UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20202021
Commission File Number 1-4422
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
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)
30324
(Zip Code)
(404) 888-2000
(Registrant’s telephone number, including area code)
________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | ROL | NYSE |
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. Yes x No o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x 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 | x | 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).
Yes | o | No | x |
Rollins, Inc. had 2020.2021. shares of its $1 par value Common Stock outstanding as of July 16,
ROLLINS, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 2020,2021, AND DECEMBER 31, 20192020
(in thousands except share data)
(unaudited)
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 134,829 | $ | 94,276 | ||||
Trade receivables, net of allowance for doubtful accounts of $16,452 and $16,699, respectively | 129,297 | 122,766 | ||||||
Financed receivables, short-term, net of allowance for doubtful accounts of $1,810 and $1,675, respectively | 23,285 | 22,267 | ||||||
Materials and supplies | 34,064 | 19,476 | ||||||
Other current assets | 41,626 | 51,002 | ||||||
Total current assets | 363,101 | 309,787 | ||||||
Equipment and property, net | 191,141 | 195,533 | ||||||
Goodwill | 602,310 | 572,847 | ||||||
Customer contracts, net | 275,782 | 273,720 | ||||||
Trademarks & tradenames, net | 104,760 | 102,539 | ||||||
Other intangible assets, net | 10,176 | 10,525 | ||||||
Operating lease, right-of-use assets | 214,874 | 200,727 | ||||||
Financed receivables, long-term, net of allowance for doubtful accounts of $1,204 and $1,284 respectively | 38,281 | 30,792 | ||||||
Benefit plan assets | 9,312 | 21,565 | ||||||
Deferred income taxes | 2,105 | 2,180 | ||||||
Other assets | 24,540 | 24,161 | ||||||
Total assets | $ | 1,836,382 | $ | 1,744,376 | ||||
LIABILITIES | ||||||||
Accounts payable | $ | 48,037 | $ | 35,234 | ||||
Accrued insurance | 31,230 | 30,441 | ||||||
Accrued compensation and related liabilities | 87,050 | 81,943 | ||||||
Unearned revenues | 139,541 | 122,825 | ||||||
Operating lease liabilities - current | 71,494 | 66,117 | ||||||
Current portion of long-term debt | 12,500 | 12,500 | ||||||
Other current liabilities | 88,321 | 60,975 | ||||||
Total current liabilities | 478,173 | 410,035 | ||||||
Accrued insurance, less current portion | 35,520 | 34,920 | ||||||
Operating lease liabilities, less current portion | 144,846 | 135,651 | ||||||
Long-term debt | 242,500 | 279,000 | ||||||
Deferred income tax liability | 14,482 | 9,927 | ||||||
Long-term accrued liabilities | 58,031 | 59,093 | ||||||
Total liabilities | 973,552 | 928,626 | ||||||
Commitments and contingencies | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, without par value; | shares authorized, shares issued— | — | ||||||
Common stock, par value $ per share; shares authorized, and shares issued and outstanding, respectively | 327,759 | 327,431 | ||||||
Paid in capital | 88,640 | 89,413 | ||||||
Accumulated other comprehensive loss | (29,163 | ) | (21,109 | ) | ||||
Retained earnings | 475,594 | 420,015 | ||||||
Total stockholders’ equity | 862,830 | 815,750 | ||||||
Total liabilities and stockholders’ equity | $ | 1,836,382 | $ | 1,744,376 | ||||
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 128,528 | $ | 98,477 | ||||
Trade receivables, net of allowance for expected credit losses of $13,863 and $16,854 respectively | 142,868 | 126,337 | ||||||
Financed receivables, short-term, net of allowance for expected credit losses of $1,635 and $1,297 respectively | 25,431 | 23,716 | ||||||
Materials and supplies | 29,952 | 30,843 | ||||||
Other current assets | 49,546 | 35,404 | ||||||
Total current assets | 376,325 | 314,777 | ||||||
Equipment and property, net of accumulated depreciation of $307,352 and $294,226, respectively | 134,911 | 178,052 | ||||||
Goodwill | 664,118 | 653,176 | ||||||
Customer contracts, net | 291,976 | 298,949 | ||||||
Trademarks & tradenames, net | 108,517 | 109,044 | ||||||
Other intangible assets, net | 10,158 | 10,777 | ||||||
Operating lease, right-of-use assets | 258,073 | 212,342 | ||||||
Financed receivables, long-term, net of allowance for expected credit losses of $2,706 and $1,934 respectively | 43,837 | 38,187 | ||||||
Benefit plan assets | 1,118 | 1,198 | ||||||
Deferred income taxes | 2,653 | 2,222 | ||||||
Other assets | 30,007 | 27,176 | ||||||
Total assets | $ | 1,921,693 | $ | 1,845,900 | ||||
LIABILITIES | ||||||||
Accounts payable | $ | 74,815 | $ | 64,596 | ||||
Accrued insurance | 31,015 | 31,675 | ||||||
Accrued compensation and related liabilities | 91,912 | 91,011 | ||||||
Unearned revenues | 151,379 | 131,253 | ||||||
Operating lease liabilities - current | 77,604 | 73,248 | ||||||
Current portion of long-term debt | 18,750 | 17,188 | ||||||
Other current liabilities | 73,269 | 63,540 | ||||||
Total current liabilities | 518,744 | 472,511 | ||||||
Accrued insurance, less current portion | 36,369 | 36,067 | ||||||
Operating lease liabilities, less current portion | 182,804 | 140,897 | ||||||
Long-term debt | 69,250 | 185,812 | ||||||
Deferred income tax liabilities | 9,330 | 10,612 | ||||||
Long-term accrued liabilities | 54,512 | 58,641 | ||||||
Total liabilities | 871,009 | 904,540 | ||||||
Commitments and contingencies | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, without par value; | shares authorized, shares issued— | — | ||||||
Common stock, par value $ | per share; shares authorized, and shares issued and outstanding, respectively492,079 | 491,612 | ||||||
Paid in capital | 98,842 | 101,757 | ||||||
Accumulated other comprehensive loss | (10,890 | ) | (10,897 | ) | ||||
Retained earnings | 470,653 | 358,888 | ||||||
Total stockholders’ equity | 1,050,684 | 941,360 | ||||||
Total liabilities and stockholders’ equity | $ | 1,921,693 | $ | 1,845,900 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 20202021 AND 20192020
(in thousands except per share data)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
REVENUES | ||||||||||||||||
Customer services | $ | 553,329 | $ | 523,957 | $ | 1,041,230 | $ | 953,026 | ||||||||
COSTS AND EXPENSES | ||||||||||||||||
Cost of services provided | 255,622 | 253,333 | 506,774 | 470,591 | ||||||||||||
Depreciation and amortization | 21,925 | 20,132 | 43,522 | 36,815 | ||||||||||||
Sales, general and administrative | 171,253 | 161,886 | 329,115 | 301,416 | ||||||||||||
Gain on sale of assets, net | (451 | ) | (252 | ) | (726 | ) | (433 | ) | ||||||||
Interest expense, net | 1,460 | 1,899 | 3,625 | 1,625 | ||||||||||||
INCOME BEFORE INCOME TAXES | 103,520 | 86,959 | 158,920 | 143,012 | ||||||||||||
PROVISION FOR INCOME TAXES | 28,162 | 22,664 | 40,294 | 34,491 | ||||||||||||
NET INCOME | $ | 75,358 | $ | 64,295 | $ | 118,626 | $ | 108,521 | ||||||||
NET INCOME PER SHARE - BASIC AND DILUTED | $ | 0.23 | $ | 0.20 | $ | 0.36 | $ | 0.33 | ||||||||
DIVIDENDS PAID PER SHARE | $ | 0.08 | $ | 0.11 | $ | 0.20 | $ | 0.21 | ||||||||
Weighted average participating shares outstanding - basic and diluted | 327,763 | 327,506 | 327,723 | 327,506 | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
REVENUES | ||||||||||||||||
Customer services | $ | 638,204 | $ | 553,329 | $ | 1,173,758 | $ | 1,041,230 | ||||||||
COSTS AND EXPENSES | ||||||||||||||||
Cost of services provided | 297,862 | 255,622 | 559,414 | 506,774 | ||||||||||||
Depreciation and amortization | 23,306 | 21,925 | 46,902 | 43,522 | ||||||||||||
Sales, general and administrative | 183,482 | 171,253 | 345,690 | 329,115 | ||||||||||||
Gain on sale of assets, net | (891 | ) | (451 | ) | (33,151 | ) | (726 | ) | ||||||||
Interest expense, net | 506 | 1,460 | 1,112 | 3,625 | ||||||||||||
INCOME BEFORE INCOME TAXES | 133,939 | 103,520 | 253,791 | 158,920 | ||||||||||||
PROVISION FOR INCOME TAXES | 35,085 | 28,162 | 62,294 | 40,294 | ||||||||||||
NET INCOME | $ | 98,854 | $ | 75,358 | $ | 191,497 | $ | 118,626 | ||||||||
NET INCOME PER SHARE - BASIC AND DILUTED | $ | 0.20 | $ | 0.15 | $ | 0.39 | $ | 0.24 | ||||||||
DIVIDENDS PAID PER SHARE | $ | 0.08 | $ | 0.05 | $ | 0.16 | $ | 0.13 | ||||||||
Weighted average shares outstanding - basic and diluted | 491,999 | 491,645 | 491,950 | 491,585 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 20202021 AND 20192020
(in thousands)
(unaudited)
(In thousands) | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
NET INCOME | $ | 75,358 | $ | 64,295 | $ | 118,626 | $ | 108,521 | ||||||||
Other comprehensive (loss) / earnings | ||||||||||||||||
Foreign currency translation adjustments | 9,378 | 485 | (7,490 | ) | 2,827 | |||||||||||
Change in derivatives | 170 | (257 | ) | (564 | ) | (257 | ) | |||||||||
Other comprehensive (loss) / earnings | 9,548 | 228 | (8,054 | ) | 2,570 | |||||||||||
Comprehensive earnings | $ | 84,906 | $ | 64,523 | $ | 110,572 | $ | 111,091 | ||||||||
Three Months Ending | Six Months Ending | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
NET INCOME | $ | 98,854 | $ | 75,358 | $ | 191,497 | $ | 118,626 | ||||||||
Other comprehensive earnings / (loss) | ||||||||||||||||
Foreign currency translation adjustments | 704 | 9,378 | 283 | (7,490 | ) | |||||||||||
Change in derivatives, net of tax | (439 | ) | 170 | (276 | ) | (564 | ) | |||||||||
Other comprehensive earnings / (loss) | 265 | 9,548 | 7 | (8,054 | ) | |||||||||||
Comprehensive earnings | $ | 99,119 | $ | 84,906 | $ | 191,504 | $ | 110,572 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 20202021 AND 20192020
(in thousands)
(unaudited)
Common Stock | Paid-in- | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | capital | income/ (loss) | Earnings | Total | |||||||||||||||||||
Balance at March 31, 2019 | 327,530 | $ | 327,530 | $ | 79,932 | $ | (68,736 | ) | $ | 380,398 | $ | 719,124 | ||||||||||||
Net Income | — | — | — | — | 64,295 | 64,295 | ||||||||||||||||||
Other comprehensive income, net of tax | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 485 | — | 485 | ||||||||||||||||||
Change in derivatives | — | — | — | (257 | ) | — | (257 | ) | ||||||||||||||||
Cash dividends | — | — | — | — | (34,367 | ) | (34,367 | ) | ||||||||||||||||
Stock compensation | (27 | ) | (27 | ) | 3,724 | — | — | 3,697 | ||||||||||||||||
Employee stock buybacks | (17 | ) | (17 | ) | (696 | ) | — | — | (713 | ) | ||||||||||||||
Balance at June 30, 2019 | 327,486 | $ | 327,486 | $ | 82,960 | $ | (68,508 | ) | $ | 410,326 | $ | 752,264 | ||||||||||||
Common Stock | Paid-in- | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | capital | income/ (loss) | Earnings | Total | |||||||||||||||||||
Balance at December 31, 2018 | 327,308 | $ | 327,308 | $ | 85,386 | $ | (71,078 | ) | $ | 370,292 | $ | 711,908 | ||||||||||||
Impact of adoption of ASC 842 | — | — | — | — | 212 | 212 | ||||||||||||||||||
Net Income | — | — | — | — | 108,521 | 108,521 | ||||||||||||||||||
Other comprehensive income, net of tax | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 2,827 | — | 2,827 | ||||||||||||||||||
Change in derivatives | — | — | — | (257 | ) | — | (257 | ) | ||||||||||||||||
Cash dividends | — | — | — | — | (68,699 | ) | (68,699 | ) | ||||||||||||||||
Stock compensation | 437 | 437 | 7,149 | — | — | 7,586 | ||||||||||||||||||
