| 10-Q | 2020-09-30 | Filed 2020-10-28 |
| 10-Q | 2020-06-30 | Filed 2020-07-31 |
| 10-Q | 2020-03-31 | Filed 2020-04-30 |
| 10-K | 2019-12-31 | Filed 2020-02-28 |
| 10-Q | 2019-09-30 | Filed 2019-10-25 |
| 10-Q | 2019-06-30 | Filed 2019-07-26 |
| 10-Q | 2019-03-31 | Filed 2019-04-26 |
| 10-K | 2018-12-31 | Filed 2019-03-01 |
| 10-Q | 2018-09-30 | Filed 2018-10-26 |
| 10-Q | 2018-06-30 | Filed 2018-07-27 |
| 10-Q | 2018-03-31 | Filed 2018-04-27 |
| 10-K | 2017-12-31 | Filed 2018-02-26 |
| 10-Q | 2017-09-30 | Filed 2017-10-27 |
| 10-Q | 2017-06-30 | Filed 2017-07-28 |
| 10-Q | 2017-03-31 | Filed 2017-04-28 |
| 10-K | 2016-12-31 | Filed 2017-02-24 |
| 10-Q | 2016-09-30 | Filed 2016-10-28 |
| 10-Q | 2016-06-30 | Filed 2016-07-28 |
| 10-Q | 2016-03-31 | Filed 2016-04-28 |
| 10-K | 2015-12-31 | Filed 2016-02-24 |
| 10-Q | 2015-09-30 | Filed 2015-10-29 |
| 10-Q | 2015-06-30 | Filed 2015-07-29 |
| 10-Q | 2015-03-31 | Filed 2015-04-30 |
| 10-K | 2014-12-31 | Filed 2015-02-25 |
| 10-Q | 2014-09-30 | Filed 2014-10-29 |
| 10-Q | 2014-06-30 | Filed 2014-07-25 |
| 10-Q | 2014-03-31 | Filed 2014-04-25 |
| 10-K | 2013-12-31 | Filed 2014-02-26 |
| 10-Q | 2013-09-30 | Filed 2013-10-25 |
| 10-Q | 2013-06-30 | Filed 2013-07-26 |
| 10-Q | 2013-03-31 | Filed 2013-04-26 |
| 10-Q | 2012-09-30 | Filed 2012-10-26 |
| 10-Q | 2012-06-30 | Filed 2012-07-27 |
| 10-Q | 2012-03-31 | Filed 2012-04-27 |
| 10-Q | 2011-09-30 | Filed 2011-10-28 |
| 10-Q | 2011-06-30 | Filed 2011-07-29 |
| 10-Q | 2011-03-31 | Filed 2011-04-29 |
| 10-Q | 2010-06-30 | Filed 2010-07-30 |
| 10-Q | 2010-03-31 | Filed 2010-04-30 |
| 10-K | 2009-12-31 | Filed 2010-02-25 |
| Part 1	Financial Information |
| Item 1. Financial Statements |
| Note 1.Basis of Preparation and Other |
| Note 2.Recent Accounting Pronouncements |
| Note 3.Revenue |
| Note 4.Earnings per Share |
| Note 5.Contingencies |
| Note 6.Fair Value of Financial Instruments |
| Note 7.Unearned Revenue |
| Note 8.Leases |
| Note 9.Debt |
| Note 10.Stockholders' Equity |
| Note 11. Pension and Post Retirement Benefit Plan |
| Note 12. Business Combinations |
| Note 13.Derivative Instruments and Hedging Activities |
| Note 14.Subsequent Events |
| Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
| Item 4. Controls and Procedures |
| Part II Other Information |
| Item 1.	Legal Proceedings |
| Item 1A. 	Risk Factors |
| Item 2. 	Unregistered Sales of Equity Securities and Use of Proceeds. |
| EX-31.1 | i20550_ex31-1.htm |
| EX-31.2 | i20550_ex31-2.htm |
| EX-32.1 | i20550_ex32-1.htm |
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
|
Assets, Equity
|
Rev, G Profit, Net Income
|
Ops, Inv, Fin
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
Commission File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | o | ||
| Non-accelerated filer | o | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | o | x |
Rollins, Inc. had shares of its $1 par value Common Stock outstanding as of October 16, 2020.
