filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Stockholders of Rollins, Inc.:
The management of Rollins, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Rollins, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and principal accounting officer, we conducted an evaluation of the effectiveness of the design and operation of internal controls over financial reporting as of December 31, 2023 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
During the year ended December 31, 2023, we completed the acquisition of Fox Pest Control ("Fox"). See Note 2, Acquisitions, for more information. We are currently in the process of integrating Fox into our assessment of our internal control over financial reporting. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting in the year of acquisition, Management's assessment and conclusions on the effectiveness of our disclosure controls and procedures as of December 31, 2023 excludes an assessment of the internal control over financial reporting of Fox. Fox represented approximately 4% of our revenues for the year ended December 31, 2023 and approximately 1% of our total assets at December 31, 2023.
Excluding the above, management’s assessment is that Rollins, Inc. maintained effective internal control over financial reporting as of December 31, 2023.
The independent registered public accounting firm, Deloitte & Touche LLP has audited the consolidated financial statements as of and for the year ended December 31, 2023, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 35.
| /s/ Jerry E. Gahlhoff, Jr. | /s/ Kenneth D. Krause | |||||||
| Jerry E. Gahlhoff, Jr. | Kenneth D. Krause | |||||||
| President and Chief Executive Officer | Executive Vice President, Chief Financial Officer and Treasurer | |||||||
| Principal Executive Officer | Principal Financial Officer | |||||||
| Atlanta, Georgia | ||||||||
| February 15, 2024 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Rollins, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Rollins, Inc. and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2023, of the Company and our report dated February 15, 2024, expressed an unqualified opinion on those financial statements.
As described in Management's Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Fox Pest Control, which was acquired on April 1, 2023, and whose financial statements constitute 1% of total assets and 4% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2023. Accordingly, our audit did not include the internal control over financial reporting at Fox Pest Control.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 15, 2024
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Rollins, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of financial position of Rollins, Inc. and subsidiaries (the "Company") as of December 31, 2023, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the year ended December 31, 2023, and the related notes collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 15, 2024
We have served as the Company's auditor since 2023.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Rollins, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of financial position of Rollins, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We served as the Company's auditor from 2004 to 2023.
Atlanta, Georgia
February 16, 2023
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Rollins, Inc. and Subsidiaries
(in thousands except share information)
| December 31, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 103,825 | $ | 95,346 | |||||||
| Trade receivables, net of allowance for expected credit losses of $15,797 and $14,073, respectively | 178,214 | 155,759 | |||||||||
| Financed receivables, short-term, net of allowance for expected credit losses of $1,874 and $1,768, respectively | 37,025 | 33,618 | |||||||||
| Materials and supplies | 33,383 | 29,745 | |||||||||
| Other current assets | 54,192 | 34,151 | |||||||||
| Total current assets | 406,639 | 348,619 | |||||||||
| Equipment and property, net of accumulated depreciation of $360,421 and $333,298, respectively | 126,661 | 128,046 | |||||||||
| Goodwill | 1,070,310 | 846,704 | |||||||||
| Customer contracts, net | 386,152 | 298,559 | |||||||||
| Trademarks & tradenames, net | 151,368 | 111,646 | |||||||||
| Other intangible assets, net | 8,214 | 8,543 | |||||||||
| Operating lease right-of-use assets | 323,390 | 277,355 | |||||||||
| Financed receivables, long-term, net of allowance for expected credit losses of $3,728 and $3,200, respectively | 75,909 | 63,523 | |||||||||
| Other assets | 46,817 | 39,033 | |||||||||
| Total assets | $ | 2,595,460 | $ | 2,122,028 | |||||||
| LIABILITIES | |||||||||||
| Accounts payable | $ | 49,200 | $ | 42,796 | |||||||
| Accrued insurance – current | 46,807 | 39,534 | |||||||||
| Accrued compensation and related liabilities | 114,355 | 99,251 | |||||||||
| Unearned revenues | 172,380 | 158,092 | |||||||||
| Operating lease liabilities – current | 92,203 | 84,543 | |||||||||