Employee stock buybacks | (259 | ) | (259 | ) | (9,575 | ) | — | — | (9,834 | ) | ||||||||||||||
Balance at June 30, 2019 | 327,486 | $ | 327,486 | $ | 82,960 | $ | (68,508 | ) | $ | 410,326 | $ | 752,264 | ||||||||||||
Common Stock | Paid-in- | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | capital | income/ (loss) | Earnings | Total | |||||||||||||||||||
Balance at March 31, 2020 | 327,767 | $ | 327,767 | $ | 84,865 | $ | (38,711 | ) | $ | 426,450 | $ | 800,371 | ||||||||||||
Net Income | — | — | — | — | 75,358 | 75,358 | ||||||||||||||||||
Other comprehensive income, net of tax | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 9,378 | — | 9,378 | ||||||||||||||||||
Change in derivatives | — | — | — | 170 | — | 170 | ||||||||||||||||||
Cash dividends | — | — | — | — | (26,214 | ) | (26,214 | ) | ||||||||||||||||
Stock compensation | (6 | ) | (6 | ) | 3,827 | — | — | 3,821 | ||||||||||||||||
Employee stock buybacks | (2 | ) | (2 | ) | (52 | ) | — | — | (54 | ) | ||||||||||||||
Balance at June 30, 2020 | 327,759 | $ | 327,759 | $ | 88,640 | $ | (29,163 | ) | $ | 475,594 | $ | 862,830 | ||||||||||||
Common Stock | Paid-in- | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | capital | income/ (loss) | Earnings | Total | |||||||||||||||||||
Balance at December 31, 2019 | 327,431 | $ | 327,431 | $ | 89,413 | $ | (21,109 | ) | $ | 420,015 | $ | 815,750 | ||||||||||||
Impact of adoption of ASC 326 | — | — | — | — | 2,484 | 2,484 | ||||||||||||||||||
Net Income | — | — | — | — | 118,626 | 118,626 | ||||||||||||||||||
Other comprehensive income, net of tax | ||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | (7,490 | ) | — | (7,490 | ) | ||||||||||||||||
Change in derivatives | — | — | — | (564 | ) | — | (564 | ) | ||||||||||||||||
Cash dividends | — | — | — | — | (65,531 | ) | (65,531 | ) | ||||||||||||||||
Stock compensation | 549 | 549 | 7,091 | — | — | 7,640 | ||||||||||||||||||
Employee stock buybacks | (221 | ) | (221 | ) | (7,864 | ) | — | — | (8,085 | ) | ||||||||||||||
Balance at June 30, 2020 | 327,759 | $ | 327,759 | $ | 88,640 | $ | (29,163 | ) | $ | 475,594 | $ | 862,830 | ||||||||||||
Accumulated Other | ||||||||||||||||||||||||
Common Stock | Paid-in- | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Income/ (Loss) | Earnings | Total | |||||||||||||||||||
Balance at March 31, 2021 | 492,124 | $ | 492,124 | $ | 95,824 | $ | (11,155 | ) | $ | 412,142 | $ | 988,935 | ||||||||||||
Net Income | 98,854 | 98,854 | ||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||
Foreign currency translation adjustments | 704 | 704 | ||||||||||||||||||||||
Change in derivatives | (439 | ) | (439 | ) | ||||||||||||||||||||
Cash dividends | (40,343 | ) | (40,343 | ) | ||||||||||||||||||||
Stock compensation | (18 | ) | (18 | ) | 3,938 | 3,920 | ||||||||||||||||||
Employee stock buybacks | (27 | ) | (27 | ) | (920 | ) | (947 | ) | ||||||||||||||||
Balance at June 30, 2021 | 492,079 | $ | 492,079 | $ | 98,842 | $ | (10,890 | ) | $ | 470,653 | $ | 1,050,684 |
Accumulated Other | ||||||||||||||||||||||||
Common Stock | Paid-in- | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Income/ (Loss) | Earnings | Total | |||||||||||||||||||
Balance at March 31, 2020 | 491,651 | $ | 491,651 | $ | 84,865 | $ | (38,711 | ) | $ | 262,566 | $ | 800,371 | ||||||||||||
Net Income | 75,358 | 75,358 | ||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||
Foreign currency translation adjustments | 9,378 | 9,378 | ||||||||||||||||||||||
Change in derivatives | 170 | 170 | ||||||||||||||||||||||
Cash dividends | (26,214 | ) | (26,214 | ) | ||||||||||||||||||||
Stock compensation | (6 | ) | (6 | ) | 3,827 | 3,821 | ||||||||||||||||||
Employee stock buybacks | (2 | ) | (2 | ) | (52 | ) | (54 | ) | ||||||||||||||||
Balance at June 30, 2020 | 491,643 | $ | 491,643 | $ | 88,640 | $ | (29,163 | ) | $ | 311,710 | $ | 862,830 |
Accumulated Other | ||||||||||||||||||||||||
Common Stock | Paid-in- | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Income/ (Loss) | Earnings | Total | |||||||||||||||||||
Balance at December 31, 2020 | 491,612 | $ | 491,612 | $ | 101,757 | $ | (10,897 | ) | $ | 358,888 | $ | 941,360 | ||||||||||||
Net Income | 191,497 | 191,497 | ||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||
Foreign currency translation adjustments | 283 | 283 | ||||||||||||||||||||||
Change in derivatives | (276 | ) | (276 | ) | ||||||||||||||||||||
Cash dividends | (79,732 | ) | (79,732 | ) | ||||||||||||||||||||
Stock compensation | 750 | 750 | 7,091 | 7,841 | ||||||||||||||||||||
Employee stock buybacks | (283 | ) | (283 | ) | (10,006 | ) | (10,289 | ) | ||||||||||||||||
Balance at June 30, 2021 | 492,079 | $ | 492,079 | $ | 98,842 | $ | (10,890 | ) | $ | 470,653 | $ | 1,050,684 |
Accumulated Other | ||||||||||||||||||||||||
Common Stock | Paid-in- | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Income/ (Loss) | Earnings | Total | |||||||||||||||||||
Balance at December 31, 2019 | 491,146 | $ | 491,146 | $ | 89,413 | $ | (21,109 | ) | $ | 256,300 | $ | 815,750 | ||||||||||||
Impact of adoption of ASC 842 | 2,484 | 2,484 | ||||||||||||||||||||||
Net Income | 118,626 | 118,626 | ||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||
Foreign currency translation adjustments | (7,490 | ) | (7,490 | ) | ||||||||||||||||||||
Change in derivatives | (564 | ) | (564 | ) | ||||||||||||||||||||
Cash dividends | (65,531 | ) | (65,531 | ) | ||||||||||||||||||||
Stock compensation | 827 | 827 | 7,091 | (278 | ) | 7,640 | ||||||||||||||||||
Employee stock buybacks | (330 | ) | (330 | ) | (7,864 | ) | 109 | (8,085 | ) | |||||||||||||||
Balance at June 30, 2020 | 491,643 | $ | 491,643 | $ | 88,640 | $ | (29,163 | ) | $ | 311,710 | $ | 862,830 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 20202021 AND 20192020
(in thousands)
(unaudited)
Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 118,626 | $ | 108,521 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 43,522 | 36,815 | ||||||
Provision for deferred income taxes | 3,055 | 4,763 | ||||||
Provision for bad debts | 9,769 | 4,925 | ||||||
Stock-based compensation expense | 7,640 | 7,586 | ||||||
Other, net | (1,078 | ) | (900 | ) | ||||
Changes in operating assets and liabilities | 53,238 | (19,534 | ) | |||||
Net cash provided by operating activities | 234,772 | 142,176 | ||||||
INVESTING ACTIVITIES | ||||||||
Cash used for acquisitions of companies, net of cash acquired | (56,030 | ) | (410,067 | ) | ||||
Purchases of equipment and property | (12,441 | ) | (13,436 | ) | ||||
Proceeds from sales of franchises | 285 | 486 | ||||||
Other | 1,820 | 1,097 | ||||||
Net cash used in investing activities | (66,366 | ) | (421,920 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Payment of contingent consideration | (7,862 | ) | (5,233 | ) | ||||
Repayment of term loan | (7,000 | ) | (3,125 | ) | ||||
Repayment on revolving commitment | (97,500 | ) | (17,000 | ) | ||||
Borrowings on term loan | — | 250,000 | ||||||
Borrowings on revolving commitment | 68,000 | 118,000 | ||||||
Cash paid for common stock purchased | (8,085 | ) | (9,834 | ) | ||||
Dividends paid | (65,531 | ) | (68,699 | ) | ||||
Net cash provided by/(used in) financing activities | (117,978 | ) | 264,109 | |||||
Effect of exchange rate changes on cash | (9,875 | ) | (1,384 | ) | ||||
Net increase/(decrease) in cash and cash equivalents | 40,553 | (17,019 | ) | |||||
Cash and cash equivalents at beginning of period | 94,276 | 115,485 | ||||||
Cash and cash equivalents at end of period | $ | 134,829 | $ | 98,466 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Non-cash additions to operating lease right-of-use assets | $ | 52,273 | $ | 31,242 | ||||
Six Months Ending | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 191,497 | $ | 118,626 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 46,902 | 43,522 | ||||||
Provision for deferred income taxes | (1,715 | ) | 3,055 | |||||
Provision for expected credit losses | 4,673 | 9,769 | ||||||
Gain on sale of assets, net | (33,151 | ) | (726 | ) | ||||
Stock based compensation expense | 7,841 | 7,640 | ||||||
Other, net | (62 | ) | (352 | ) | ||||
Changes in operating assets and liabilities | 3,220 | 53,238 | ||||||
Net cash provided by operating activities | 219,205 | 234,772 | ||||||
INVESTING ACTIVITIES | ||||||||
Cash used for acquisitions of companies, net of cash acquired | (28,385 | ) | (56,030 | ) | ||||
Purchases of equipment and property | (13,229 | ) | (12,441 | ) | ||||
Proceeds from sales of assets | 70,414 | 1,330 | ||||||
Proceeds from sales of franchises | 99 | 285 | ||||||
Other, net | (274 | ) | 490 | |||||
Net cash provided by/(used in) investing activities | 28,625 | (66,366 | ) | |||||
FINANCING ACTIVITIES | ||||||||
Payment of contingent consideration | (12,873 | ) | (7,862 | ) | ||||
Borrowings under revolving commitment | 49,500 | 68,000 | ||||||
Repayments of term loan | (48,000 | ) | (7,000 | ) | ||||
Repayments of revolving commitment | (116,500 | ) | (97,500 | ) | ||||
Payment of dividends | (79,732 | ) | (65,531 | ) | ||||
Cash paid for common stock purchased | (10,289 | ) | (8,085 | ) | ||||
Net cash used in financing activities | (217,894 | ) | (117,978 | ) | ||||
Effect of exchange rate changes on cash | 115 | (9,875 | ) | |||||
Net increase in cash and cash equivalents | 30,051 | 40,553 | ||||||
Cash and cash equivalents at beginning of period | 98,477 | 94,276 | ||||||
Cash and cash equivalents at end of period | $ | 128,528 | $ | 134,829 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Non-cash additions to operating lease right-of-use assets | $ | 86,954 | $ | 52,273 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
ROLLINS, INC. AND SUBSIDIARIES
NOTE 1. | BASIS OF PREPARATION AND OTHER |
Basis of Preparation -The
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(including its subsidiaries unless the context otherwise requires, “Rollins,” “we,” “us,” “our,” or the “Company”) for the year ended December 31, 2019 other than updates related to Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments as noted below.2020. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 20192020 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 March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic, which continues to spread throughout the U.S. and the world. This has resulted in authorities implementing numerous measures to contain the virus, including, but not limited to, travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. The pest control industry was designated as “essential” by the Department of Homeland Security and the Company has been able to remain operational in every part of the world in which it operates. The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements. The Company considered the impact of COVID-19 on the assumptions and estimates used in preparing the condensed consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the quarter have been made. These adjustments are of a normal recurring nature, but complicated by the uncertainty surrounding the global economic impact of the COVID-19 pandemic. The results of operations for the six months ended June 30, 2020 are not necessarily indicative of results for the entire year. The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods.