ROLLINS, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 2020, AND DECEMBER 31, 2019
(in thousands except share data)
(Unaudited)
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables, net of allowance for doubtful accounts of $ | ||||||||
| Financed receivables, short-term, net of allowance for doubtful accounts of $ | ||||||||
| Materials and supplies | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Equipment and property, net | ||||||||
| Goodwill | ||||||||
| Customer contracts, net | ||||||||
| Trademarks & tradenames, net | ||||||||
| Other intangible assets, net | ||||||||
| Operating lease, right-of-use assets | ||||||||
| Financed receivables, long-term, net of allowance for doubtful accounts of $ | ||||||||
| Benefit plan assets | ||||||||
| Deferred income taxes | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued insurance | ||||||||
| Accrued compensation and related liabilities | ||||||||
| Unearned revenues | ||||||||
| Operating lease liabilities - current | ||||||||
| Current portion of long-term debt | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Accrued insurance, less current portion | ||||||||
| Operating lease liabilities, less current portion | ||||||||
| Long-term debt | ||||||||
| Deferred income tax liabilities | ||||||||
| Long-term accrued liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, without par value; shares authorized, shares issued | ||||||||
| Common stock, par value $ per share; shares authorized, and shares issued and outstanding, respectively | ||||||||
| Paid in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(in thousands except per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| REVENUES | ||||||||||||||||
| Customer services | $ | $ | $ | $ | ||||||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Cost of services provided | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Sales, general and administrative | ||||||||||||||||
| Accelerated stock vesting expense | ||||||||||||||||
| Pension settlement loss | ||||||||||||||||
| Gain on sale of assets, net | ( | ) | ||||||||||||||
| Interest expense, net | ||||||||||||||||
| INCOME BEFORE INCOME TAXES | ||||||||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| NET INCOME PER SHARE - BASIC AND DILUTED | $ | $ | $ | $ | ||||||||||||
| DIVIDENDS PAID PER SHARE | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding - basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(in thousands)
(unaudited)
| (In thousands) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| Other comprehensive earnings / (loss) | ||||||||||||||||
| Pension Settlement | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in derivatives | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive earnings / (loss) | ( | ) | ||||||||||||||
| Comprehensive earnings | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(in thousands)
(unaudited)
| Common Stock | Paid-in- | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Income/ (Loss) | Earnings | Total | |||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Pension Settlement | — | |||||||||||||||||||||||
| Change in derivatives | — | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||
| Cash dividends | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock compensation | ( | ) | ( | ) | ||||||||||||||||||||
| Employee stock buybacks | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common Stock | Paid-in- | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Income/ (Loss) | Earnings | Total | |||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Impact of adoption of ASC 842 | — | |||||||||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Pension Settlement | — | |||||||||||||||||||||||
| Change in derivatives | — | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||
| Cash dividends | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||
| Employee stock buybacks | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common Stock | Paid-in- | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Income/ (Loss) | Earnings | Total | |||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Change in derivatives | — | |||||||||||||||||||||||
| Cash dividends | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock compensation | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common Stock | Paid-in- | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Income/ (Loss) | Earnings | Total | |||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Impact of adoption of ASC 326 | — | |||||||||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||
| Change in derivatives | — | ( | ) | ( | ) | |||||||||||||||||||
| Cash dividends | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||
| Employee stock buybacks | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
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 NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(in thousands)
(unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision for deferred income taxes | ( | ) | ||||||
| Provision for bad debts | ||||||||
| Stock-based compensation expense | ||||||||
| Other, net | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Cash used for acquisitions of companies, net of cash acquired | ( | ) | ( | ) | ||||
| Purchases of equipment and property | ( | ) | ( | ) | ||||
| Proceeds from sales of franchises | ||||||||
| Other | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Payment of contingent consideration | ( | ) | ( | ) | ||||
| Repayment of term loan | ( | ) | ( | ) | ||||
| Repayment on revolving commitment | ( | ) | ( | ) | ||||
| Borrowings on term loan | ||||||||
| Borrowings on revolving commitment | ||||||||
| Cash paid for common stock purchased | ( | ) | ( | ) | ||||
| Dividends paid | ( | ) | ( | ) | ||||
| Net cash (used in)/provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net increase/(decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Non-cash additions to operating lease right-of-use assets | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
ROLLINS, INC. AND SUBSIDIARIES
| NOTE 1. | BASIS OF PREPARATION AND OTHER |
Basis of Preparation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. There has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Rollins, Inc. (the “Company”) for the year ended December 31, 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. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2019 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 nine months ended September 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 certain prior period amounts in the Statement of Cash Flows from Operating Activities to Financing Activities for payment of contingent consideration to conform to the current period presentation.
| 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, 2020 and recognized the decrease in the allowance for doubtful accounts, net of tax, as a $2.5 million increase to beginning retained earnings.
| 7 |
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 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. Below is a roll forward of the Company’s allowance for credit losses for the nine months ended September 30, 2020.