| Current portion of long-term debt | — | 15,000 | |||||||||
| Other current liabilities | 101,744 | 54,568 | |||||||||
| Total current liabilities | 576,689 | 493,784 | |||||||||
| Accrued insurance, less current portion | 48,060 | 38,350 | |||||||||
| Operating lease liabilities, less current portion | 233,369 | 196,888 | |||||||||
| Long-term debt | 490,776 | 39,898 | |||||||||
| Other long-term accrued liabilities | 90,999 | 85,911 | |||||||||
| Total liabilities | 1,439,893 | 854,831 | |||||||||
| Commitments and contingencies (see Note 12) | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
| Preferred stock, without par value; 500,000 shares authorized, zero shares issued | — | — | |||||||||
| Common stock, par value $1 per share; 800,000,000 shares authorized, 484,080,014 and 492,447,997 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively | 484,080 | 492,448 | |||||||||
| Additional paid in capital | 131,840 | 119,242 | |||||||||
| Accumulated other comprehensive loss | (26,755) | (31,562) | |||||||||
| Retained earnings | 566,402 | 687,069 | |||||||||
| Total stockholders’ equity | 1,155,567 | 1,267,197 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,595,460 | $ | 2,122,028 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Rollins, Inc. and Subsidiaries
(in thousands except per share information)
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| REVENUES | |||||||||||||||||
| Customer services | $ | 3,073,278 | $ | 2,695,823 | $ | 2,424,300 | |||||||||||
| COSTS AND EXPENSES | |||||||||||||||||
| Cost of services provided (exclusive of depreciation and amortization below) | 1,469,871 | 1,308,399 | 1,162,617 | ||||||||||||||
| Sales, general and administrative | 915,233 | 802,710 | 727,489 | ||||||||||||||
| Restructuring costs | 5,196 | — | — | ||||||||||||||
| Depreciation and amortization | 99,752 | 91,326 | 86,558 | ||||||||||||||
| Total operating expenses | 2,490,052 | 2,202,435 | 1,976,664 | ||||||||||||||
| OPERATING INCOME | 583,226 | 493,388 | 447,636 | ||||||||||||||
| Interest expense, net | 19,055 | 2,638 | 830 | ||||||||||||||
| Other (income), net | (22,086) | (8,167) | (35,679) | ||||||||||||||
| CONSOLIDATED INCOME BEFORE INCOME TAXES | 586,257 | 498,917 | 482,485 | ||||||||||||||
| PROVISION FOR INCOME TAXES | 151,300 | 130,318 | 125,920 | ||||||||||||||
| NET INCOME | $ | 434,957 | $ | 368,599 | $ | 356,565 | |||||||||||
| NET INCOME PER SHARE - BASIC AND DILUTED | $ | 0.89 | $ | 0.75 | $ | 0.72 | |||||||||||
| Weighted average shares outstanding – basic | 489,949 | 492,300 | 492,054 | ||||||||||||||
| Weighted average shares outstanding – diluted | 490,130 | 492,413 | 492,054 | ||||||||||||||
| DIVIDENDS PAID PER SHARE | $ | 0.54 | $ | 0.43 | $ | 0.42 |
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Rollins, Inc. and Subsidiaries
(in thousands)
| 2023 | 2022 | 2021 | |||||||||||||||
| NET INCOME | $ | 434,957 | $ | 368,599 | $ | 356,565 | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Pension and other postretirement benefit plans | (215) | — | — | ||||||||||||||
| Foreign currency translation adjustments | 4,816 | (14,215) | (5,895) | ||||||||||||||
| Unrealized gain (loss) on available for sale securities | 206 | (936) | — | ||||||||||||||
| Change in derivatives | — | — | 381 | ||||||||||||||
| Other comprehensive income (loss), net of tax | 4,807 | (15,151) | (5,514) | ||||||||||||||
| Comprehensive income | $ | 439,764 | $ | 353,448 | $ | 351,051 |
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Rollins, Inc. and Subsidiaries
(in thousands)
| Common Stock | Additional Paid- In- Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 491,612 | $ | 491,612 | $ | 101,757 | $ | (10,897) | $ | 382,179 | $ | 964,651 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 356,565 | 356,565 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (5,895) | — | (5,895) | |||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps, net of tax | — | — | — | 381 | — | 381 | |||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (208,656) | (208,656) | |||||||||||||||||||||||||||||||||||||||||
| Stock compensation | 593 | 593 | 14,272 | — | — | 14,865 | |||||||||||||||||||||||||||||||||||||||||
| Employee stock buybacks | (294) | (294) | (10,400) | — | — | (10,694) | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 491,911 | $ | 491,911 | $ | 105,629 | $ | (16,411) | $ | 530,088 | $ | 1,111,217 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 368,599 | 368,599 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (14,215) | — | (14,215) | |||||||||||||||||||||||||||||||||||||||||
| Unrealized losses on available for sale securities | — | — | — | (936) | — | (936) | |||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (211,618) | (211,618) | |||||||||||||||||||||||||||||||||||||||||
| Stock compensation | 765 | 765 | 20,450 | — | — | 21,215 | |||||||||||||||||||||||||||||||||||||||||