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, a few customers, or the Company’s foreign operations.
The Company reclassified certainThree-for-Two Stock Split
All prior period amounts inyear share and per share data presented have been adjusted to account for the Statement of Cash Flows from Operating Activities to Financing Activities for payment of contingent consideration to conform to the current period presentation.three-for-two stock split effective December 10, 2020.
NOTE 2. | RECENT ACCOUNTING PRONOUNCEMENTS |
Recently adopted accounting standards
In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The Company adopted ASU 2016-13 effective January 1,March 2020, and recognized the decrease in the allowance for doubtful accounts, net of tax, as a $2.5 million increase to beginning retained earnings.
ROLLINS, INC. AND SUBSIDIARIES
The Company is exposed to credit losses primarily related to accounts receivables and financed receivables derived from customer services revenue. To reduce credit risk for residential pest control accounts receivable, we promote enrollment in our auto-pay programs. In general, we may suspend future services for customers with past due balances. The Company’s credit risk is generally low with a large number of entities comprising Rollins’ customer base and dispersion across many different geographical regions.
The Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risks. The Company’s established credit evaluation and monitoring procedures seek to minimize the amount of business we conduct with higher risk customers. The credit quality of a potential obligor is evaluated at the loan origination based on an assessment of the individual’s Beacon/credit bureau score. Rollins requires a potential obligor to have good credit worthiness with low risk before entering into a contract. Depending upon the individual’s credit score, the Company may accept with 100% financing or require a significant down payment or turndown the contract. Delinquencies of accounts are monitored each month. Financing receivables include installment receivable amounts which are due subsequent to one year from the balance sheet dates.
The Company’s allowances for credit losses for trade accounts receivable and financed receivables are developed using historical collection experience, current and economic and market conditions, reasonable and supportable forecasts, and a review of the current status of customers’ receivables. The Company’s receivable pools are classified between residential customers, commercial customers, large commercial customers, and financed receivables. Accounts are written-off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. Below is a roll forward of the Company’s allowance for credit losses for the six months ended June 30, 2020.
Trade Receivables | Financed Receivables | Total Receivables | ||||||||||
Balance at January 1, 2020 | $ | 16,699 | $ | 2,959 | $ | 19,658 | ||||||
Adoption of ASC 326 | (3,330 | ) | — | (3,330 | ) | |||||||
Adjusted balance at January 1, 2020 | 13,369 | 2,959 | 16,328 | |||||||||
Provision for expected credit losses | 8,480 | 1,288 | 9,768 | |||||||||
Write-offs charged against the allowance | (8,233 | ) | (1,233 | ) | (9,466 | ) | ||||||
Recoveries collected | 2,729 | — | 2,729 | |||||||||
Currency Conversion | 107 | — | 107 | |||||||||
Balance at June 30, 2020 | $ | 16,452 | $ | 3,014 | $ | 19,466 |
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (ASC 350)2020-04 Reference Rate Reform (Topic 848): Simplifying the Test for Goodwill Impairment, which eliminated the requirement to calculate the implied fair value of goodwill (i.e., Step 2Facilitation of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities would record an impairment charge basedEffects of Reference Rate Reform on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1)Financial Reporting (“ASU 2020-04”). The Company adoptedupdate provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting, caused by reference rate reform. ASU 2017-042020-04 is effective January 1, 2020.for all entities as of March 12, 2020 through December 31, 2022. The Company but does not expect the adoption of thisthe standard to have a material impact on its futurethe Company’s consolidated financial statements.Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The updated accounting guidance modified the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements. The Company adopted ASU 2018-13 effective January 1, 2020 and the adoption did not materially impact its financial statement disclosures.
ROLLINS, INC. AND SUBSIDIARIES
Recently issued accounting standards to be adopted in 2021 or later
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (topic 740): Simplifying the Accounting for Income Taxes.Taxes (“ASU 2019-12”). The standard eliminates the need for an organization to analyze whether the following apply in a given period (1) exception to the incremental approach for intraperiod tax allocation (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments and (3) exceptions in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (1) franchise taxes that are partially based on income, (2) transactions with a government that result in a step-up in the tax basis of goodwill, (3) separate financial statements of legal entities that are not subject to tax, and (4) enacted changes in tax laws in interim periods. The standard in this update isCompany adopted ASU 2019-12 effective forJanuary 1, 2021, and the Company’s financial statements issued for fiscal years beginning in 2021. The adoption of this ASU isdid not expected to have a material impact on the Company’s consolidated financial statements.
7
ROLLINS, INC. AND SUBSIDIARIES
NOTE 3. | REVENUE |
The following tables present our revenues disaggregated by revenue source (in thousands).
Sales and usage-based taxes are excluded from revenues. No sales to an individual customer or in a country other than the United States accounted for 10% or more than 10% of the sales for the periods listed on the following table.
Revenue by major geographic area, and by significant product and service offerings
Revenue, classified by the major geographic areas in which our customers are located, was as follows:
(In thousands) | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
United States | $ | 517,576 | $ | 485,170 | $ | 969,922 | $ | 879,170 | ||||||||
Other countries | 35,753 | 38,787 | 71,308 | 73,856 | ||||||||||||
Total Revenues | $ | 553,329 | $ | 523,957 | $ | 1,041,230 | $ | 953,026 | ||||||||
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30, | June 30, | ||||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||
United States | $ | 589,935 | $ | 517,576 | $ | 1,084,035 | $ | 969,922 | |||||||||
Other countries | 48,269 | 35,753 | 89,723 | 71,308 | |||||||||||||
Total Revenues | $ | 638,204 | $ | 553,329 | $ | 1,173,758 | $ | 1,041,230 |
Revenue from external customers, classified by significant product and service offerings, was as follows:
(In thousands) | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Residential revenue | $ | 257,921 | $ | 224,682 | $ | 462,578 | $ | 397,190 | ||||||||
Commercial revenue | 179,900 | 191,456 | 363,215 | 361,127 | ||||||||||||
Termite completions, bait monitoring, & renewals | 109,817 | 102,352 | 204,044 | 182,601 | ||||||||||||
Franchise revenues | 3,521 | 3,442 | 6,938 | 6,703 | ||||||||||||
Other revenues | 2,170 | 2,025 | 4,455 | 5,405 | ||||||||||||
Total Revenues | $ | 553,329 | $ | 523,957 | $ | 1,041,230 | $ | 953,026 |
Three Months Ending | Six Months Ending | ||||||||||||||||
June 30, | June 30, | ||||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||
Residential revenue | $ | 292,945 | $ | 257,921 | $ | 528,124 | $ | 462,578 | |||||||||
Commercial revenue | 210,838 | 179,900 | 399,535 | 363,215 | |||||||||||||
Termite completions, bait monitoring, & renewals | 127,674 | 109,817 | 233,368 | 204,044 | |||||||||||||
Franchise revenues | 4,111 | 3,521 | 7,570 | 6,938 | |||||||||||||
Other revenues | 2,636 | 2,170 | 5,161 | 4,455 | |||||||||||||
Total Revenues | $ | 638,204 | $ | 553,329 | $ | 1,173,758 | $ | 1,041,230 |
See Note 8. Unearned Revenue, for disclosures related to our unearned revenue balance.
ALLOWANCE FOR CREDIT LOSSES |
Effective January 1, 2020, the Company adopted ASC 326, the new accounting standard related to credit losses. The Company is exposed to credit losses primarily related to accounts receivables and financed receivables derived from customer services revenue. To reduce credit risk for residential pest control accounts receivable, we promote enrollment in our auto-pay programs. In general, we may suspend future services for customers with past due balances. The Company’s credit risk is generally low with a large number of entities comprising Rollins’ customer base and dispersion across many different geographical regions.
The Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risks. The Company’s established credit evaluation and monitoring procedures seek to minimize the amount of business we conduct with higher risk customers. The credit quality of a potential obligor is evaluated at the loan origination based on an assessment of the individual’s Beacon/credit bureau score. Rollins requires a potential obligor to have good credit worthiness with low risk before entering into a contract. Depending upon the individual’s credit score, the Company may accept with 100% financing or require a significant down payment or turn down the contract. Delinquencies of accounts are monitored each month. Financing receivables include installment receivable amounts which are due subsequent to one year from the balance sheet dates.
The Company’s allowances for credit losses for trade accounts receivable and financed receivables are developed using historical collection experience, current economic and market conditions, reasonable and supportable forecasts, and a review of the current status of customers’ receivables. The Company’s receivable pools are classified between residential customers, commercial customers, large commercial customers, and financed receivables. Accounts are written-off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. The Company stops accruing interest to these receivables when they are deemed uncollectible. Below is a roll forward of the Company’s allowance for credit losses for the three and six months ended June 30, 2021 and 2020.
8
ROLLINS, INC. AND SUBSIDIARIES
Schedule of Roll Forward of the Company’s Allowance for Credit Losses
(in thousands) | |||||||||||||
Allowance for Credit Losses | |||||||||||||
Trade | Financed | Total | |||||||||||
Receivables | Receivables | Receivables | |||||||||||
Beginning Balance | Balance at March 31, 2021 | $ | 15,731 | $ | 3,370 | $ | 19,101 | ||||||
Provision for expected credit losses | 369 | 1,618 | 1,987 | ||||||||||
Write-offs charged against the allowance | (3,650 | ) | (645 | ) | (4,295 | ) | |||||||
Recoveries collected | 1,413 | (2 | ) | 1,411 | |||||||||
Ending Balance | Balance at June 30, 2021 | $ | 13,863 | $ | 4,341 | $ | 18,204 | ||||||
Allowance for Credit Losses | |||||||||||||
Trade | Financed | Total | |||||||||||
Receivables | Receivables | Receivables | |||||||||||
Beginning Balance | Balance at December 31, 2020 | $ | 16,854 | $ | 3,231 | $ | 20,085 | ||||||
Provision for expected credit losses | 2,234 | 2,439 | 4,673 | ||||||||||
Write-offs charged against the allowance | (7,749 | ) | (1,326 | ) | (9,075 | ) | |||||||
Recoveries collected | 2,524 | (3 | ) | 2,521 | |||||||||
Ending Balance | Balance at June 30, 2021 | $ | 13,863 | $ | 4,341 | $ | 18,204 | ||||||
Allowance for Credit Losses | |||||||||||||
Trade | Financed | Total | |||||||||||
Receivables | Receivables | Receivables | |||||||||||
Beginning Balance | Balance at March 31, 2020 | $ | 11,861 | $ | 3,053 | $ | 14,914 | ||||||
Provision for expected credit losses | 6,927 | 554 | 7,481 | ||||||||||
Write-offs charged against the allowance | (4,454 | ) | (593 | ) | (5,047 | ) | |||||||
Recoveries collected | 2,118 | — | 2,118 | ||||||||||
Ending Balance | Balance at June 30, 2020 | $ | 16,452 | $ | 3,014 | $ | 19,466 | ||||||
Allowance for Credit Losses | |||||||||||||
Trade | Financed | Total | |||||||||||
Receivables | Receivables | Receivables | |||||||||||
Beginning Balance | Balance at December 31, 2019 | $ | 16,699 | $ | 2,959 | $ | 19,658 | ||||||
Adoption of ASC 326 | (3,330 | ) | — | (3,330 | ) | ||||||||
Provision for expected credit losses | 8,480 | 1,288 | 9,768 | ||||||||||
Write-offs charged against the allowance | (8,233 | ) | (1,233 | ) | (9,466 | ) | |||||||
Recoveries collected | 2,836 | — | 2,836 | ||||||||||
Ending Balance | Balance at June 30, 2020 | $ | 16,452 | $ | 3,014 | $ | 19,466 |
NOTE 5. | 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.
9
ROLLINS, INC. AND SUBSIDIARIES
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Basic and diluted earnings per share | ||||||||||||||||
Common stock | $ | 0.23 | $ | 0.20 | $ | 0.36 | $ | 0.33 | ||||||||
Restricted shares of common stock | $ | 0.22 | $ | 0.18 | $ | 0.35 | $ | 0.30 |
Three Months Ending | Six Months Ending | ||||||||||||||||
June 30, | June 30, | ||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||
Common stock | $ | 0.20 | $ | 0.15 | $ | 0.39 | $ | 0.24 | |||||||||
Restricted shares of common stock | $ | 0.20 | $ | 0.15 | $ | 0.39 | $ | 0.23 |
NOTE 6. | CONTINGENCIES |
In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits, claims, arbitrations, regulatory actions or arbitrationsinvestigations which allege that the subsidiaries’ services caused damage.damage or in evaluating the Company’s practices. In addition, the Company defends employment-related cases and claims from time to time. We are involved in certain environmental matters primarily arising in the normal course of business. We are actively contesting each of these matters.
