |
| | $ | — |
| | $ | — |
| | $ | (70 | ) |
The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of March 31,
20172018 and March 31,
20162017 (in thousands):
| | | | | |
| | Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated as Hedging Instruments for the Three Months Ended March 31, 2017 and 2016 | |
| | | | Amount of Gain or (Loss) | |
| | Location of Gain or | | Recognized in Income | |
Derivatives Not Designated as Hedging Instruments | | (Loss) Recognized in Income | | Three Months Ended March 31, | |
| | | | 2017 | | | 2016 | |
Sell AUD/Buy USD Fwd Contract | | Other Inc/Exp | | $ | (8 | ) | | $ | (35 | ) |
Sell CAD/Buy USD Fwd Contract | | Other Inc/Exp | | | 38 | | | | (545 | ) |
Total | | | | $ | 30 | | | $ | (580 | ) |
ROLLINS, INC. AND SUBSIDIARIES
Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated
as Hedging Instruments for the Three Months Ended March 31, 2018 and 2017
|
| | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income | | Amount of Gain or (Loss) Recognized in Income Three Months Ended March 31, |
| | | 2018 | | 2017 |
Sell AUD/Buy USD Fwd Contract | Other Inc/(Exp) | | $ | 11 |
| | $ | (8 | ) |
Sell CAD/Buy USD Fwd Contract | Other Inc/(Exp) | | 136 |
| | 38 |
|
Total | | | $ | 147 |
| | $ | 30 |
|
The table below presents the total fair value classification within the fair value hierarchy for the complete portfolio of derivative transactions at March 31,
20172018 (in thousands):
| | Recurring Fair Value Measurements | |
| | Quoted Prices in Active | | | | | | | | | | | | | | | | | | | |
| | Markets for Identical | | | Significant Other | | | Significant | | | | | | | |
| | Assets and Liabilities | | | Observable Inputs | | | Unobservable Inputs | | | | | | | |
| | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total Fair Value at As of | |
| | March 31, | | | March 31, | | | March 31, | | | March 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Financial Instruments | | $ | 0 | | | $ | 0 | | | $ | 36 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 36 | | | $ | 0 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Financial Instruments | | $ | 0 | | | $ | 0 | | | $ | (21 | ) | | $ | (469 | ) | | $ | 0 | | | $ | 0 | | | $ | (21 | ) | | $ | (469 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recurring Fair Value Measurements |
| Quoted Prices in Active | | | | | | | | | | | | |
| Markets for Identical Assets and Liabilities | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | |
| (Level 1) March 31, | | (Level 2) March 31, | | (Level 3) March 31, | | Total Fair Value at As of March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Assets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Derivative Financial Instruments | $ | — |
| | $ | — |
| | $ | 75 |
| | $ | 36 |
| | $ | — |
| | $ | — |
| | $ | 75 |
| | $ | 36 |
|
Liabilities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Derivative Financial Instruments | $ | — |
| | $ | — |
| | $ | — |
| | $ | (21 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (21 | ) |
As of March 31,
2017,2018, the fair value of derivatives in a net asset position was
$15,000$75,000 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 March 31,
2017,2018, it could have been required to settle its obligations under the agreements at their termination value of
$15,000.ROLLINS, INC. AND SUBSIDIARIES
NOTE
10.12. SUBSEQUENT EVENTS
On April 25, 2017: Rollins, Inc. (NYSE:ROL), a premier global consumer and commercial services company24, 2018, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $0.115$0.14 per share payable June 9, 201711, 2018 to stockholders of record at the close of business May 10, 2017.2018.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On April 26, 2017,25, 2018, the Company reported its 44th48th consecutive quarter of improved revenue and earnings. NetThe Company recorded first quarter revenues of $408.7 million, an increase of 8.9% over the prior year’s first quarter revenue of $375.2 million. Rollins’ net income wasincreased 20.5% to $48.5 million or $0.22 per diluted share for the first quarter ended March 31, 2018, compared to $40.3 million or $0.18 per diluted share for the same period in 2017. The Northern U.S. region experienced major snow storms during the first quarter of 2018, which makes the 48th consecutive quarter of improved earnings all the more encouraging as weather normalizes.
On April 17, the Company announced that it will use part of the savings from the 2017 Tax Cuts and Jobs Act to improve employee benefits. These changes include an enhanced 401(k) match, stock grants, additional paid time off and additional employee scholarship opportunities.