| Employee stock buybacks | (228) | (228) | (6,837) | — | — | (7,065) | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 492,448 | $ | 492,448 | $ | 119,242 | $ | (31,562) | $ | 687,069 | $ | 1,267,197 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 434,957 | 434,957 | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustment, net of tax | — | — | — | (215) | — | (215) | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 4,816 | — | 4,816 | |||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on available for sale securities | — | — | — | 206 | — | 206 | |||||||||||||||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (264,348) | (264,348) | |||||||||||||||||||||||||||||||||||||||||
| Stock compensation | 630 | 630 | 25,929 | — | — | 26,559 | |||||||||||||||||||||||||||||||||||||||||
| Employee stock buybacks | (274) | (274) | (10,532) | — | — | (10,806) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock, including excise tax | (8,724) | (8,724) | (2,799) | — | (291,276) | (302,799) | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | 484,080 | $ | 484,080 | $ | 131,840 | $ | (26,755) | $ | 566,402 | $ | 1,155,567 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Rollins, Inc. and Subsidiaries
(in thousands)
| 2023 | 2022 | 2021 | |||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||
| Net income | $ | 434,957 | $ | 368,599 | $ | 356,565 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 99,752 | 91,326 | 86,558 | ||||||||||||||
| Stock-based compensation expense | 24,605 | 21,215 | 14,865 | ||||||||||||||
| Provision for expected credit losses | 26,860 | 19,441 | 15,285 | ||||||||||||||
| Gain on sale of assets, net | (6,635) | (8,167) | (35,679) | ||||||||||||||
| Gain on sale of businesses, net | (15,450) | — | — | ||||||||||||||
| Provision for deferred income taxes | (7,644) | 1,595 | 3,421 | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Trade accounts receivable and other accounts receivable | (45,874) | (34,003) | (22,439) | ||||||||||||||
| Financed receivables | (15,794) | (23,891) | (14,473) | ||||||||||||||
| Materials and supplies | (4,279) | (540) | 2,644 | ||||||||||||||
| Other current assets | (16,126) | 5,836 | (11,159) | ||||||||||||||
| Accounts payable and accrued expenses | 43,407 | 304 | 1,421 | ||||||||||||||
| Unearned revenue | 6,777 | 10,400 | 11,934 | ||||||||||||||
| Other long-term assets and liabilities | 3,810 | 13,815 | (7,138) | ||||||||||||||
| Net cash provided by operating activities | 528,366 | 465,930 | 401,805 | ||||||||||||||
| INVESTING ACTIVITIES | |||||||||||||||||
| Acquisitions, net of cash acquired | (366,854) | (119,188) | (146,098) | ||||||||||||||
| Capital expenditures | (32,465) | (30,628) | (27,194) | ||||||||||||||
| Proceeds from sale of assets | 12,489 | 14,597 | 74,438 | ||||||||||||||
| Proceeds from sale of businesses | 15,903 | — | — | ||||||||||||||
| Other investing activities, net | (1,968) | 1,078 | (111) | ||||||||||||||
| Net cash (used in) investing activities | (372,895) | (134,141) | (98,965) | ||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||
| Payment of contingent consideration | (12,489) | (17,334) | (22,809) | ||||||||||||||
| Borrowings under term loan | — | 252,000 | — | ||||||||||||||
| Borrowings under revolving commitment | 1,070,000 | 43,000 | 206,500 | ||||||||||||||
| Repayments of term loan | (55,000) | (245,000) | (88,000) | ||||||||||||||
| Repayments of revolving commitment | (577,000) | (150,000) | (166,500) | ||||||||||||||
| Payment of dividends | (264,348) | (211,618) | (208,656) | ||||||||||||||
| Cash paid for common stock purchased | (315,013) | (7,065) | (10,694) | ||||||||||||||
| Other financing activities, net | 4,430 | — | — | ||||||||||||||
| Net cash (used in) financing activities | (149,420) | (336,017) | (290,159) | ||||||||||||||
| Effect of exchange rate changes on cash | 2,428 | (5,727) | (5,857) | ||||||||||||||
| Net (decrease) increase in cash and cash equivalents | 8,479 | (9,955) | 6,824 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 95,346 | 105,301 | 98,477 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 103,825 | $ | 95,346 | $ | 105,301 | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||
| Cash paid for interest | $ | 19,239 | $ | 4,162 | $ | 1,313 | |||||||||||
| Cash paid for income taxes, net | $ | 159,154 | $ | 119,573 | $ | 119,762 | |||||||||||
| Non-cash additions to operating lease right-of-use assets | $ | 146,558 | $ | 122,149 | $ | 116,594 |
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2023 2022, and 2021, Rollins, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description—Rollins, Inc. (“Rollins,” “we,” “us,” “our,” or the “Company”), is an international services company headquartered in Atlanta, Georgia that provides pest and termite control services to both residential and commercial customers through its wholly-owned subsidiaries and independent franchises in the United States ("U.S."), Canada, Australia, Europe, and Asia with international franchises in Canada, Central and South America, the Caribbean, Europe, the Middle East, Asia, Africa, and Australia.