| (in thousands) | ||||||||||||
| Allowance for Doubtful Accounts | ||||||||||||
| Trade Receivables | Financed Receivables | Total Receivables | ||||||||||
| Balance at January 1, 2020 | $ | $ | $ | |||||||||
| Adoption of ASC 326 | ( | ) | — | ( | ) | |||||||
| Adjusted balance at January 1, 2020 | ||||||||||||
| Provision for expected credit losses | ||||||||||||
| Write-offs charged against the allowance | ( | ) | ( | ) | ( | ) | ||||||
| Recoveries collected | ||||||||||||
| Currency Conversion | ( | ) | ( | ) | ||||||||
| Balance at September 30, 2020 | $ | $ | $ | |||||||||
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (ASC 350): Simplifying the Test for Goodwill Impairment, which eliminated the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities would record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). The Company adopted ASU 2017-04 effective January 1, 2020. The adoption of this standard had no material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The updated accounting guidance 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.
| 8 |
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. 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 is effective for the Company’s financial statements issued for fiscal years beginning in 2021. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
| 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 more than 10% of the sales for the periods listed on the following table. Revenue, classified by the major geographic areas in which our customers are located, was as follows:
| (In thousands) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Other countries | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
Revenue from external customers, classified by significant product and service offerings, was as follows:
| (In thousands) | ||||||||||||||||
| Three Months Ending | Nine Months Ending | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Residential revenue | $ | $ | $ | $ | ||||||||||||
| Commercial revenue | ||||||||||||||||
| Termite completions, bait monitoring, & renewals | ||||||||||||||||
| Franchise revenues | ||||||||||||||||
| Other revenues | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
| 9 |
ROLLINS, INC. AND SUBSIDIARIES
| NOTE 4. | EARNINGS PER SHARE |
The Company follows ASC 260, Earnings Per Share (ASC 260) that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to participating common stockholders by the weighted average number of participating common shares outstanding for the period.
| Three Months Ending | Nine Months Ending | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Basic and diluted earnings per share | ||||||||||||||||
| Common stock | $ | $ | $ | $ | ||||||||||||
| Restricted shares of common stock | $ | $ | $ | $ | ||||||||||||
| NOTE 5. | CONTINGENCIES |
In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits, claims, arbitrations, regulatory actions or investigations which allege that the subsidiaries’ services caused 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 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.
| NOTE 6. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The Company’s financial instruments consist of cash and cash equivalents, trade receivables, notes receivable, accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their respective fair values.
At September 30, 2020 and 2019, the Company had $33.8 million and $51.8 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 Ending | Nine Months Ending | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Beginning | $ | $ | $ | $ | ||||||||||||
| New acquisitions and revaluations | ||||||||||||||||
| Payouts | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest on outstanding contingencies | ||||||||||||||||
| Charge offset, forfeit and other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Ending balance | $ | $ | $ | $ | ||||||||||||
| 10 |
ROLLINS, INC. AND SUBSIDIARIES
| NOTE 7. | 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 nine months ended September 30, 2020 and 2019 were $
| For the period ended | September 30, | December 31, | September 30, | |||||||||
| (in thousands) | 2020 | 2019 | 2019 | |||||||||
| Balance at beginning of year | $ | $ | $ | |||||||||
| Deferral of unearned revenue | ||||||||||||
| Recognition of unearned revenue | ( | ) | ( | ) | ( | ) | ||||||
| Balance at end of period | $ | $ | $ | |||||||||
The Company had no material contracted, but not recognized, revenue as of September 30, 2020 or December 31, 2019.
At September 30, 2020 and December 31, 2019, the Company had long-term unearned revenue of $
| NOTE 8. | LEASES |
The Company leases certain buildings, vehicles, and equipment in order to reduce the risk associated with ownership. The Company elected the practical expedient approach permitted under ASC 842 not to include short-term leases with a duration of 12 months or less on the balance sheet. As of September 30, 2020, and December 31, 2019, all leases were classified as operating leases. Building leases generally carry terms of 5 to 10 years with annual rent escalations at fixed amounts per the lease. Vehicle leases generally carry a fixed term of one year with renewal options to extend the lease on a monthly basis resulting in lease terms up to 7 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.