On February 28, 2018, the Company announced that it has purchased the stock of AMES Group Limited and Kestrel Pest Control Limited, both companies operating in the UK. AMES Group Limited is a long established pest control company, with a rich history of providing superior pest control, bird control, and specialist services to commercial customers throughout the midlands and including London. Kestrel Pest Control provides superior commercial pest control to customers in South Hampton and surrounding areas of the Southwest. Kestrel Pest Control will merge with our Safeguard UK brand.
ROLLINS, INC. AND SUBSIDIARIES
On March 1, 2018, the Company announced that it had completed its acquisition of OPC Services. OPC Services will continue to operate as a separate business, and one of Rollins' Specialty Brands, along with HomeTeam Pest Defense, Northwest Exterminating, Western Pest Services and Waltham Pest Services.
Rollins continued its solid financial performance generating $72.7 million in cash from operations year to date.
Results of Operations:
THREE MONTHS ENDED MARCH 31, 2018 COMPARED TO THREE MONTHS ENDED MARCH 31, 2017
Revenue
Revenues for the first quarter ended March 31, 2018 increased $33.5 million or 8.9% to $408.7 million compared to $375.2 million for the first quarter ended March 31,
2017, as compared to $31.9 million for the prior year quarter, a 26.1% improvement. Revenues increased by 6.4% to $375.2 million for the first quarter 2017 as compared to $352.7 million for the prior year first quarter. The Company saw a negative impact on the exchange rate of the Canadian and Australian dollars and British pounds to U.S. dollars reducing revenues and pre-tax earnings by $1.4 million and $1.5 million, in 2017 and 2016, respectively. Earnings for the quarter ended March 31, 2017 increased to $0.18 per diluted share, as compared to $0.15 per diluted share for the same period in 2016.A portion of the Company’s higher net income was due to a tax benefit of approximately $4.3 million as result of adoption of the Accounting Standards Update (ASU) 2016-09, which was recently issued by the Financial Accounting Standards Board, addressing the accounting of employee share-based payments in the first quarter 2017. Excluding this tax benefits in the first quarter, net income increased approximately 12.7% to $36.0 million or $0.17 per diluted share. See the reconciliation of this non-GAAP measure below.
Reconciliation of Non-GAAP Financial Measure:
Rollins has used the non-GAAP financial measure of earnings excluding the tax benefit of the adoption of ASU 2016-09 addressing the accounting of employee share-based payments. Earnings excluding the tax benefit of the adoption of ASU 2016-09 should not be considered in isolation or as a substitute for operating income, net income or other performance measures prepared in accordance with U.S. GAAP. Rollins uses Earnings excluding the tax benefit of the adoption of ASU 2016-09 as a measure of operating performance because it allows us to compare performance consistently over various periods without regard to changes in our capital structure. A non-GAAP financial measure is a numerical measure of financial performance, financial position, or cash flows that either 1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows, or 2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. Set forth below is a reconciliation of Earnings excluding the tax benefit of the adoption of ASU 2016-09 with Net Income, the most comparable GAAP measure. This reconciliation also appears on Rollins’ investor website, which can be found on the Internet at www.rollins.com.
Periods ended, (Unaudited) | | Three Months Ended, | |
(in thousands except per share data) | | March 31, 2017 | | | March 31, 2016 | | | Increase | | | % Increase | |
Net Income (as reported) | | $ | 40,270 | | | $ | 31,928 | | | $ | 8,342 | | | | 26.1 | % |
Less: | | | | | | | | | | | | | | | | |
Tax benefit of the adoption of ASU 2016-09 | | | (4,292 | ) | | | — | | | | (4,292 | ) | | | N/A | |
Earnings excluding the tax benefit of the adoption of ASU 2016-09 | | $ | 35,978 | | | $ | 31,928 | | | $ | 4,050 | | | | 12.7 | % |
| | | | | | | | | | | | | | | | |
Earnings per share excluding the tax benefit of the adoption of ASU 2016-09 basic and diluted | | $ | 0.17 | | | $ | 0.15 | | | $ | 0.02 | | | | 13.1 | % |
| | | | | | | | | | | | | | | | |
Basic and diluted shares outstanding | | | 217,971 | | | | 218,686 | | | | (715 | ) | | | -0.3 | % |
ROLLINS, INC. AND SUBSIDIARIES
During the quarter, the Company announced that its wholly-owned subsidiary, HomeTeam Pest Defense had performed its one millionth TAEXX Tubes in the Wall® installation. TAEXX is installed while a home is being constructed. HomeTeam has relationships with more than 1,000 home builders nationwide, ranging from the top 10 national home builders to regional and local customer home builders. For most of our national home builder partners, TAEXX is included as a standard feature in their homes. We are proud of HomeTeam and proud to be a part of this accomplishment.