Principles of Consolidation—The Company’s Consolidated Financial Statements include the accounts of Rollins, Inc. and the Company’s wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The Company does not consolidate the financial statements of any company in which it does not have a controlling financial interest. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity. All material intercompany accounts and transactions have been eliminated.
Segment Reporting—Effective January 1, 2023, we reorganized our reporting structure in connection with our Chief Executive Officer succession. As a result of the transition, we reevaluated our segment reporting and determined that we have two operating segments and two goodwill reporting units. We continue to operate under one reportable segment which contains our residential, commercial, and termite service offerings.
Subsequent Events—The Company evaluates its financial statements through the date the financial statements are issued. Refer to Note 19, Subsequent Events for further details.
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and certain financial statement disclosures. Estimates and assumptions are used for, but not limited to, accrued insurance, revenue recognition, right-of-use ("ROU") asset and liability valuations, accounts and financed receivable reserves, inventory (materials and supplies) valuation, employee benefit plans, income tax contingency accruals and valuation allowances, contingency accruals, goodwill and other intangible asset valuations. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from these estimates and assumptions. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the year have been made. These adjustments are of a normal recurring nature. The results of operations for the year ended December 31, 2023 are not necessarily indicative of results for future years.
Revenue Recognition—The Company’s revenue recognition policy is to recognize revenue upon transfer of control of promised products and services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which are distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Goods and Services and Performance Obligations
The Company contracts with its customers to provide the following goods and services, each of which is a distinct performance obligation:
Pest control services - Rollins provides pest control services to protect residential and commercial properties from common pests, including rodents and insects. Pest control generally consists of assessing a customer’s property for conditions that invite pests, tackling current infestations, and stopping the life cycle to prevent future invaders. Revenue from pest control services is recognized as services are rendered.
The Company’s revenue recognition policies are designed to recognize revenues upon satisfaction of the performance obligation at the time services are performed. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial one-year contract, and revenues are
recognized at the time services are performed. The Company defers recognition of advance payments and recognizes the revenue as the services are rendered. The Company classifies discounts related to the advance payments as a reduction in revenues.
Termite control services - Rollins provides a variety of termite protection services. Termite protection programs include liquid treatments, wet and dry foam applications, termite baiting and wood treatments. Revenue from initial termite treatment services is recognized as services are provided.
Maintenance/monitoring/inspection - In connection with the initial service offerings, Rollins provides recurring maintenance, monitoring or inspection services to help protect consumers’ property from any future sign of termite activities after the original treatment. This recurring service is a service-type warranty under ASC 606, “Revenue from Contracts with Customers,” as it is routinely sold and purchased separately from the initial treatment services and is typically purchased or renewed annually.
Termite baiting revenues are recognized based on the transfer of control of the individual units of accounting. At the inception of a new baiting services contract, upon quality control review of the installation, the Company recognizes revenue for the installation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring performance obligation. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue that depicts the Company’s performance in transferring control of the service. The allocation of the transaction price to the two deliverables is based on the relative stand-alone selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual contract period on a straight-line basis that depicts the Company’s performance in transferring control of the service.
Revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term that depicts the Company’s performance in transferring control of the service, and the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date, and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company accrues for known claims. The costs of providing termite services upon renewal are compared to the expected revenue to be received and a provision is made for any expected losses.
Miscellaneous services - In certain agreements with customers, Rollins may offer other miscellaneous services, including restroom cleaning (eliminating foul odors, grease and grime which could attract pests) and training (seminars covering good manufacturing practices and product stewardship). Revenue from miscellaneous services is recognized when services are provided.
The Company’s international operations accounted for approximately 7%, 7%, and 8% of revenues for the years ended December 31, 2023, 2022, and 2021, respectively.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record unearned revenue when revenue is recognized subsequent to billing. Unearned revenue mainly relates to the Company’s termite baiting offering, conventional renewals, and year-in-advance pest control services for which we have been paid in advance and earn the revenue when we transfer control of the product or service. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. Refer to Note 3, Revenue for further information, including changes in unearned revenue for the year.
The Company extends terms to certain customers on higher dollar termite and ancillary work, as well as to certain franchisees for initial funding on the sale of franchises. These financed receivables are segregated from our trade receivables. The allowance for expected credit losses reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. See Note 4, Allowance for Credit Losses for further information.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.