Management does not believe that any pending claim, proceeding, litigation, regulatory action (including tax) or litigation,investigation, 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.
NOTE 7. | 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.liabilities, and debt. The carrying amounts of these financial instruments approximate their respective fair values. The Company also has derivative instruments as further discussed in Note 15. Derivative Instruments and Hedging Activities.
During the quarter ending June 30, 2021, the Company invested $10.6 million of unrestricted cash in international bonds, a level 2 asset under the fair value hierarchy. The investment is recorded in other current assets. The fair market values of the bonds approximates their amortized cost.
At
As of June 30, 20202021 and 2019,2020, the Company had $47.1$27.1 million and $54.7$47.1 million of acquisition holdback and earnout liabilities with the former owners of acquired companies. The earnout liabilities were discounted to reflect the expected probability of payout, and both earnout and holdback liabilities were discounted to their net present value on the Company’s books and are considered level 3 liabilities. The table below presents a summary of the changes in fair value for these liabilities.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Beginning | $ | 51,328 | $ | 28,999 | $ | 49,131 | $ | 30,926 | ||||||||
New acquisitions and revaluations | 1,054 | 27,893 | 5,543 | 29,450 | ||||||||||||
Payouts | (5,822 | ) | (2,426 | ) | (7,862 | ) | (5,233 | ) | ||||||||
Interest on outstanding contingencies | 565 | 510 | 1,148 | 722 | ||||||||||||
Charge offset, forfeit and other | (40 | ) | (291 | ) | (875 | ) | (1,180 | ) | ||||||||
Ending Balance | $ | 47,085 | $ | 54,685 | $ | 47,085 | $ | 54,685 |
The table below presents a summary of the changes in fair value for these liabilities.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Beginning | $ | 32,976 | $ | 51,328 | $ | 35,744 | $ | 49,131 | ||||||||
New acquisitions and revaluations | 1,906 | 1,054 | 3,973 | 5,543 | ||||||||||||
Payouts | (7,947 | ) | (5,822 | ) | (12,873 | ) | (7,862 | ) | ||||||||
Interest on outstanding contingencies | 258 | 565 | 537 | 1,148 | ||||||||||||
Charge offset, forfeit and other | (136 | ) | (40 | ) | (324 | ) | (875 | ) | ||||||||
Ending Balance | $ | 27,057 | $ | 47,085 | $ | 27,057 | $ | 47,085 |
10
ROLLINS, INC. AND SUBSIDIARIES
NOTE 8. | UNEARNED REVENUE |
The Company records unearned revenue when we have either received payment or contractually have the right to bill for services in advance of the services or performance obligations being performed. Deferred revenue recognized in the three and six months ended June 30, 2021 and 2020 and 2019 were $43.2$46.5 million and $40.5$43.2 million, respectively and $85.9$92.3 million and $80.5$85.9 million respectively. Changes in unearned revenue were as follows:
For the period ended | June 30, | December 31, | June 30, | |||||||||
(in thousands) | 2020 | 2019 | 2019 | |||||||||
Balance at beginning of year | $ | 136,507 | $ | 127,075 | $ | 127,075 | ||||||
Deferral of unearned revenue | 105,928 | 174,404 | 100,188 | |||||||||
Recognition of unearned revenue | (85,936 | ) | (164,972 | ) | (80,496 | ) | ||||||
Balance at end of period | $ | 156,499 | $ | 136,507 | $ | 146,767 |
The Company had no material contracted, but not recognized,Changes in unearned revenue as
Six Months Ended June 30, | ||||||||
(in thousands) | 2021 | 2020 | ||||||
Balance at beginning of year | $ | 149,224 | $ | 136,507 | ||||
Deferral of unearned revenue | 116,034 | 105,928 | ||||||
Recognition of unearned revenue | (92,307 | ) | (85,936 | ) | ||||
Balance at end of period | $ | 172,951 | $ | 156,499 |
As of June 30, 2020 or December 31, 2019.
At June 30, 20202021 and December 31, 2019,2020, the Company had long-term unearned revenue of $17.021.6 million and $13.718.0 million, respectively. 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 yearsor less with immaterial amounts recognized through 2029.
NOTE 9. | LEASES |
The Company leases certain buildings, vehicles, and equipment in order to reduce the risk associated with ownership. The Company elected the practical expedient approach permitted under ASC 842 not to include short-term leases with a duration of 12 months or less on the balance sheet. As of June 30, 20202021, and December 31, 2019,2020, all leases were classified as operating leases. Building leases generally carry terms of 5 to 1015 years with annual rent escalations at fixed amounts per the lease. Vehicle leases generally carry a fixed term of one year with renewal options to extend the lease on a monthly basis resulting in lease terms up to 57 years depending on the class of vehicle. The exercise of renewal options is at the Company’s sole discretion. It is reasonably certain that the Company will exercise the renewal options on its vehicle leases. The measurement of right-of-use assets and liabilities for vehicle leases includes the fixed payments associated with such renewal periods. We separate lease and non-lease components of contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants.
During the six months ended June 30, 2021, the Company completed multiple sale-leaseback transactions where it sold 17 of its properties related to the Clark Pest Control acquisition for gross proceeds of $67.0 million and a gain of $31.5 million. These leases are classified as operating leases with terms of 7 to 15 years.
The Company uses the rate implicit in the lease when available; however, most of our leases do not provide a readily determinable implicit rate. Accordingly, we estimate our incremental borrowing rate based on information available at lease commencement.
Schedule of Lease Classification
(in thousands, except Other Information) | ||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
Lease Classification | Financial Statement Classification | 2021 | 2020 | 2021 | 2020 | |||||||||||||
Short-term lease cost | Cost of services provided, Sales, general, and administrative expenses | $ | 60 | $ | 57 | $ | 125 | $ | 133 | |||||||||
Operating lease cost | Cost of services provided, Sales, general, and administrative expenses | 22,634 | 21,307 | 46,025 | 42,024 | |||||||||||||
Total lease expense | $ | 22,694 | $ | 21,364 | $ | 46,150 | $ | 42,157 | ||||||||||
Other Information | ||||||||||||||||||
Weighted-average remaining lease term – operating leases | 5.59 years | 3.78 years | ||||||||||||||||
Weighted-average discount rate – operating leases | 3.75% | 3.93% | ||||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||
Operating cash flows for operating leases | $ | 45,498 | $ | 41,599 |
11
ROLLINS, INC. AND SUBSIDIARIES
June 30, 2020 | ||||||
Lease Commitments
Future minimum lease payments, including assumed exercise of renewal options at as of June 30, 20202021 were as follows:
(in thousands) | Operating Leases | |||
2020 (excluding the six months ended June 30, 2020) | $ | 40,717 | ||
2021 | 71,763 | |||
2022 | 53,682 | |||
2023 | 33,800 | |||
2024 | 14,063 | |||
2025 | 7,913 | |||
Thereafter | 11,987 | |||
Total Future Minimum Lease Payments | $ | 233,925 | ||
Less: Amount representing interest | $ | 17,585 | ||
Total future minimum lease payments, net of interest | $ | 216,340 |
Schedule of Future minimum lease payments
(in thousands) | ||||
2021 (excluding the six months ended June 30, 2021) | $ | 44,958 | ||
2022 | 76,537 | |||
2023 | 56,663 | |||
2024 | 33,021 | |||
2025 | 18,425 | |||
2026 | 12,612 | |||
Thereafter | 51,645 | |||
Total Future Minimum Lease Payments | 293,861 | |||
Less: Amount representing interest | (33,453 | ) | ||
Total future minimum lease payments, net of interest | $ | 260,408 |
Future commitments presented in the table above include lease payments in renewal periods for which it is reasonably certain that the Company will exercise the renewal option. Total future minimum lease payments for operating leases, including the amount representing interest, are comprised of $95.0163.1million for building leases and $138.9130.7million for vehicle leases. As of June 30, 2020,2021, the Company had no additional future obligations of $6.8 million for leases that had not yet commenced.
NOTE 10. | GOODWILL AND INTANGIBLE ASSETS |
The cumulative carrying amount of goodwill was $664.1 million and $653.2 million as of June 30, 2021 and December 31, 2020, respectively. Goodwill generally changes due to the timing of acquisitions, finalization of allocation of purchase prices of previous acquisitions and foreign currency translations. During the six months ended June 30, 2021, goodwill increased $11.7 million due to acquisitions and decreased $0.8 million due to foreign currency translation. The carrying amount of goodwill in foreign countries was $81.1 million as of June 30, 2021 and $81.4 million as of December 31, 2020.
The Company tests goodwill and indefinite-lived intangible assets as of September 30 each year, or more frequently if indicators of an impairment exist. The Company has concluded there were no indicators of impairment during the six months ended June 30, 2021.
The carrying amount of customer contracts was $292.0 million and $298.9 million as of June 30, 2021, and December 31, 2020, respectively. The carrying amount of trademarks and tradenames was $108.5 million and $109.0 million as of June 30, 2021 and December 31, 2020, respectively. The carrying amount of other intangible assets was $10.2 million and $10.8 million as of June 30, 2021 and December 31, 2020, respectively. The carrying amount of customer contracts in foreign countries was $43.1 million and $45.7 million as of June 30, 2021 and December 31, 2020, respectively. The carrying amount of trademarks and tradenames in foreign countries was $3.1 million and $3.3 million as of June 30, 2021 and December 31, 2020, respectively. The carrying amount of other intangible assets in foreign countries was $0.9 million and $1.0 million as of June 30, 2021 and December 31, 2020, respectively.
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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 indefinite-lived and amortizable intangible assets as of June 30, 2021 (in thousands):
Schedule of Components of Indefinite-lived and Amortizable Intangible Assets
Carrying Value | Useful Life in Years | |||||
Amortizable intangible assets: | ||||||
Customer contracts | $ | 291,976 | 3-20 | |||
Trademarks and tradenames | 14,313 | 7-20 | ||||
Non-compete agreements | 4,483 | 3-20 | ||||
Patents | 1,443 | 3-15 | ||||
Other assets | 587 | 10 | ||||
Total amortizable intangible assets | 312,802 | |||||
Indefinite-lived intangible assets: | ||||||
Trademarks and tradenames | 94,204 | |||||
Internet domains | 2,227 | |||||
Other assets | 1,418 | |||||
Total indefinite-lived intangible assets | 97,849 | |||||
Total customer contracts and other intangible assets | $ | 410,651 |
NOTE 11. | DEBT |
The
On April 30, 2019, the Company entered into a Revolving Credit Agreement with Truist Bank N.A. (formerly SunTrust Bank now known as Truist BankN.A.) and Bank of America, N.A. (the “Credit Agreement”) for an unsecured Revolving Commitmentrevolving commitment of up to $175.0million, which includes a $75.0million letter of credit subfacility and a $25.0million swingline subfacility (the “Revolving Commitment”), and an unsecured variable rate $250.0million Term Loanterm loan with SunTrust Bank, now known as Truist Bank, N.A., and Bank of America, N.A.N.A (the “Term Loan”). Both the Revolving Commitment and the Term Loan (“Credit Facility”) have five-year terms commencing on April 29, 2019. In addition, the Credit Agreement has provisions to extend eachthe term beyondof the Revolving Commitment termination datebeyond April 29, 2024, as well as optional prepayment rightsthe right at any time and from time to time to prepay any borrowing under the Credit Agreement, in whole or in part, without premium or penalty. As of June 30, 2021, the Term Loan had outstanding borrowings of $88.0 million and there were no borrowings under the Revolving Commitment. The effective interest rate on the debt outstanding as of June 30, 2021 was 0.854%. The effective interest rate is comprised of the 1-month LIBOR plus a margin of 75.0 basis points as determined by the Company’s leverage ratio calculation. As of December 31, 2020, the Revolving Commitment had outstanding borrowings of $72.067.0 million and the Term Loan had outstanding borrowings of $183.0136.0 million. As of December 31, 2019, the Revolving Commitment had outstanding borrowings of $101.5 million and the Term Loan had outstanding borrowings of $190.0million. The Credit Agreement includes a debt covenant that requires the Company’s leverage ratio to be no greater than 3.00:1.00. The Leverage Ratio is calculated as of the last day of the fiscal quarter most recently endedended.. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance throughout 2020.2021.