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.
| 11 |
ROLLINS, INC. AND SUBSIDIARIES
| (in thousands) | ||||||
| Nine Months Ended | ||||||
| Lease Classification | Financial Statement Classification | September 30, 2020 | ||||
| Short-term lease cost | Cost of services provided, Sales, general, and administrative expenses | $ | ||||
| Operating lease cost | Cost of services provided, Sales, general, and administrative expenses | |||||
| Total lease expense | $ | |||||
| Other Information | ||||||
| Weighted-average remaining lease term - operating leases | ||||||
| Weighted-average discount rate - operating leases | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||
| Operating cash flows for operating leases | $ | |||||
Lease Commitments
Future minimum lease payments, including assumed exercise of renewal options at September 30, 2020 were as follows:
| (in thousands) | Operating Leases | |||
| 2020 (excluding the nine months ended September 30, 2020) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total Future Minimum Lease Payments | ||||
| Less: Amount representing interest | ( | ) | ||
| Total future minimum lease payments, net of interest | $ | |||
Future commitments presented in the table above exclude lease payments in renewal periods for which it is reasonably certain that the Company will exercise the renewal option. Total future minimum lease payments for operating leases, including the amount representing interest, are comprised of $
| 12 |
ROLLINS, INC. AND SUBSIDIARIES
| NOTE 9. | DEBT |
On April 30, 2019, the Company entered into a Revolving Credit Agreement with SunTrust Bank N.A., now known as Truist Bank N.A., and Bank of America, N.A. (the “Credit Agreement”) for an unsecured revolving commitment of up to $
| NOTE 10. | STOCKHOLDERS’ EQUITY |
During the nine months ended September 30, 2020, the Company paid $91.7 million, or $ per share, in cash dividends compared to $103.1 million, or $0.315 per share, during the same period in 2019.
During the third quarter ended September 30, 2020 and during the same period in 2019, 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 $
As more fully discussed in Note 17 of the Company’s notes to the consolidated financial statements in its 2019 Annual Report on Form 10-K, time-lapse restricted shares and restricted stock units have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plans. The Company issues new shares from its authorized but unissued share pool. At September 30, 2020, approximately 4.9 million shares of the Company’s common stock were reserved for issuance.
Time Lapse Restricted Shares
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Time lapse restricted stock: | ||||||||||||||||
| Pre-tax compensation expense | $ | $ | $ | $ | ||||||||||||
| Tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Restricted stock expense, net of tax | $ | $ | $ | $ | ||||||||||||
According to the Employee Stock Incentive Plan, restricted shares automatically vest upon the death of an employee holding the unvested shares. The increase in pre-tax compensation expense for the quarter and nine months ended September 30, 2020 was the result of the accelerated vesting of unvested restricted shares held by the Company’s Chairman of the Board, R. Randall Rollins, who passed away in August, 2020.
| 13 |
ROLLINS, INC. AND SUBSIDIARIES
The following table summarizes information on unvested restricted stock outstanding as of September 30, 2020:
| (number of shares in thousands) | Number of Shares | Average Grant- Date Fair Value | ||||||
| Unvested Restricted Stock at December 31, 2019 | $ | |||||||
| Forfeited | ( | ) | ||||||
| Vested | ( | ) | ||||||
| Granted | ||||||||
| Unvested Restricted Stock at September 30, 2020 | $ | |||||||
At September 30, 2020 and December 31, 2019, 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.
| NOTE 11. | PENSION AND POST RETIREMENT BENEFIT PLAN |
In September 2019, the Company settled its fully-funded pension plan. At December 31, 2019, $21.6 million of pension assets remained available to fund other employee benefits. The Company used $5.8 million and $18.0 million to fund its 401(k)-match obligation during the quarter and nine months ended September 30, 2020, respectively. The Company plans to fund any remaining 2020 benefit plan obligations, with reversion of any remaining pension assets to the Company per ERISA regulations before year end. As of September 30, 2020, the Company had approximately $
Components of Net Pension Benefit Loss / (Gain)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Interest and service cost | $ | $ | $ | $ | ||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of net loss | ||||||||||||||||
| Pension settlement loss | ||||||||||||||||
| Net periodic benefit | $ | $ | $ | $ | ||||||||||||
During the nine months ended September 30, 2020, and the same period in 2019, the Company made no contributions to its defined benefit retirement plans (the “Plans”). The Company made no contributions for the year ended December 31, 2019.
| 14 |
ROLLINS, INC. AND SUBSIDIARIES
| NOTE 12. | BUSINESS COMBINATIONS |
The Company made
| September 30, 2020 | ||||
| Accounts receivable, net | $ | |||
| Materials & supplies | ||||
| Equipment and property | ||||
| Goodwill | ||||
| Customer contracts | ||||
| Other intangible assets | ||||
| Other assets and liabilities, net | ||||
| Current liabilities | ( | ) | ||
| Total purchase price | ||||
| Less: Contingent consideration liability | ( | ) | ||
| Total cash purchase price | $ | |||
Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. For the period ended September 30, 2020, $44.6 million of goodwill was added related to the 18 acquisitions noted above. The cumulative carrying amount of goodwill was $619.7 million and $572.8 million at September 30, 2020 and December 31, 2019, respectively. Goodwill generally changes due to the timing of acquisitions, finalization of allocation of purchase prices of previous acquisitions and foreign currency translations. The carrying amount of goodwill in foreign countries was $
The Company completed its most recent annual impairment analysis as of September 30, 2020. Based upon the results of this analysis, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.