Incremental Costs of Obtaining a Contract with a Customer
Incremental costs of obtaining a contract include only those costs that we incur to obtain a contract that we would not have incurred if the contract had not been obtained, primarily sales commissions. These costs are considered incremental costs to obtain a contract and are, therefore, recognized as an asset and amortized to expense over the life of the contract to the extent such costs are expected to be recovered. Capitalized costs of obtaining a contract are recorded within other current assets and other assets on our consolidated statements of financial position. Amortization of capitalized costs is recorded within sales, general and administrative expense on our consolidated statements of income.
Practical Expedients and Exemptions
In certain cases, we expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses in our consolidated statements of income.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Allowance for Expected Credit Losses—The Company maintains an allowance for expected credit losses based on the expected collectability of accounts receivable. Management uses historical collection results as well as accounts receivable aging in order to determine the expected collectability of accounts receivable. Substantially all of the Company’s receivables are due from pest control and termite services in the United States and select international locations. The Company’s allowance for expected credit losses is determined using a combination of factors. The Company’s established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Provisions for expected credit losses are recorded in selling, general and administrative expenses. Accounts are written off against the allowance for expected credit losses when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery. Therefore, the provision for expected credit losses can fluctuate from period to period. We record specific provisions when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, our estimates of the realizability of receivables would be further adjusted, either upward or downward.
Advertising—Advertising costs are charged to sales, general and administrative expense during the year in which they are incurred.
| Years ended December 31, | 2023 | 2022 | 2021 | ||||||||||||||
| (in thousands) | |||||||||||||||||
| Advertising | $ | 115,987 | $ | 102,959 | $ | 91,879 |
Cash and Cash Equivalents—The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents.
The Company’s $103.8 million of total cash at December 31, 2023 is held at various banking institutions. Approximately $52.1 million is held in cash by foreign subsidiaries and the remaining $51.7 million is primarily held in Federal Deposit
Insurance Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times may exceed federally insured amounts. The Company has not incurred any losses in these accounts.
| At December 31, | 2023 | 2022 | |||||||||
| (in thousands) | |||||||||||
| Cash held in foreign bank accounts | $ | 52,141 | $ | 68,580 |
Rollins maintains adequate liquidity and capital resources, without regard to its foreign deposits, that are directed to finance domestic operations and obligations and to fund expansion of its business for the foreseeable future.
Marketable Securities—From time to time, the Company maintains investments held by several large, well-capitalized financial institutions. The Company’s investment policy does not allow investment in any securities rated less than “investment grade” by national rating services.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt securities are classified as available-for-sale because the Company does not have the intent to hold the securities to maturity. Available-for-sale securities are stated at their fair values, with the unrealized gains and losses reported in other comprehensive income.
The Company had no other marketable securities other than those held in the defined benefit pension plan and the non-qualified deferred compensation plan at December 31, 2023 and 2022. See Note 11 for further details.
Materials and Supplies—Materials and supplies are stated at the lower of cost or net realizable value. Cost is determined on the first-in, first-out method.
Other Current Assets—Other current assets include prepaid assets, the current portion of capitalized costs to obtain a contract, and an international bond investment.
Income Taxes—The Company provides for income taxes based on FASB ASC topic 740 “Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. The Company provides an allowance for deferred tax assets when it determines that it is more likely than not that the deferred tax assets will not be utilized. The Company establishes additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold. The Company’s policy is to record interest and penalties related to income tax matters in income tax expense.
Equipment and Property—Equipment and property are stated at cost, net of accumulated depreciation, and are depreciated on a straight-line basis over the estimated useful lives of the related assets. Depreciation expense is computed using the following asset lives: buildings, 10 to 40 years; and furniture, fixtures and operating equipment, 2 to 10 years. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are expensed as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to other income, net on our consolidated statements of income.
Certain internal-use software and systems development costs are capitalized. Accordingly, the specific identified costs incurred to develop and obtain software, which is intended for internal use, are not capitalized until the software is put into use. Management, with the relevant authority, authorizes and commits to funding a software project and it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred during a software development’s discovery phase and post-integration stage, are expensed as incurred. Application development activities that are eligible for capitalization include software design and configuration, development of interfaces, coding, testing and installation. Capitalized internal-use software and systems costs are subsequently amortized on a straight-line basis over a three to seven years period after project completion and when the related software or system is ready for intended use.
Impairment of Long-Lived Assets—In accordance with the FASB ASC Topic 360, “Property, Plant and Equipment,” the Company’s long-lived assets, such as property and equipment and intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. We periodically evaluate the appropriateness of remaining depreciable lives assigned to long-lived assets, including customer contracts and assets that may be subject to a management plan for disposition.