NOTE 12. | STOCKHOLDERS’ EQUITY |
During the six months ended June 30, 2020,2021, the Company paid $65.5$79.7 million, or $ per share, in cash dividends compared to $68.7$65.5 million, or $ per share, during the same period in 2019.2020.
During the second quarter ended June 30, 20202021 and during the same period in 20192020, the Company did not repurchase shares on the open market.
The Company repurchases shares from employees for the payment of their taxes on restricted shares that have vested. The Company repurchased $0.1 million and $0.7 million for the quarterquarters ended June 30, 2021 and 2020, and 2019, respectively$10.3 million and $8.1 million and $9.8 million of common stock during the six monthsix-month period ended June 30, 2021 and 2020 and 2019, respectively.
As more fully discussed in Note 17 of the Company’s notes to the consolidated financial statements in its 20192020 Annual Report on Form 10-K, time-lapse restricted sharesawards and restricted stock units (“restricted shares”) 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. AtAs of June 30, 2020,2021, approximately 4.96.6 million shares of the Company’s common stock were reserved for issuance.
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ROLLINS, INC. AND SUBSIDIARIES
Time Lapse Restricted Shares and Restricted Stock Units
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Time lapse restricted stock: | ||||||||||||||||
Pre-tax compensation expense | $ | 3,821 | $ | 3,697 | $ | 7,640 | $ | 7,586 | ||||||||
Tax benefit | (1,100 | ) | (963 | ) | (1,937 | ) | (1,784 | ) | ||||||||
Restricted stock expense, net of tax | $ | 2,721 | $ | 2,734 | $ | 5,703 | $ | 5,802 |
ROLLINS, INC. AND SUBSIDIARIESexpense:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Time lapse restricted stock: | ||||||||||||||||
Pre-tax compensation expense | $ | 3,920 | $ | 3,821 | $ | 7,841 | $ | 7,640 | ||||||||
Tax benefit | (1,039 | ) | (1,100 | ) | (1,925 | ) | (1,937 | ) | ||||||||
Restricted stock expense, net of tax | $ | 2,881 | $ | 2,721 | $ | 5,916 | $ | 5,703 |
The following table summarizes information on unvested restricted stock outstanding as of June 30, 2020:2021:
Number of Shares | Average Grant- Date Fair Value | |||||||
Unvested Restricted Stock at December 31, 2019 | 2,310 | $ | 25.84 | |||||
Forfeited | (24 | ) | 24.22 | |||||
Vested | (627 | ) | 19.46 | |||||
Granted | 573 | 36.73 | ||||||
Unvested Restricted Stock at June 30, 2020 | 2,232 | $ | 30.44 |
(number of shares in thousands) | Number of Shares | Average Grant- Date Fair Value | ||||||
Unvested Restricted Stock at December 31, 2020 | 2,870 | $ | 20.36 | |||||
Forfeited | (34 | ) | 22.62 | |||||
Vested | (826 | ) | 16.22 | |||||
Granted | 778 | 37.04 | ||||||
Unvested Restricted Stock at June 30, 2021 | 2,788 | $ | 26.14 |
AtAs of June 30, 20202021 and December 31, 2019,2020, the Company had $million and $million of total unrecognized compensation cost, respectively, related to time-lapse restricted shares that are expected to be recognized over a weighted average period of approximately years and years, respectively.
NOTE 13. | PENSION |
In September 2019, the Company settled its fully-funded Rollins, Inc. pension plan. At December 31, 2019, $21.6As of June 30, 2021, $1.1 million of Rollins, Inc. pension assets remained available to fund other employee benefits. The Company used $6.3 million and $12.3 million to fund its 401(k)-match obligation duringin the quarter and sixth months ended June 30, 2020, respectively. The Company plans to continue funding future benefit plan obligations,trust with a possibleplanned reversion of anythe remaining pension assets to the Company per ERISA regulations. Asregulations before year end. The Company anticipates tax of approximately 45% of the pension plan assets to be paid upon reversion, which includes the 20% excise tax. In addition, the Company has a remaining Waltham, Inc. defined benefit plan. This plan had assets of $2.1 million, a projected liability of $3.0 million and an unfunded status of $0.9 million as of June 30, 2020, the2021. The Company had approximately $9.3 million remaining of benefit plan assets.
Components of Net Pension Benefit Loss / (Gain)
Three Months Ended June 30, | Six Month Ended June 30, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Interest and service cost | $ | 28 | $ | 1,762 | $ | 53 | $ | 3,524 | ||||||||
Expected return on plan assets | (24 | ) | (2,640 | ) | (59 | ) | (5,280 | ) | ||||||||
Amortization of net loss | 25 | 878 | 50 | 1,756 | ||||||||||||
Net periodic loss | $ | 29 | $ | — | $ | 44 | $ | — |
During the six months ended June 30, 2020, and the same period in 2019, the Companyhas not made no contributions to its defined benefit retirement plans (the “Plans”). The Company made no contributions for the year ended December 31,since 2019.
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ROLLINS, INC. AND SUBSIDIARIES
NOTE 14. | BUSINESS COMBINATIONS |
The Company made 1318 acquisitions during the six-month period ended June 30, 2020,2021, and 3031 acquisitions for the year ended December 31, 2019, some of which have been disclosed on various press releases and related Current Reports on Form 8-K.2020. For the 1318 acquisitions so far in 2020,completed through June 30, 2021, the preliminary values of major classes of assets acquired and liabilities assumed recorded at the datedates of acquisition, as adjusted during the valuation period, are included in the reconciliation of the total consideration as follows (in thousands):
June 30, 2020 | ||||
Accounts receivable, net | $ | 1,835 | ||
Materials & supplies | 192 | |||
Equipment and property | 3,446 | |||
Goodwill | 29,080 | |||
Customer contracts | 27,968 | |||
Other intangible assets | 3,094 | |||
Other assets and liabilities, net | 4,003 | |||
Current liabilities | (7,906 | ) | ||
Total purchase price | $ | 61,712 | ||
Less: Contingent consideration liability | (5,682 | ) | ||
Total cash purchase price | $ | 56,030 |
Schedule of Assets Acquired and Liabilities assumed recorded at the date of acquisition.
June 30, 2021 | ||||
Accounts receivable, net | $ | 504 | ||
Materials and supplies | 128 | |||
Equipment and property | 1,613 | |||
Goodwill | 11,732 | |||
Customer contracts | 17,994 | |||
Other intangible assets | 291 | |||
Current liabilities | (142 | ) | ||
Other assets and liabilities, net | 163 | |||
Total consideration paid | $ | 32,283 | ||
Less: Contingent consideration liability | (3,898 | ) | ||
Total cash purchase price | $ | 28,385 |
Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. The factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized. For the period ended June 30, 2020, $29.12021, $11.7 million of goodwill was added related to the 1318 acquisitions noted above. The cumulative carrying amount ofrecognized goodwill was $602.3 million and $572.8 million at June 30, 2020 and December 31, 2019, respectively. Goodwill generally changes dueis expected 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 $57.5 million at June 30, 2020 and $55.8 million at December 31, 2019.be deductible for tax purposes.
The Company completed its most recent annual impairment analysis as of September 30, 2019. Based upon the results of this analysis, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.
The carrying amount of customer contracts was $275.8 million and $273.7 million at June 30, 2020, and December 31, 2019, respectively. The carrying amount of trademarks and tradenames was $104.8 million and $102.5 million at June 30, 2020 and December 31, 2019, respectively. The carrying amount of other intangible assets was $10.2 million and $10.5 million at June 30, 2020 and December 31, 2019, respectively. The carrying amount of customer contracts in foreign countries was $33.5 million at both June 30, 2020 and December 31, 2019. The carrying amount of trademarks and tradenames in foreign countries was $3.1 million and $3.4 million at June 30, 2020 and December 31, 2019, respectively. The carrying amount of other intangible assets in foreign countries was $1.0 million and $1.2 million at June 30, 2020 and December 31, 2019, respectively.
Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives. The following table sets forth the components of intangible assets as of June 30, 2020 (in thousands):
Intangible Asset | Carrying Value | Useful Life in Years | ||||||
Customer contracts | $ | 275,782 | 3-12 | |||||
Trademarks and tradenames | 104,760 | N/A - 20 | ||||||
Non-compete agreements | 4,337 | 3-20 | ||||||
Patents | 1,458 | 3-15 | ||||||
Other assets | 2,154 | 10 | ||||||
Internet domains | 2,227 | N/A | ||||||
Total customer contracts and other intangible assets | $ | 390,718 |
ROLLINS, INC. AND SUBSIDIARIES
NOTE 15. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
Risk Management Objective of Using Derivatives
The Company is exposed to certain interest rate risks on our outstanding debt and foreign currency risks arising from our international business operations and global economic conditions. The Company enters into certain derivative financial instruments to lock in certain interest rates, as well as to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.
Cash Flow Hedges of Interest Rate Risk
The Company uses interest rate swap arrangements to manage or hedge its interest rate risk. Notwithstanding the terms of the swaps, the Company is ultimately obligated for all amounts due and payable under the Revolving Commitment and the Term Loan (“Credit Facility”).Facility. The Company does not use such instruments for speculative or trading purposes.
On June 19, 2019, the Company entered into a floating-to-fixed interest rate swap for an aggregate notional amount of $100.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility. The Company designated the swap as a cash flow hedge. The swap requires us to pay a fixed rate of 1.94% per annum on the notional amount. The notional amounts as of June 30, 2021 and December 31, 2020 were $20.0 million and $40.0 million, respectively. The cash flows from the swap began June 30, 2019 and endsend on December 31, 2021. As of December 31, 2019, $0.32020, $0.4 million had been recorded as ana loss in Accumulated Loss in Other Comprehensive Income (“AOCI”). An additional lossFor the six months ended June 30, 2021, a gain of $0.6$0.3 million was recorded in AOCI, incompared to a loss of $0.6 million for the six months ended June 30, 2020. Realized gains and losses in connection with each required interest payment are reclassified from AOCI to interest expense during the period of the cash flows. During the quarter and six months ended June 30, 2020,2021, the Company reclassified into interest expense $0.2$0.1 million and $0.3 million, respectively. The fair value of the Company’s interest rate swaps was recorded as $0.7$0.1 million in Other Current Liabilities and $0.1 million in Long-Term Liabilities for a combined obligationas of $0.8 million at June 30, 2020.2021. The fair value of the Company’s interest rate swaps was recorded as $0.2 million in Other Current Liabilities and $0.1 million in Long-Term Liabilities for a combined obligationas of $0.3 million at December 31, 2019.2020. On a quarterly basis, management evaluates anyour swap agreement to determine its effectiveness or ineffectiveness and records the change in fair value as an adjustment to AOCI. Management intends that the swap remains effective.
15
ROLLINS, INC. AND SUBSIDIARIES
Hedges of Foreign Exchange Risk
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. We use foreign currency derivatives, specifically vanilla foreign currency forward contracts (“FX Forwards”), to manage our exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX Forwards are typically settled in US dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards were recorded in other income/expense and were equal to a net loss of $0.3 million and $0.1 million for the quarter ended June 30, 2020 and 2019, respectively, and a net gain of $0.8$0.2 million and a net loss of $0.2$0.3 million for the quarters ended June 30, 2021 and 2020, respectively, and net gains of $0.4 million and $0.8 million for the six months ended June 30, 20202021 and 2019,2020, respectively. The fair valuevalues of the Company’s FX Forwards waswere recorded as $0.1net obligations of $0.2 million in Other Current Assets at June 30, 2020 and was a net obligation of $0.2$0.4 million in Other Current Liabilities atas of June 30, 2021 and December 31, 2019.2020, respectively.
As of June 30, 2020,2021, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):
Non-Designated Derivative Summary | Non-Designated Derivative Summary | Non-Designated Derivative Summary | ||||||||||||||||||||||
Number of | ||||||||||||||||||||||||
FX Forward Contracts | Number of Instruments | Sell Notional | Buy Notional | Instruments | Sell Notional | Buy Notional | ||||||||||||||||||
Sell AUD/Buy USD Fwd Contract | 5 | $ | 1,000 | $ | 690 | 7 | $ | 700 | $ | 522 | ||||||||||||||
Sell CAD/Buy USD Fwd Contract | 7 | $ | 8,500 | 6,343 | 7 | $ | 8,000 | $ | 6,217 | |||||||||||||||
Total | 12 | $ | 7,033 | 14 | $ | 6,739 |
The financial statement impact related to these derivative instruments was insignificant for the 6six months ended June 30, 20202021 and year ended December 31, 2019.2020.