Rollins continued its solid financial performance generating $58.0 million in cash from operations year to date.
Results of Operations:
THREE MONTHS ENDED MARCH 31, 2017 COMPARED TO THREE MONTHS ENDED MARCH 31, 2016
Revenue
Revenues for the first quarter ended March 31, 2017 increased $22.5 million or 6.4% to $375.2 million compared to $352.7 million for the first quarter ended March 31, 2016. Growth occurred across all service lines. Substantially allApproximately 4.2 percentage points of thisthe 8.9% increase in revenues was due tocame from acquisitions while growth in customers and pricing while approximately 1% ofmade up the increase was attributable to acquisitions made within the last twelve months.
remaining 4.7 percentage points.
The Company has three primary service offerings: commercial
pest control, residential
pest control and termite, including ancillary services. During the first quarter ended March 31,
2017,2018, commercial pest control revenue approximated
41%40% of the Company’s revenues, residential pest control approximated
41%40% of the Company’s revenues, and termite and ancillary service revenue approximated
18%19% of the Company’s revenues. Comparing first quarter
20172018 to first quarter
2016,2017, the Company’s commercial pest control revenue grew
5.3%5.6%, residential pest control revenue grew
7.0%8.4%, and termite and ancillary services revenue grew
7.5%16.2%. Foreign operations accounted for approximately 8%
and 7% of total revenues during the first quarters of
both 2018 and 2017,
and 2016, respectively.
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) |
| | 2017 | | | 2016 | | | 2015 | |
First Quarter | | $ | 375,247 | | | $ | 352,736 | | | $ | 330,909 | |
Second Quarter | | | — | | | | 411,133 | | | | 392,150 | |
Third Quarter | | | — | | | | 423,994 | | | | 399,746 | |
Fourth Quarter | | | — | | | | 385,614 | | | | 362,500 | |
Year ended December 31, | | $ | 375,247 | | | $ | 1,573,477 | | | $ | 1,485,305 | |
|
| | | | | | | | | | | |
Consolidated Net Revenues |
(in thousands) |
| 2018 | | 2017 | | 2016 |
First Quarter | $ | 408,742 |
| | $ | 375,247 |
| | $ | 352,736 |
|
Second Quarter | — |
| | 433,555 |
| | 411,133 |
|
Third quarter | — |
| | 450,442 |
| | 423,994 |
|
Fourth Quarter | — |
| | 414,713 |
| | 385,614 |
|
Year ended December 31, | $ | 408,742 |
|
| $ | 1,673,957 |
|
| $ | 1,573,477 |
|
Cost of Services Provided
Cost of Services provided for the first quarter ended March 31,
20172018 increased
$11.4$17.0 million or
6.4%,9.0% to $206.1 million, compared to
$189.2 million the quarter ended March 31,
2016.2017. Gross margin for the quarter
remainedwas flat at 49.6%
for the first quarter, compared to the prior year first
quarter.quarter gross margin. The margin for the
quarter was negatively affected by the severe weather in the Northeast. The Company paid $2.2 million to employees via a 401(k) match that decreased first quarter 2018 gross margin by 1 percentage point. The quarter benefited from improved efficiencies in routing and scheduling technology which also helped to lower
service salaries
as a percent of revenue. Service salaries were down compared to revenue, but we expect this to rise second quarter with the arrival of spring and summer months. Insurance and claims were lower than prior year as a percent of revenue as
there was a decreasewe reduced our exposure in
service salaries and administrative salaries as a percent of revenues from the prior year. Personnel related expenses were down as a percent of revenue as group insurance expense was down quarter-over-quarter marginally. Insurance and claims were flat to prior year as we emphasize safety in all areas. Thelitigation. These gains
the Company experienced were offset by higher
personnel related costs from the aforementioned 401(k) plan Company match. Fleet expenses are up as gasoline
expenses as the pricecosts are up an average of $0.25 per gallon
rose, leased vehicle costs, and
accruedincreased lease expenses.