Goodwill and Other Intangible Assets—In accordance with the FASB ASC Topic 350, “Intangibles - Goodwill and other,” the Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. The Company does not amortize intangible assets with indefinite lives or goodwill. Goodwill and other intangible assets with indefinite useful lives are tested for impairment annually or more frequently if events or circumstances indicate the assets might be impaired. Such conditions may include an economic downturn or a change in the assessment of future operations. The Company performs impairment tests of goodwill at the reporting unit level. Such impairment tests for goodwill include comparing the fair value of the appropriate reporting unit with its carrying value. If the fair value of the reporting unit is below the carrying value, the Company recognizes a goodwill impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. The Company performs impairment tests for indefinite-lived intangible assets by comparing the fair value of each indefinite-lived intangible asset to its carrying value. The Company recognizes an impairment charge if the asset’s carrying value exceeds its estimated fair value.
Following the reorganization of our reporting structure, as discussed previously, and determination that we have two goodwill reporting units, we changed the date of our annual goodwill and indefinite-lived intangible asset impairment test from September 30 to October 1. The change in the date of the annual assessment represents a change in accounting principle. Management believes this change in accounting principle is preferable, as the later date better aligns the timing of the tests with the availability of key inputs, such as forecasts for our two reporting units, and provides additional time for the completion of our annual impairment testing in advance of our year-end reporting.
This change was not material to our consolidated financial statements and was not intended to nor did it delay, accelerate, or avoid an impairment charge. We determined that it was impracticable to objectively apply this change retrospectively as it would require application of significant estimates and assumptions with the use of hindsight.
Any change in testing date for goodwill or an indefinite-lived intangible asset should not result in more than one year elapsing between impairment tests. We performed a goodwill impairment analysis as of January 1, 2023 and October 1, 2023. We performed an impairment analysis of our indefinite-lived intangible assets on September 30, 2023 and October 1, 2023. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or intangible assets with indefinite lives was indicated.
Other Assets—Other assets is mostly comprised of deferred compensation assets, the non-current portion of capitalized costs to obtain a contract, and an international bond investment.
Accrued Insurance—The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and auto liability. Risks are managed through either high deductible insurance or, for Clark Pest Control only, a non-affiliated group captive insurance member arrangement. The estimated costs of existing and future claims under the retained loss program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The group captive is subject to a third-party actuary retained by the captive manager, independent from the Company. For the high deductible insurance program, the Company contracts with an independent third-party actuary to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration in establishing the reserve, along with management’s knowledge of changes in business practice and existing claims compared to current balances. Management’s judgment is inherently subjective as a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events. The Company continues to be proactive in safety and risk management to develop and maintain ongoing programs to reduce and prevent incidents and claims. Initiatives that have been implemented include required pre-employment screening and ongoing motor vehicle record review for all drivers, post-offer physicals for new employees, pre-hire, random and post incident drug testing, driver training and post-injury nurse triage for work-related injuries. The accruals and reserves we hold are based on estimates that involve a degree of judgment and are inherently variable and could be overestimated or insufficient. If actual claims exceed our estimates, our operating results could be materially affected, and our ability to take timely corrective actions to limit future costs may be limited.
Accrual for Termite Contracts—The Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future costs include termiticide life expectancy and government regulation. An accrual for termite contracts is included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.
Other Current Liabilities—Other current liabilities are mostly comprised of the current portion of acquisition holdback and earnout liabilities (see Note 9), contingency accruals, deferred compensation liabilities (see Note 11) and taxes payable.
Other Long-term Accrued Liabilities—Other long-term accrued liabilities include long-term balances for deferred compensation, acquisition holdback and earnout liabilities, deferred tax liabilities, contingency accruals, and the long-term portion of unearned revenue.
Contingency Accruals—The Company is a party to legal proceedings with respect to matters in the ordinary course of business. In accordance with the FASB ASC Topic 450 “Contingencies,” management estimates and accrues for its liability and costs associated with the pending and threatened legal and regulatory proceedings. Estimates and accruals are determined in consultation with outside counsel. Because it is not possible to accurately predict the ultimate result of the proceedings, judgments concerning accruals for liabilities and costs associated with litigation are inherently uncertain and actual liability may vary from amounts estimated or accrued. However, in the opinion of management, the outcome of the proceedings will not have a material adverse impact on the Company’s financial condition or results of operations. Contingency accruals are included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.
Earnings Per Share—the FASB ASC Topic 260-10 “Earnings Per Share-Overall,” requires a basic earnings per share and diluted earnings per share presentation. Further, all outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and an entity is required to include participating securities in its calculation of basic earnings per share.
The Company calculates basic and diluted earnings per share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company's participating securities consist of share-based payment awards that contain a nonforfeitable right to receive dividends and, therefore, are considered to participate in undistributed earnings with common shareholders. See Note 13 for further information on restricted stock granted to employees. See Note 18 for the calculation of basic and diluted earnings per share under the two-class method.