NOTE 16. | SUBSEQUENT EVENTS |
On July 28, 2020,27, 2021, the Company announced that theCompany’s Board of Directors declared a regular quarterly cash dividend on its common stock of $ per share payable on September 10, 20202021 to stockholders of record at the close of business on August 10, 2020.2021.
16
ROLLINS, INC. AND SUBSIDIARIES
ITEM 2. |
The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this quarterly report on Form 10-Q.
KEY PERSONNEL CHANGES:
On July 29,27, 2021, the Company’s Board of Directors appointed Julie Bimmerman to serve as the Company’s Interim Chief Financial Officer and Treasurer to assume the duties of principal financial officer and principal accounting officer. The Company’s current Chief Financial Officer and Treasurer, Paul E. Northern, transferred into an operational role as Senior Vice President focused on sustainability, also effective July 27, 2021.
COVID-19:
The global spread and unprecedented impact of the COVID-19 pandemic (“COVID-19”) continues to create significant volatility, uncertainty and economic disruption around the world. In 2020, the pest control industry was designated as “essential” by the Department of Homeland Security and as a result, the Company has been able to remain operational in every part of the world in which it operates. With the recent availability of vaccinations, many COVID-19 restrictions have been lifted; however, the discovery and increased spread of new COVID-19 variants may result in additional restrictions being imposed. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take actions that may alter our operations, including those that may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees and customers. We do not know when, or if, it will become practical to relax or eliminate some or all these measures entirely as there is no guarantee that COVID-19 will be fully contained.
The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported second quarter revenuesamounts of $553.3 million, an increaseassets and liabilities and related disclosures as of 5.6% over the prior year’s second quarter revenuedate of $524.0 million. Rollins’ net income increased 17.2% to $75.4 million, or $0.23 per diluted sharethe condensed consolidated financial statements. The Company considered the impact of COVID-19 on the assumptions and estimates used in preparing the condensed consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the second quarter have been made. These adjustments are of a normal recurring nature but complicated by the uncertainty surrounding the global economic impact of COVID-19. The results of operations for the six months ended June 30, 2020, compared with $64.3 million, or $0.20 per diluted share2021 are not necessarily indicative of results for the same periodentire year. The severity, magnitude and duration, as well as the economic consequences of COVID-19, are uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions may change over time in 2019.response to COVID-19 and may change materially in future periods.
Results of Operations:
THREE MONTHS ENDED JUNE 30, 20202021 COMPARED TO THREE MONTHS ENDED JUNE 30, 20192020
COVID-19 Pandemic Impact
Going into the quarter ended June 30, 2020, we were faced with the global economic downturn resulting from the COVID-19 pandemic. The Company responded with numerous operational adjustments to address the economic and health safety challenges. These included new COVID-related procedures, modified customer service and related protocols, daily health screenings before entering shared offices, and a transition to remote work locations to reduce concentrations of personnel in offices where appropriate. Cost containment efforts included furloughs, layoffs, elimination of non-essential travel, postponing capital expenditures, and temporary salary reductions for upper management, among other actions.
Customer retention during the pandemic is less predictable, and of greater immediate concern. Our residential pest control business has remained consistent with seasonal trends, especially as temperatures rise across the U.S. and pest activity increases. Through the date of this filing, our commercial pest control business has been more adversely impacted, as it crosses multiple industries such as healthcare, food processing, logistics, grocery, retail and hospitality. Each of these industries is being impacted differently by the pandemic. Many of our commercial customers continue to operate as “essential” businesses; however, unfortunately, there are a notable number of others forced to temporarily close their doors. We expect this impact will persist for the remainder of 2020 and possibly beyond, the degree of the impact will depend on the extent and duration of the economic contraction.
While we have a substantial amount of intangible assets on our balance sheet, based on our second quarter revenues, we do not anticipate any significant long-term loss in revenues or cash flows that would approach a level for impairment of intangible assets.
All of our critical supply-chain vendors have remained operational, and we have engaged additional new sources to supplement our existing suppliers, especially for critical PPE and other COVID-19 related items. Fleet suppliers and support vendors continue to serve our needs.
Revenue
Revenues for the second quarter ended June 30, 20202021 increased $29.4$84.9 million, or 5.6%15.3%, to $553.3$638.2 million compared to $524.0$553.3 million for the second quarter ended June 30, 2019.2020. Approximately 3.11.7 percentage points of the 5.6%15.3% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining 2.513.6 percentage points.
The Company has three primary service offerings: commercialresidential pest control, residentialcommercial pest control, and termite, including ancillary services. During the second quarter ended June 30, 2020,2021, residential pest control approximated 46% of the Company’s revenues, commercial pest control revenue approximated 33% of the Company’s revenues, residential pest control approximated 47% of the Company’s revenues, and termite and ancillary service revenue approximated 20%21% of the Company’s revenues.
ROLLINS, INC. AND SUBSIDIARIES
Our commercial customers’ operations were most heavily impacted by the various governmental shelter-in-place mandates and their negative effect on small to medium size businesses. As a result, when comparingComparing the second quarter of 20202021 to the second quarter of 2019,2020, the Company’s commercial pest control revenue decreased 6.0%. However,increased 17.2% partially due to the Company’s believes the launchlifting of its new VitalClean sanitation services helped some of its commercial customers reopen and protect their employees and customers. By contrast, demandmany COVID restrictions. Demand for our residential pest control service offerings grew significantly during the second quarter of 2020. For example, mosquito sales grew more than 30% comparedalso continues to the second quarter of 2019. The Company believes withgrow. With many people working from or confined to their homes, the awareness of unwanted pests has helped contribute to our growth in residential service revenues. Comparing the second quarter of 20202021 to the second quarter of 2019,2020, residential pest control revenue grew 14.8%13.6%. Termite and ancillary services revenue grew 7.3%16.3%. Foreign operations accounted for approximately 6%8% and 7%6% of total revenues during the second quarterquarters of 20202021 and 2019,2020, respectively.
17
ROLLINS, INC. AND SUBSIDIARIES
Revenues are impacted by the seasonal nature of the Company’s pest and termite control services. The increase in pest activity, as well as the metamorphosis of termites in the spring and summer (the occurrence of which is determined by the change in seasons), has historically resulted in an increase in the Company’s revenues as evidenced by the following chart:
Consolidated Net Revenues | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
First Quarter | $ | 535,554 | $ | 487,901 | $ | 429,069 | ||||||
Second Quarter | 638,204 | 553,329 | 523,957 | |||||||||
Third Quarter | — | 583,698 | 556,466 | |||||||||
Fourth Quarter | — | 536,292 | 505,985 | |||||||||
Year to date | $ | 1,173,758 | $ | 2,161,220 | $ | 2,015,477 |
Consolidated Net Revenues | ||||||||||||
(in thousands) | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
First Quarter | $ | 487,901 | $ | 429,069 | $ | 408,742 | ||||||
Second Quarter | 553,329 | 523,957 | 480,461 | |||||||||
Third Quarter | — | 556,467 | 487,739 | |||||||||
Fourth Quarter | — | 505,985 | 444,623 | |||||||||
Year ended December 31, | $ | 1,041,230 | $ | 2,015,478 | $ | 1,821,565 | ||||||
Revenues are also impacted by the Company’s acquisitions. For the second quarters of 2021, 2020, 2019, and 2018,2019, acquisitions increased revenues by approximately $9.5 million, $16.5 million, and $26.2 million, and $23.4 million, respectively.
Cost of Services Provided
Cost of Servicesservices provided for the second quarter ended June 30, 20202021 increased $2.3$42.3 million, or 0.9%16.5%, to $255.6$297.9 million, compared to $253.3$255.6 million for the second quarter of the prior year. Gross Marginmargin for the second quarter of 20202021 was 53.8%53.3%, up 2.1down 0.5 percentage points from 51.7%53.8% for the second quarter of 2019.2020. During the quarter, the Company’s slight margin improvementdecline was driven by expense reductionsgrowth in the following areas:
● | Increased service salaries |
● | Increased materials cost due to the write-down of unused personal protection equipment; and |
Depreciation and Amortization
Depreciation and amortization expense for the second quarter ended June 30, 20202021 increased $1.8$1.4 million to $21.9$23.3 million, an increase of 8.9%6.4% from the same period in the prior year. Depreciation increased $0.1 million due to acquisitions and equipment purchases, while amortization of intangible assets increased $1.3 million due to the amortization of customer contracts from several acquisitions.
Sales, General and Administrative
Sales, general and administrative expenses for the second quarter ended June 30, 2021 decreased to 28.8% of revenues, increasing $12.2 million, or 7.1%, to $183.5 million, compared to $171.3 million or 30.9% of revenues for the second quarter ended June 30, 2020. The following factors contributed to the control of Company spending:
● | Reduced provision for expected credit losses as outlook improved from second quarter 2020; |
● | Administrative salary and benefit savings; and |
● | Reduced telephone expenses due to improved contract terms. |
Interest Expense, Net
Net interest expense for the second quarter ended June 30, 2021 was $0.5 million compared to $1.5 million for the same period last year. The change was driven primarily by the lower average debt balance in 2021 compared to the same quarter in 2020.
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ROLLINS, INC. AND SUBSIDIARIES
Income Taxes
The effective tax rate was 26.2% for the second quarter ended June 30, 2021 compared to 27.2% for the second quarter ended June 30, 2020. The rate is lower in the current year due to the decrease in the amount of foreign withholding tax relative to an increase in pretax income.
SIX MONTHS ENDED JUNE 30, 2021 COMPARED TO SIX MONTHS ENDED JUNE 30, 2020
Revenue
Revenues for the six months ended June 30, 2021 increased $132.5 million or 12.7% to $1.174 billion compared to $1.041 billion for the six months ended June 30, 2020. Approximately 1.8 percentage points of the 12.7% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining 10.9 percentage points.
During the six months ended June 30, 2021, residential pest control approximated 45% of the Company’s revenues, commercial pest control revenue approximated 34% of the Company’s revenues, and termite and ancillary service revenue approximated 21% of the Company’s revenues. Comparing the first six months of 2021 to the first six months of 2020, the Company’s commercial pest control revenue increased 10.0%, residential pest control revenue grew 14.2%, and termite and ancillary services revenue grew 14.4%. Foreign operations accounted for approximately 8% and 7% of total revenues during the first six months of 2021 and 2020, respectively.
Cost of Services Provided
Cost of Services provided for the six months ended June 30, 2021 increased $52.6 million, or 10.4%, to $559.4 million, compared to $506.8 million for the six months ended June 30, 2020. Gross Margin for the first six months of 2021 was 52.3%, up 1.0 percentage point from 51.3% for the first six months of 2020. Margin improvement was driven by the following:
● | Reduced COVID-19 related personnel expense related to sick leave and benefit extension during furloughs; and |
● | Service management salary and benefit savings. |
Depreciation and Amortization
Depreciation and amortization expense for the six months ended June 30, 2021 increased $3.4 million to $46.9 million, an increase of 7.8% from the same period in the prior year. Depreciation increased $1.0 million due to acquisitions and equipment purchases while amortization of intangible assets increased $0.8$2.4 million due to the amortization of customer contracts from several acquisitions.
Sales, General and Administrative
Sales, General and Administrative Expenses for the second quarter ended June 30, 2020 remained at 30.9% of revenues, increasing $9.4 million, or 5.8%, to $171.3 million, compared to $161.9 million for the second quarter ended June 30, 2019. The Company controlled spending through the following:
ROLLINS, INC. AND SUBSIDIARIES
Interest Expense, Net
Net interest expense for the second quarter ended June 30, 2020 was $1.5 million compared to $1.9 million for the same period last year. The change was driven primarily by the lower average debt balance in 2020 compared to the same quarter in 2019.
Income Taxes
The effective tax rate was 27.2% for the second quarter ended June 30, 2020 and 26.1% for the second quarter ended June 30, 2019. The increase in the effective tax rate for second quarter ended June 30, 2020 was primarily due to reductions in certain beneficial deductions.