The Company experienced good cost controls across most spending categories.Bad debt increased as compared to 2017.
Depreciation and Amortization
Depreciation and Amortization expenses for the first quarter ended March 31,
20172018 increased
$2.1$3.1 million to
$13.8$16.9 million, an increase of
18.3%22.8%. Depreciation increased
$0.3 million due to
expenditures associated with the 2016 rollout of BOSS as well as acquisitions and equipment purchases while amortization of intangible assets increased
$2.8 million due to amortization of customer contracts included in
various acquisitions.several acquisitions which reduced the Company’s earnings per share by approximately $0.01 per diluted share after taxes.
ROLLINS, INC. AND SUBSIDIARIES
Sales, General and Administrative
Sales, General and Administrative Expenses for the first quarter ended March 31,
20172018 increased
$2.9$11.3 million or
2.6%9.8%, to
30.7%30.9% of revenues,
down 1.1up 0.2 percentage points from
31.8%30.7% for the first quarter ended March 31,
2016.2017. The
decreaseincrease in the percent of revenue is due to
lowerhigher administrative salaries
as percent of revenues as we maintain a quality support center staff while continuing to grow revenues. The Company experienced reducedand personnel related expenses
from lower group insurance costs and reduced telephonedue to acquisitions, fleet costs due to
a change of dataincreased gasoline prices, and professional service
providers. As planned, the Company experienced increased sales salariescosts related to IT projects. The increases were partially offset by lower insurance and
advertising expenses directed toward increased revenue productionclaims expense, due to claims and
higher use of outside contractors to develop and maintain the BOSS system, the Company’s customer relationship management system.ROLLINS, INC. AND SUBSIDIARIES
Gain on Sale of assets, Net
Gain on sales of assets, net was a net gain of $26,000 for the first quarter ended March 31, 2017, down from $89,000 prior year. The gains were for the sales of Company owned vehicles and equipment.
Income Taxes for the first quarter ended March 31,
20172018 decreased
$2.3$6.3 million or
11.8%37.2% to
$17.0$10.7 million from
$19.3$17.0 million reported for first quarter ended March 31,
2016. The Company adopted the amendments of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accountingin the first quarter of 2017.
Accordingly, excess tax benefits of $4.3 million related to share based payment award transactions were recognized as a component of income tax expense rather than equity. The effective tax rate was
18.0% for the first quarter ended March 31, 2018 and 29.7% for the first quarter ended March 31,
2017 and 37.6% for2017. The decrease in the
first quarter ended March 31, 2016effective rate was primarily due to
differencesa reduction in
the federal income tax
credits,rate enacted under the Tax Cuts and Jobs Act of 2017 (the Tax Act). The Tax Act has significant complexities and the Company, under Staff Accounting Bulletin 118, has made certain reasonable estimates that could be adjusted in future periods as required. Implementation guidance from the Internal Revenue Service, clarifications of state tax
rateslaw and
completion of the
adoptionCompany’s 2017 tax return filings could all impact these estimates. The Company does not believe potential adjustments in future periods would materially impact the Company’s financial condition or results of
ASU 2016-09.operations. Management believes that the corporate effective tax rate for 2018 will be in the mid 20% range.
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 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
$58.0$72.7 million and
$41.3$56.8 million for the three months ended March 31,
2017,2018, and
2016,2017, respectively. During the three months ended March 31,
20172018 and
2016,the same period in 2017 the Company made no
contributionscontribution to its defined benefit retirement
plans (the “Plans”).plans. The Company is
planningadequately funded on
makingits Pension Plans and is not expecting to make further contributions
of $5.5 million to the Plans during the fiscal year ending December 31, 2017. In the opinion of management, Plan contributions will not have a material effect on the Company’s financial position, results of operations or liquidity for 2017.in 2018.