Translation of Foreign Currencies—Assets and liabilities reported in functional currencies other than U.S. dollars are translated into U.S. dollars at the year-end rate of exchange. Revenues and expenses are translated at the weighted average exchange rates for the year. The resulting translation adjustments are charged or credited to other comprehensive income. Gains or losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables, denominated in foreign currency are included in the earnings of the current period.
Stock-Based Compensation—The Company accounts for its stock-based compensation in accordance with the FASB ASC Topic 718 “Compensation – Stock Compensation.” Time-lapsed restricted stock awards and restricted stock units ("restricted shares") have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plan. In addition, in 2023, performance share units (“PSUs”) were granted to the Company’s executive officers. The PSUs will vest and convert to shares of common stock at the end of a three-year performance period upon the Company’s successful achievement of certain financial and market performance goals. The Company issues new shares from its authorized but unissued share pool.
Restricted shares and PSUs provide for the issuance of a share of the Company’s common stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. During these years, certain restricted shares award grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the restricted shares are issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed.
The fair value of each restricted share and PSUs with Company-specific performance criteria is equal to the market value of a share of the Company's common stock on the grant date. For PSUs that are granted with a total shareholder return
("TSR") component, management estimates the fair value using a Monte Carlo simulation valuation model, as these awards are subject to a market condition. The fair value of these awards is recognized as compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period.
Comprehensive Income (Loss)—Other Comprehensive Income (Loss) results from foreign currency translations, minimum pension liability adjustments, cash flow hedge of interest rate risks and unrealized gains and losses on available for sale securities.
Franchising Program—The Company has franchise programs through Orkin, Critter Control and its Australian subsidiaries. We had a total of 138, 137 and 135 domestic franchise agreements as of December 31, 2023, 2022 and 2021, respectively. International franchise agreements totaled 86, 89 and 103 as of December 31, 2023, 2022 and 2021, respectively. Transactions with our franchises involve sales of territories and customer contracts to establish new franchises and the payment of initial franchise fees and royalties by franchisees. The territories, customer contracts and initial franchise fees are typically paid for by a combination of cash and notes.
Combined domestic and international revenues from Orkin, Critter Control and Australia franchises were $16.5 million, $15.6 million and $15.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. Total franchising revenues were less than 1.0% of the Company’s annual revenues for each of the three years.
Right to access intellectual property (Franchise)—The right to access Orkin’s, Critter Control’s and our Australia franchisors’ intellectual property is an essential part of our franchise agreements. These agreements provide the franchisee a license to use the brand name and trademark when advertising and selling services to end customers in their normal course of business. Orkin and Critter Control franchise agreements contain a clause allowing the respective franchisor to purchase certain assets of the franchisee at the conclusion of their franchise agreement or upon termination. This is only an option for the franchisor to re-purchase the assets selected by the franchisor and is not a performance obligation or a form of consideration.
Recent Accounting Guidance
Recently adopted accounting standards
In March 2022, the FASB issued Accounting Standards Update ("ASU") 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The amendments in this Update eliminate the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, for public business entities, the amendments in this ASU require that an entity disclose current-period gross write-offs by year of origination for financing receivables. ASU 2022-02 was effective for fiscal years beginning after December 15, 2022. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
Accounting standards issued but not yet adopted
In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,” to amend certain disclosure and presentation requirements for a variety of topics within the ASC. These amendments align the requirements in the Accounting Standards Codification ("ASC") to the removal of certain disclosure requirements set out in Regulation S-X and Regulation S-K, announced by the SEC. The effective date for each amended topic in the ASC is either the date on which the SEC’s removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or on June 30, 2027, if the SEC has not removed the requirements by that date. Early adoption is prohibited. The Company does not expect that the application of this standard will have an impact on its consolidated financial statements and disclosures.
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which is intended to improve reportable segment disclosure requirements, primarily through additional and more detailed information about a reportable segment's expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption.
The Company is currently evaluating the potential impact of adopting this new guidance on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which is intended to enhance the transparency and decision usefulness of income tax disclosures. This amendment modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation and additional information for reconciling items that meet a quantitative threshold, (2) the amount of income taxes paid (net of refunds received) (disaggregated by federal, state, and foreign taxes) as well as individual jurisdictions in which income taxes paid is equal to or greater than 5 percent of total income taxes paid net of refunds, (3) the income or loss from continuing operations before income tax expense or benefit (disaggregated between domestic and foreign) and (4) income tax expense or benefit from continuing operations (disaggregated by federal, state and foreign). The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, while retrospective application is permitted. The Company is currently evaluating the potential impact of adopting this new guidance on its disclosures.