SIX MONTHS ENDED JUNE 30, 2020 COMPARED TO SIX MONTHS ENDED JUNE 30, 2019
Revenue
Revenues for the six months ended June 30, 2020 increased $88.2 million or 9.3% to $1.041 billion compared to $953.0 million for the six months ended June 30, 2019. Growth occurred across all service lines. Approximately 5.7 percentage points of the 9.3% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining 3.6 percentage points.
During the six months ended June 30, 2020, commercial pest control revenue approximated 35% of the Company’s revenues, residential pest control approximated 44% of the Company’s revenues, and termite and ancillary service revenue approximated 20% of the Company’s revenues. Comparing the first six months of 2020 to the first six months of 2019, the Company’s commercial pest control revenue increased 0.6%, residential pest control revenue grew 16.5%, and termite and ancillary services revenue grew 11.7%. Foreign operations accounted for approximately 7% and 8% of total revenues during the first six months of 2020 and 2019, respectively.
Cost of Services Provided
Cost of Services provided for the six months ended June 30, 2020 increased $36.2 million, or 7.7%, to $506.8 million, compared to $470.6 million for the six months ended June 30, 2019. Gross Margin for the six months of 2020 was 51.3%, up 0.7 percentage points from 50.6% for the six months of 2019. Margin improvement was driven by the following:
Depreciation and Amortization
Depreciation and amortization expense for the six months ended June 30, 2020 increased $6.7 million to $43.5 million, an increase of 18.2% from the same period in the prior year. Depreciation increased $3.0 million due to acquisitions and equipment purchases while amortization of intangible assets increased $3.7 million due to the amortization of customer contracts from several acquisitions.
ROLLINS, INC. AND SUBSIDIARIES
Sales, General and Administrative
Sales, General and Administrative Expenses for the six months ended June 30, 2020 remained at2021 decreased to 29.5% of revenues, increasing $16.6 million, or 5.0%, to $345.7 million, compared to $329.1 million or 31.6% of revenues increasing $27.7 million, or 9.2%, to $329.1 million, compared to $301.4 million for the six months ended June 30, 2019.2020. The following factors contributed to the control of Company controlled spending through the following:spending:
Lower |
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ROLLINS, INC. AND SUBSIDIARIES
Gain on sale of assets, net
During the six months ended June 30, 2021, the Company recognized a gain of $33.2 million compared to $0.7 million in the prior year. The current year gain is primarily related to multiple sale-leaseback transactions where the Company sold 17 of its Clark Pest Control acquisition properties.
Interest Expense, Net
Net interest expense for the first six months ended June 30, 20202021 was $3.6$1.1 million compared to $1.6$3.6 million for the same period last year. The changedecrease was primarily driven from new financing borrowedby the lower average debt balance in April 20192021 compared to fund acquisition growth.the same period in 2020.
Income Taxes
The effective tax rate was 24.5% for the six months ended June 30, 2021 compared to 25.4% for the six months ended June 30, 2020 and 24.1% for2020. The rate is lower in the six months ended June 30, 2019. The increasecurrent year due to the effectivedecrease in the amount of foreign withholding tax rate for six months ended June 30, 2020 was primarily duerelative to reductionsan increase in certain beneficial deductions.pretax income.
ROLLINS, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
The Company believes its current cash and cash equivalents balances, future cash flows expected to be generated from operating activities and available borrowings under its $175.0 million revolving credit facility and $250.0 million term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future. The Company’s operating activities generated net cash of $234.8$219.2 million and $142.2$234.8 million for the six months ended June 30, 2021 and 2020, and 2019, respectively. The Company made no contributions to its sole remaining defined benefit retirement plan during the six months ended June 30, 2020 and 2019 and had approximately $9.3 million of benefit plan assets remaining as of June 30, 2020.
The Company invested approximately $12.4$13.2 million in capital expenditures, exclusive of expenditures for business acquisitions, during the six months ended on June 30, 2020,2021, compared to $13.4$12.4 million during the same period in 2019. Non-essential capital expenditures for 2020 have been cancelled in response to the pandemic crisis.2020. Capital expenditures for the six months ended on June 30, 20202021 consisted primarily of the purchase of operating equipment replacements and technology-related projects. During the six months ended on June 30, 2020,2021, the Company made expenditures for acquisitions totaling $56.0$28.4 million, compared to $410.1$56.0 million during the same period in 2019. 2020.
A total of $65.5$79.7 million was paid in cash dividends (an aggregate of $0.20$0.16 per share) during the six monthsix-month period ended June 30, 2020,2021, compared to $68.7$65.5 million paid in cash dividends (an aggregate of $0.21$0.133 per share) during the same period in 2019.
2020. On July 28, 2020,27, 2021, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $0.08 per share payable September 10, 20202021 to stockholders of record at the close of business August 10, 2020,2021, to be funded with existing cash balances and available credit facilities. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.
The Company did not repurchase shares of its common stock on the open market during the first six months of 20202021 or during the same period in 2019.2020. The Company has had a buyback program in place for a number of years and has routinely purchased shares when it felt the opportunity was desirable. The Board authorized the purchase of 11.2516.9 million additional shares of the Company’s common stock in July 2012. These authorizations enable the Company to continue the purchase of Company common stock when appropriate, which is an important benefit resulting from the Company’s strong cash flows. The stock buy-back program has no expiration date. In total, 7.611.4 million additional shares may be purchased under the share repurchase program. The Company repurchased $8.1$10.3 million and $9.8$8.1 million of common stock for the first six months ended on June 30, 20202021 and 2019,2020, respectively, from employees for the payment of taxes on vesting restricted shares. The acquisitions, capital expenditures, share repurchases and cash dividends were funded through existing cash balances, borrowings on our line of credit, a term loan, and operating activities.
The Company’s balance sheet as of June 30, 20202021 and December 31, 20192020 includes short-term unearned revenues of $139.5$151.4 million and $122.8$131.3 million, respectively, representing approximately 7% and 6% of ourits annual revenue as of each respective balance sheet date. This represents cash paid to the Company by its customers in advance of services that will be recognized over the next twelve months. The Company’s total cash and cash equivalents of $134.8$128.5 million atas of June 30, 20202021 is held at various banking institutions. Approximately $73.2$73.6 million is held in cash accounts at foreign bank institutions and the remaining balance is primarily held in non-interest-bearing accounts at various domestic banks. The Company’s international business is expanding, and we intend to continue to grow the business in foreign markets in the future through acquisitions of unrelated companies, reinvestment of foreign deposits and future earnings. Repatriation of cash from the Company’s foreign subsidiaries is not a part of the Company’s current business plan. The Company maintains a large cash position in the United States. The Company maintains adequate liquidity and capital resources that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future without regard to its foreign deposits.
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ROLLINS, INC. AND SUBSIDIARIES
Litigation
Litigation
In the normal course of business, certain of the Company’sCompany and its subsidiaries are defendantsinvolved in, a numberand will continue to be involved in, various claims, arbitrations, contractual disputes, investigations, litigation, and tax and other regulatory matters relating to, and arising out of, lawsuits,our businesses and our operations. These matters may involve, but are not limited to, allegations that our services or vehicles caused damage or injury, claims that our services did not achieve the desired results, claims related to acquisitions and allegations by federal, state or arbitrations which allege that the subsidiaries’ services caused damage.local authorities of violations of regulations or statutes. In addition, the Company defendswe are parties to employment-related cases and claims from time to time.time, which may include claims on a representative or class action basis alleging wage and hour law violations. We are also involved from time to time in certain environmental and tax matters primarily arising in the normal course of business. We are actively contestingevaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.
As previously disclosed, the SEC is conducting an investigation, which the Company believes is primarily focused on how it established accruals and reserves at period-ends and the impact of those accruals and reserves on reported earnings per share (the “Investigation”). The Investigation relates to period-ends for periods beginning January 1, 2015. The Company is continuing to fully cooperate with the SEC’s investigation, including providing supplemental information and current and former employees for interviews and testimony. However, as previously reported, the Company cannot predict the outcome of this Investigation. The Company’s Audit Committee retained independent counsel to conduct an initial internal investigation into matters related to the SEC investigation and, in particular, the Company’s processes for establishing reserves for each quarter in the relevant periods. This internal investigation, which was originally concluded in October 2020, is now being supplemented as a result of these matters.new developments in connection with the Investigation. See the Company’s Current Report on Form 8-K furnished to the SEC on July 28, 2021 for more information.
As previously reported in the Company’s 2020 Form 10-K, in connection with the Investigation, the Company has reevaluated and strengthened its internal controls over financial reporting, including improving processes and procedures and supporting documentation, including those related to management’s judgments and estimates. The Company, based on the preliminary findings of the supplemental internal investigation to date, and consultation with the Company’s Audit Committee and independent counsel, continues to believe that its financial statements filed with the SEC on Forms 10-K and 10-Q for the relevant periods fairly present in all material respects its financial condition, results of operations and cash flows as of their respective balance sheet dates and for the periods then ended. More information about the Investigation is included in the Current Report on Form 8-K furnished to the SEC on July 28, 2021, as noted above. Also see Part I, Item 1.A. of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2020 for additional discussion of related Risk Factors.
Management does not believe that any pending claim, proceeding or litigation, regulatory action or investigation, 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, 2019, other than ASC 326.2020.
New Accounting StandardsCaution Regarding Forward-Looking Statements
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.