The Company invested approximately
$5.5$6.1 million in capital expenditures, exclusive of expenditures for business acquisitions, during the three months ended March 31,
2017,2018, compared to
$9.0$5.5 million during the same period in
2016,2017, and expects to invest approximately $22.0 million for the remainder of
2017.2018. Capital expenditures for the first three months consisted primarily of the purchase of operating equipment replacements and technology related projects. During the three months ended March 31,
2017,2018, the Company made expenditures for acquisitions totaling
$3.0$43.2 million, compared to
$21.1$3.0 million during the same period in
2016.2017. A total of
$25.1$30.6 million was paid in cash dividends ($
0.1150.14 per share)
a 21.7% increase during the first three months of
2017,2018, compared to
$21.9$25.1 million or ($
0.100.115 per share) during the same period in
2016.2017. On April
25, 2017,24, 2018, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of
$0.115$0.14 per share payable June
9, 201711, 2018 to stockholders of record at the close of business May 10,
20172018 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
fromon the open market during the first three months of
2017 compared to the repurchase of approximately 54,000 shares at a weighted average price of $24.772018 and during the
first three months of 2016.same period in 2017. 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 7.5 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, 5.1 million additional shares may be purchased under the share repurchase program. The Company repurchased
$7.5$9.2 million and
$7.4$7.5 million of common stock for the three months ended March 31,
20172018 and
2016,2017, 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 and operating activities.
The Company’s balance sheet as of March 31, 20172018 and December 31, 20162017 includes short-term unearned revenues of $104.3$117.9 million and $99.8$109.0 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 $162.5$84.3 million of total cash at March 31, 2017,2018, is held at various banking institutions. Approximately $53.2$62.7 million is held in cash accounts at foreign bank institutions and the remaining $109.3$21.6 million 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 reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies. 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 while having little third-partyfirst-party debt to service. The Company maintains adequate liquidity
ROLLINS, INC. AND SUBSIDIARIES
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.
On October 31, 2012, the Company entered into a Revolving Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured line of credit of up to $175.0 million, which includes a $75.0 million letter of credit subfacility, and a $25.0 million swingline subfacility. The Company had no outstanding borrowings under the line of credit or under the swingline subfacility as of March 31,
2017.2018. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance through
2017.ROLLINS, INC. AND SUBSIDIARIES
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.
On December 2, 2014, Plaintiff Killian Pest Control sued Rollins, Inc. and its subsidiary HomeTeam Pest Defense alleging that HomeTeam’s exclusive use of its “tubes in the walls” system violates the federal Sherman Antitrust Act, and California’s Cartwright Act and Business and Professions Code. Plaintiffs seek a declaratory judgment that the alleged misconduct violates the Sherman and Cartwright Acts, and the Business and Professions Code; a permanent injunction against continuing alleged violations; and monetary damages. The lawsuit is pending in the United States District Court, Northern District of California. Because discovery remains open and there are unresolved questions of fact and law, the Company cannot currently estimate the loss, if any, and intends to defend this matter vigorously.
On December 2, 2014, Plaintiff Jose Luis Garnica, on behalf of himself and a class of similarly situated customers, sued Rollins, Inc. and its subsidiary HomeTeam Pest Defense alleging that HomeTeam’s exclusive use of its “tubes in the walls” system violates the federal Sherman Antitrust Act. A second Plaintiff, Cora Potter, subsequently was added. Plaintiffs seek a declaratory judgment that the alleged misconduct violates the Sherman Act; a permanent injunction against continuing violations; and monetary damages. On February 3, 2017, the Court issued an order denying Plaintiffs’ Motion for Class Certification. At a hearing on February 9, 2017, the Court granted Plaintiffs leave to seek certification of a class of customers limited to their own geographic market, the Bakersfield, California area. The lawsuit is pending in the United States District Court, Northern District of California. Because discovery remains open and there are unresolved questions of fact and law, the Company cannot currently estimate the loss, if any, and intends to defend this matter vigorously.
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,
2016.
2017, other than Topic 606.
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.
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 belief that its current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings 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 dividends; 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 business plan; possiblethe expectation of no defined benefit retirement plan contributions and their effect on the Company’s financial position, results of operations and liquidity;contributions: the Company’s expectation regarding capital expenditure for the remainder of 2017;2018; the Company's expectations regarding our corporate tax rate for 2018; the expectation of sales salaries to rise in the second quarter; the Company’s expectation to maintain compliance with debt covenants; and the Company’s belief that interest rate exposure and foreign exchange rate risk will not have a material effect on the Company’s results of operations going forward. 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; and changes in various government laws and regulations, including environmental regulations.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
ROLLINS, INC. AND SUBSIDIARIES
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,
2016.2017. The Company does not undertake to update its
forward lookingforward-looking statements.
ROLLINS, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2017,2018, 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 million credit facility. The Company is also exposed to market risks arising from changes in foreign exchange rates. See note 9Note 11 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 2016.2017.