The carrying amount of customer contracts was $
| 15 |
ROLLINS, INC. AND SUBSIDIARIES
Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives. The following table sets forth the components of intangible assets as of September 30, 2020 (in thousands):
| Intangible Asset | Carrying Value | Useful Life in Years | ||||||
| Customer contracts | $ | |||||||
| Trademarks and tradenames | N/A- | |||||||
| Non-compete agreements | ||||||||
| Internet domains | N/A | |||||||
| Patents | ||||||||
| Other assets | ||||||||
| Total customer contracts and other intangible assets | $ | |||||||
| NOTE 13. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
Risk Management Objective of Using Derivatives
The Company is exposed to certain 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”). 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 cash flows from the swap began June 30, 2019 and ends on December 31, 2021. As of December 31, 2019, $0.3 million had been recorded as an Accumulated Loss in Other Comprehensive Income (“AOCI”). An additional loss of $0.3 million was recorded in AOCI in the nine months ended September 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 nine months ended September 30, 2020, the Company reclassified into interest expense $0.3 million and $0.5 million, respectively. The fair value of the Company’s interest rate swaps was recorded as $0.7 million in Other Current Liabilities at September 30, 2020. The fair value of the Company’s interest rate swaps was recorded as $0.2 million in Other Current Liabilities and $0.1 in Long-Term Liabilities for a combined obligation of $0.3 million at December 31, 2019. On a quarterly basis, management evaluates any 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.
| 16 |
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 $0.1 million and a net gain of $0.1 million for the quarter ended September 30, 2020 and 2019, respectively and a net loss of $0.4 million and a net loss of $12 thousand for the nine months ended September 30, 2020 and 2019, respectively. The fair value of the Company’s FX Forwards was recorded as $0.1 million in Other Current Liabilities at September 30, 2020 and was a net obligation of $0.2 million in Other Current Liabilities at December 31, 2019.
As of September 30, 2020, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):
| Non-Designated Derivative Summary | ||||||||||||
| FX Forward Contracts | Number of Instruments | Sell Notional | Buy Notional | |||||||||
| Sell AUD/Buy USD Fwd Contract | $ | $ | ||||||||||
| Sell CAD/Buy USD Fwd Contract | $ | $ | ||||||||||
| Total | $ | |||||||||||
The financial statement impact related to these derivative instruments was insignificant for the nine months ended September 30, 2020 and year ended December 31, 2019.
| NOTE 14. | SUBSEQUENT EVENTS |
On October 27, 2020, the
In addition, the Company declared a regular quarterly cash dividend on its common stock of $ per share plus a special year-end dividend of $ per share, both payable on December 10, 2020 to stockholders of record at the close of business on November 10, 2020. Dividends will be paid on pre-split shares.
On October 27, 2020, the Company announced that the Board of Directors elected Mr. Jerry Nix as a director of the Company, effective October 27, 2020. Mr. Bill J. Dismuke, who has served as a director of the Company for 36 years is retiring as a director effective October 27, 2020. At the time of his resignation, Mr. Dismuke served as a member of the Audit Committee. Mr. Dismuke will not receive any compensation in connection with his resignation, other than compensation owed to him for services rendered as a director and member of the Audit Committee through the date of his resignation.
| 17 |
ROLLINS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On October 28, 2020, the Company reported third quarter revenues of $583.7 million, an increase of 4.9% over the prior year’s third quarter revenue of $556.5 million. Rollins’ net income increased 80.6% to $79.6 million, or $0.24 per diluted share for the third quarter ended September 30, 2020, compared with $44.1 million, or $0.13 per diluted share for the same period in 2019. The quarter ended September 30, 2020 was impacted by the one-time non-cash accelerated stock vesting of $6.7 million. The quarter ending September 30, 2019 was impacted by the after-tax pension settlement loss of $26.6 million.
Results of Operations:
THREE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2019
COVID-19 Pandemic Impact
Going into the quarter ended September 30, 2020, we had already made numerous operational adjustments to address the economic, health and safety challenges from the COVID-19 pandemic. 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 beyond, and that 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 third 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