ROLLINS, INC. AND SUBSIDIARIES
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Actfederal securities laws that involve risks and uncertainties concerning the business and financial results of 1995. SuchRollins, Inc. We have based these forward-looking statements include, without limitation,largely on our current opinions, expectations, beliefs, plans, objectives, assumptions and projections about future events and financial trends affecting the Company’s belief that its business,operating results of operations, financial condition, accounting estimates and assumptions and/or liquidity may be impacted by future developments related to the COVID-19 pandemic; the Company’s expectation that the adverse impact of COVID-19 on its commercial pest control business will persist for the remainder of 2020 and beyond, with the degree of the impact depending upon the extent and duration of the economic contraction; the Company belief that with many people working from or confined to their homes, the awareness of unwanted pests has helped contribute to its growth in residential service revenues; the Company’s belief that it will not experience any significant long-term loss in revenues or cash flows related to the COVID-19 pandemic that would approach a level of impairment for intangible assets; the effect of the future adoption of recent accounting pronouncements on the Company’s financial statements; the Company’s suspension of future services for customers with past due balances; the Company’s intention that its floating-to-fixed interest rate swap for an aggregate notional amount of $100.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility remains effective; statements regarding management’s expectation regarding the effect of the ultimate resolution and guidance of pending claims, proceedings or litigation on the Company’s financial position, results of operation and liquidity; the Company’s reasonable certainty that it will exercise the renewal options on its operating leases; the Company’s belief that its current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings under its $175.0 million revolving credit facility and $250.0 million term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future; the Company’s expectation that its leverage ratio will remain in compliance with its debt covenants through 2020; the Company’s expectation that it will continue to pay cash dividends to common stockholders, subject to earnings and financial condition of the Company; the Company’s intention to continue to grow the business in foreign markets in theour business. Forward-looking statements should not be read as a guarantee of future through reinvestment of foreign depositsperformance or results, and future earnings as well as acquisitions of unrelated companies and that repatriation of cash from the Company’s foreign subsidiaries iswill not a partnecessarily be accurate indications of the Company’s current business plan;times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the Company’s plantime those statements are made and/or management’s good faith belief as of that time with respect to continue funding future benefit plan obligations with a possible reversion of any remaining pension assetsevents, and are subject to the Company in compliance with ERISA regulations; the Company’s expectation that it will forego non-essential capital expenditures for the remainder of 2020; the Company’s expectation that it will maintain compliance with debt covenants and the Company’s belief that foreign exchange rate risk will not have a material effect on the Company’s results of operations going forward; the Company’s belief that it maintains adequate liquidity and capital resources that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future without regard to its foreign deposits; the Company’s estimation regarding the reclassification of accumulated other comprehensive income related to derivatives; and the Company’s belief that no changes in our internal control over financial reporting during the second quarter were identified that are reasonably likely to materially affect our internal control over financial reporting. 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 impact of the extent and duration of economic contraction related to COVID-19 on general economic activity for the remainder of 2020 and beyond; the impact of future developments related to the COVID-19 pandemic on the Company’s business, results of operations, accounting assumptions and estimates and financial condition; the possibility of an adverse ruling against the Company in pending litigation; general economic conditions; actions taken by our franchisees, subcontractors or vendors that may harm our business; market risk; changes in industry practices or technologies; a breach of data security; the degree of success of the Company’s termite process and pest control selling and treatment methods; damage to our brands or reputation; our ability to protect our intellectual property and other proprietary rights; the Company’s ability to identify and successfully integrate potential acquisitions; climate and weather conditions; competitive factors and pricing practices; our ability to attract and retain skilled workers, and potential increases in labor costs; changes in various government laws and regulations, including environmental regulations; and the existence of certain anti-takeover provisions in our governance documents, which could make a tender offer, change in control or takeover attempt that is opposed by the Company’s Board of Directors more difficult or expensive. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases the Company cannot predict the risks and uncertainties that could cause its actual performance or results to differ materially from those indicatedexpressed in or suggested by the forward-looking statements. A more detailed discussionIn addition to those factors discussed under Item 1A., “Risk Factors,” of potential risks facingPart I of the Company can be found herein in Item 1A and in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”), for the year ended December 31, 2019. The Company does not undertake2020 (the “2020 Annual Report”), the reader should consider the following list of general factors that, among others, could cause the Company’s actual results and financial condition to update its forward-looking statements.differ materially from estimated results and financial condition:
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ROLLINS, INC. AND SUBSIDIARIES
● | the Company’s belief that its accounting estimates and assumptions, financial condition and results of operations may change materially in future periods in response to the COVID-19 pandemic; |
● | the outcomes of any pending claim, proceeding, litigation, regulatory action or investigation filed against us, which could have a material adverse effect on our business, financial condition and results of operations; |
● | the Company’s evaluation of pending and threatened claims and establishment of loss contingency reserves based upon outcomes it currently believes to be probable and reasonably estimable; |
● | the Company’s reasonable certainty that it will exercise the renewal options on its operating leases; |
● | risks related to the Company’s belief that its current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings under its $175.0 million revolving credit facility and $250.0 million term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future; |
● | the Company’s ability to remain in compliance with applicable debt covenants under the Credit Facility throughout 2021; |
● | the Company’s expectation that it will continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors; |
● | the Company’s ability to continue the purchase of Company common stock when appropriate; |
● | risks related to the Company’s ability to continue to grow its business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies and that repatriation of cash from the company’s foreign subsidiaries is not a part of the Company’s current business plan; |
● | the Company’s ability to fund any remaining 2021 benefit plan obligations with reversion of any remaining pension assets to the Company in compliance with ERISA regulations during 2021; |
● | the Company’s expectation that total unrecognized compensation cost related to time-lapse restricted shares will be recognized over a weighted average period of approximately 4.3 years; |
● | the Company’s expectation that the acquisition-related goodwill recognized during the quarter will be deductible for tax purposes; |
● | the Company’s intention that its floating-to-fixed interest rate swap for an aggregate notional amount of $100.0 million ($20.0 million as of June 30, 2021) in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility remains effective; |
● | the Company’s belief that foreign exchange rate risk will not have a material effect on the Company’s results of operations going forward; |
● | the Company’s belief that it maintains adequate liquidity and capital resources that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future without regard to its foreign deposits; |
● | the Company’s belief that it will continue to be involved in, various claims, arbitrations, contractual disputes, investigations, and regulatory and litigation matters relating to, and arising out of, its businesses and its operations; |
● | the Company’s belief that the ongoing SEC investigation is primarily focused on how it established accruals and reserves at period-ends and the impact of those accruals and reserves on reported earnings, and the Company’s inability to predict the outcome of the SEC investigation; |
● | the Company’s belief, after consultation with the Audit Committee and independent counsel, that its financial statements filed with the SEC on Forms 10-K and 10-Q for the relevant periods under SEC investigation fairly present in all material respects its financial condition, results of operations and cash flows as of their respective balance sheet dates and for the periods then ended; |
● | actions taken by our franchisees, subcontractors or vendors that may harm our business; |
● | exposure of certain market risks in the ordinary course of our business, including fluctuation in interest rates and foreign currency exchange fluctuations; |
● | risks related to changes in industry practices or technologies; |
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ROLLINS, INC. AND SUBSIDIARIES
● | significant disruption in, or breach in security of our information technology systems or one of our third-party IT providers, and resultant interruptions in service or the loss of functionality of critical systems through ransomware and any related impact on our reputation; |
● | risks related to the level 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; |
● | risks related to legal, regulatory and risk management matters including risks related to the ongoing SEC investigation; 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. |
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As of June 30, 2020,2021, the Company maintained an investment portfolio (includedincluded in cash and cash equivalents)equivalents subject to short-term interest rate risk exposure.exposure; and other short-term investments included in other current assets. The Company is subject to interest rate risk exposure through borrowings on its $175.0 million revolving credit facility and $250.0 million term loan facility. The Company is also exposed to market risks arising from changes in foreign exchange rates. See Note 1316 to Part I, Item 1 for a discussion of the Company’s investments in derivative financial instruments to manage risks of fluctuations in interest and foreign exchange rates. The Company believes that this interest and foreign exchange rate risk will not have a material impact upon the Company’s results of operations going forward.
ROLLINS, INC. AND SUBSIDIARIES
ITEM 4. | CONTROLS AND PROCEDURES |
Under
Establishment of a Disclosure Committee and Evaluation of Disclosure Controls and Procedures
The Company has established a Disclosure Committee, consisting of certain members of management to assist our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) in preparing the supervisiondisclosures required under the SEC rules and to help ensure that the Company’s disclosure controls and procedures are properly implemented. The Disclosure Committee will meet on a quarterly basis and otherwise as may be necessary.
The Disclosure Committee, with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 20202021 (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation Date to ensure that the information required to be included in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
In addition, management’s
Changes in Internal Controls Over Financial Reporting
Management’s quarterly evaluation identified no changes in our internal control over financial reporting during the second quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting. As of June 30, 2020, we did not identify any material weaknesses in our internal controls, and therefore no corrective actions were taken.
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ROLLINS, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
In the normal course of business, the Company and its subsidiaries are involved in, and will continue to be involved in, various claims, arbitrations, contractual disputes, investigations, litigation, and tax and other regulatory matters relating to, and arising out of, our businesses and our operations. These matters may involve, but are not limited to, allegations that our services or vehicles caused damage or injury, claims that our services did not achieve the desired results, claims related to acquisitions and allegations by federal, state or local authorities of violations of regulations or statutes. In addition, we are parties to employment-related cases and claims from time to time, which may include claims on a representative or class action basis alleging wage and hour law violations. We are also involved from time to time in certain environmental and tax matters primarily arising in the normal course of business. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.
As previously disclosed, the SEC is conducting an investigation, which the Company believes is primarily focused on how it established accruals and reserves at period-ends and the impact of those accruals and reserves on reported earnings per share (the “Investigation”). The Investigation relates to period-ends for periods beginning January 1, 2015. The Company is continuing to fully cooperate with the SEC’s investigation, including providing supplemental information and current and former employees for interviews and testimony. However, as previously reported, the Company cannot predict the outcome of this Investigation. The Company’s Audit Committee retained independent counsel to conduct an initial internal investigation into matters related to the SEC investigation and, in particular, the Company’s processes for establishing reserves for each quarter in the relevant periods. This internal investigation, which was originally concluded in October 2020, is now being supplemented as a result of new developments in connection with the Investigation. See Note 5the Company’s Current Report on Form 8-K furnished to the SEC on July 28, 2021 for more information.
As previously reported in the Company’s 2020 Form 10-K, in connection with the Investigation, the Company has reevaluated and strengthened its internal controls over financial reporting, including improving processes and procedures and supporting documentation, including those related to management’s judgments and estimates. The Company, based on the preliminary findings of the supplemental internal investigation to date, and consultation with the Company’s Audit Committee and independent counsel, continues to believe that its financial statements filed with the SEC on Forms 10-K and 10-Q for the relevant periods fairly present in all material respects its financial condition, results of operations and cash flows as of their respective balance sheet dates and for the periods then ended. More information about the Investigation is included in the Current Report on Form 8-K furnished to the SEC on July 28, 2021, as noted above. Also see Part I, Item 11.A. of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2020 for additional discussion of certain litigation.related Risk Factors.
Management does not believe that any pending claim, proceeding or litigation, regulatory action or investigation, 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 could result in a charge that might be material to the results of an individual quarter or year.
Item 1A. | Risk Factors |
In light of recent developments relating to the COVID-19 global pandemic, the Company is supplementing
There have been no material changes from the risk factors previously disclosed in Part I., Item 1A. of itsthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission on February 28, 2020, and Part II, Item 1A. of its Quarterly Report on Form 10-Q for the quarteryear ended MarchDecember 31, 2020, filed with the Securities and Exchange Commission on April 30, 2020, to include the following risk factor: Our business, results of operations and financial condition have been and may continue to be adversely impacted by the coronavirus pandemic, and future adverse impacts could be material and difficult to predict. There have been no other material changes from the risk factors previously disclosed.
The global spread of the coronavirus (“COVID-19”), which was declared a global pandemic by the World Health Organization in March 2020, has created significant volatility, uncertainty and global macroeconomic disruption. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known. Our business, operations and financial results have been, and may continue to be, adversely impacted by the COVID-19 pandemic and by related government actions (including declared states of emergency and quarantine, “shelter in place” or similar orders), non-governmental agency recommendations and public perceptions, all of which have led to disruption in global economic and labor market conditions. These effects have had an adverse impact on our business, including reduced demand for our commercial pest control services, which contributed to a decline in revenues and other adverse impacts on our financial results. Other potential impacts of the spread of COVID-19 include continued or expanded closures of our customers’ facilities, the possibility our customers will not be able to pay for our services and solutions, or that they will attempt to defer payments owed to us, either of which could impact our liquidity, and the possibility that various government-sponsored programs to provide economic relief will be inadequate. Further, we may continue to experience adverse financial impacts if we cannot continue to offset revenue declines with cost savings through expense-related initiatives, human capital management initiatives or otherwise. As a result of these observed and evolving developments, our business, operations and financial results have the potential to continue to be negatively affected in the future. There are numerous uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the pandemic, the extent and duration of travel restrictions and business closures imposed by the governments of impacted countries, and the effects these and other factors have on underlying economic and labor market conditions. As a result, we cannot accurately predict the ultimate effects, which could be material, of the COVID-19 pandemic on our business, operations and financial results.2020.
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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 purchasespurchasers during the second quarter ended June 30, 20202021 were as follows:
Total number of shares | Maximum number of | |||||||||||||||
Total number | Weighted-Average | purchased as part | shares that may yet | |||||||||||||
of shares | price paid | of publicly announced | be purchased under | |||||||||||||
Period | Purchased (1) | per share | repurchases (2) | repurchase plan | ||||||||||||
April 1 to 30, 2020 | — | $ | — | — | 7,610,416 | |||||||||||
May 1 to 31, 2020 | — | — | — | 7,610,416 | ||||||||||||
June 1 to 30, 2020 | 1,371 | 39.25 | — | 7,610,416 | ||||||||||||
Total | 1,371 | $ | 39.25 | — | 7,610,416 |
Total number of shares | Maximum number of | |||||||||||||||
Total number | Weighted- | purchased as part of | shares that may yet | |||||||||||||
of shares | Average price | publicly announced | be purchased under | |||||||||||||
Period | purchased (1) | paid per share | repurchases (2) | repurchase plan | ||||||||||||
April 1 to 30, 2021 | 24,860 | $ | 35.69 | — | 11,415,625 | |||||||||||
May 1 to 31, 2021 | — | — | — | 11,415,625 | ||||||||||||
June 1 to 30, 2021 | 1,746 | 34.46 | — | 11,415,625 | ||||||||||||
Total | 26,606 | $ | 35.61 | — | 11,415,625 |
(1) | Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts: April |
(2) | The Company has a share repurchase plan, adopted in 2012, to repurchase up to |
26
ROLLINS, INC. AND SUBSIDIARIES
Item |
** | Furnished with this report |
ROLLINS, INC. AND SUBSIDIARIES
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ROLLINS, INC. | |||||
(Registrant) | |||||
Date: July | By: | /s/ Gary W. Rollins | |||
Gary W. Rollins | |||||
(Principal Executive Officer) | |||||
Date: July | By: | /s/ | Julie K. Bimmerman | ||
Julie K. Bimmerman | |||||
(Principal Financial and Accounting Officer) |