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 March 31, 20172018 (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
ROLLINS, INC. AND SUBSIDIARIES
Date to ensure that the information required to be included in reports filed under the
Securities Exchange Act
of 1934 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 March 31,
20172018, 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 4 to Part I, Item 1 for discussion of certain litigation. |
| |
Item 1A. | Risk Factors |
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,
2016. ROLLINS, INC. AND SUBSIDIARIES
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
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 first quarter ended March 31,
20172018 were as follows:
Period | | Total Number of shares Purchased (1) | | | Weighted-Average Price paid per Share | | | Total number of shares purchased as part of publicly announced repurchases (2) | | | Maximum number of shares that may yet be purchased under the repurchase plans | |
January 1 to 31, 2017 | | | 203,443 | | | $ | 34.60 | | | | — | | | | 5,073,611 | |
February 1 to 28, 2017 | | | 3,260 | | | | 36.48 | | | | — | | | | 5,073,611 | |
March 1 to 31, 2017 | | | 11,291 | | | | 28.57 | | | | — | | | | 5,073,611 | |
Total | | | 217,994 | | | $ | 34.31 | | | | — | | | | 5,073,611 | |
|
| | | | | | | | | | | | |
| Total Number of shares | | Weighted-Average Price paid per | | Total number of shares purchased as part of publicly announced | | Maximum number of shares that may yet be purchased under the repurchase plans |
Period | Purchased (1) | | Share | | repurchases (2) | |
January 1 to 31, 2018 | 165,852 |
| | $ | 49.92 |
| | — |
| | 5,073,611 |
|
February 1 to 28, 2018 | 3,589 |
| | 50.85 |
| | — |
| | 5,073,611 |
|
March 1 to 31, 2018 | 15,277 |
| | 49.87 |
| | — |
| | 5,073,611 |
|
Total | 184,718 |
| | $ | 49.94 |
| | — |
| | 5,073,611 |
|
| |
(1) | Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts:January 2017: 203,443;2018: 165,852; February 2017: 3,260;2018: 3,589; and March 2017: 11,2912018: 15,277 |
| |
(2) | The Company has a share repurchase plan, adopted in 2012, to repurchase up to 7.5 million shares of the Company’s common stock. The plan has no expiration date. |
On April 25, 2017, the Board of Directors of the Company amended the Company’s Restated By-laws (the “By-laws”) to remove provision formerly providing for the payment of costs for specified stockholder actions including a stockholders’ breach of the By-laws or specified intracorporate proceedings in which such stockholder is not the prevailing party. The foregoing summary of the amendment to the By-laws is qualified in its entirety by reference to the text of the By-laws, as amended and restated on the effective April 25, 2017, a copy of which is attached hereto as Exhibit 3(ii).
ROLLINS, INC. AND SUBSIDIARIES
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Item 6. | Exhibits.5. | | Exhibits. |
| | (a) | | Exhibits |
| (a) | Exhibits | |
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| (31.1) | |
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| (31.2) | |
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| (32.1) | |
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| (101.INS) | XBRL Instance Document |
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| | (101.SCH) | XBRL Taxonomy Extension Schema Document |
| | (101.CAL)
| XBRL Taxonomy Extension Calculation Linkbase Document |
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| (101.CAL) | XBRL Taxonomy Extension Calculation Linkbase Document |
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| (101.DEF) | XBRL Taxonomy Extension Definition Linkbase Document |
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| | (101.LAB) | XBRL Taxonomy Extension Label Linkbase Document |
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| | (101.PRE) | XBRL Taxonomy Extension Presentation Linkbase Document |
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20+ | | Confidential treatment has been requested for certain portions of this exhibit (indicated by asterisks). Such information has been omitted and was filed separately with the securities and Exchange Commission. |
ROLLINS, INC. AND SUBSIDIARIES
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.
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| | ROLLINS, INC. | |
| ROLLINS, INC. | (Registrant) | |
| (Registrant) |
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Date: April 28, 201727, 2018 | By: | /s/ Gary W. Rollins | |
| | | Gary W. Rollins | |
| | | Vice Chairman and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
Date: April 28, 201727, 2018 | By: | /s/ Paul E. Northen | |
| | | Paul E. Northen | |
| | | Vice President, Chief Financial Officer and Treasurer | |
| | Treasurer |
| | (Principal Financial and Accounting Officer) |