2. ACQUISITIONS
Fox Pest Control Acquisition
On April 1, 2023, the Company acquired 100% of FPC Holdings, LLC (“Fox Pest Control”, or "Fox"). As part of funding the Fox Pest Control acquisition, on April 3, 2023, the Company borrowed incremental amounts under the Credit Agreement of $305.0 million. The proceeds were used to pay cash consideration at closing.
Management believes that the acquisition will expand the Rollins family of brands and drive long term value given Fox's attractive financial profile and complementary end market exposure.
The Fox Pest Control acquisition has been accounted for as a business combination, and the Fox results of operations are included in the Company's results of operations from the April 1, 2023, acquisition date. Fox contributed revenues of $117.8 million and net earnings of $1.6 million from April 1, 2023, through the period end date, December 31, 2023. These earnings include the attribution of interest expense incurred on the borrowings to purchase Fox.
The valuation of the Fox Pest Control acquisition was performed by a third-party valuation specialist under our management’s supervision. The preliminary values of identified assets acquired, and liabilities assumed for Fox Pest Control are summarized as follows (in thousands).
| Fox Pest Control | |||||
| Cash | $ | 4,560 | |||
| Accounts receivable | 1,542 | ||||
| Materials and supplies | 431 | ||||
| Operating lease right-of-use assets | 8,689 | ||||
| Other current assets | 487 | ||||
| Goodwill | 186,695 | ||||
| Customer contracts | 118,000 | ||||
| Trademarks & tradenames | 38,000 | ||||
| Current liabilities | (4,057) | ||||
| Unearned revenue | (6,144) | ||||
| Operating lease liabilities | (8,689) | ||||
| Assets acquired and liabilities assumed | $ | 339,514 |
The Company purchased Fox Pest Control for $339.5 million. Included in the total consideration are cash payments of $302.8 million made upon closing, contingent consideration valued at $28.0 million that is based on Fox Pest Control's financial performance in the twelve months following acquisition, and holdback liabilities valued at $8.7 million to be held
by the Company to settle indemnity claims and working capital adjustments. The fair value of the contingent consideration was estimated using a Monte Carlo simulation. During the year ended December 31, 2023, we recorded a fair value adjustment of $3.1 million related to contingent consideration resulting from the acquisition of Fox. This charge is reported within sales, general and administrative expenses in our condensed consolidated statement of income.
Acquired customer contracts are estimated to have a remaining useful life of 7 years. The acquired trademarks and tradenames are expected to have an indefinite useful life. See Note 8, Customer Contracts, Tradenames and Trademarks, and Other Intangible Assets for further details.
Goodwill from this acquisition represents the excess of the purchase price over the fair value of net assets of the business acquired. The factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized. The recognized goodwill is expected to be deductible for tax purposes. Valuations of certain assets and liabilities, including intangible assets and goodwill, as of the acquisition date have not been finalized at this time and are provisional.
Pro Forma Financial Information
The following table presents unaudited consolidated pro forma information as if the acquisition of Fox had occurred on January 1, 2022. The information presented below is for illustrative purposes only and is not necessarily indicative of results that would have been achieved if the acquisition had actually occurred as of the beginning of such years or results which may be achieved in the future.
| Year Ended December 31, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Revenues | $ | 3,102,186 | $ | 2,817,629 | |||||||
| Net income | 424,735 | 358,930 |
The pro forma financial information above adjusts for the effects of material business combination items, including the alignment of accounting policies, the effect of fair value adjustments including the amortization of acquired intangible assets, interest expense related to the incremental borrowings under the Credit Agreement, and income tax effects as if Fox had been part of Rollins since January 1, 2022.
Other 2023 Acquisitions
The Company made 23 other acquisitions during 2023. The aggregate preliminary values of major classes of assets acquired and liabilities assumed recorded at the dates of acquisition, as adjusted during the valuation period, are included in the reconciliation of the total preliminary consideration as follows (in thousands):
| 2023 | |||||
| Cash | $ | 531 | |||
| Accounts receivable, net | 1,190 | ||||
| Materials and supplies | 592 | ||||
| Other current assets | 198 | ||||
| Equipment and property | 5,002 | ||||
| Goodwill | 37,319 | ||||
| Customer contracts | 31,996 | ||||
| Trademarks & tradenames | 1,457 | ||||
| Other intangible assets | 2,357 | ||||
| Current liabilities | (1,462) | ||||
| Other assets and liabilities, net | (2,472) | ||||
| Assets acquired and liabilities assumed | $ | 76,708 |
Included in the total consideration of $76.7 million are acquisition holdback liabilities of $7.8 million.
Goodwill from these 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. A majority of the recognized goodwill is expected to be deductible for tax purposes. Valuations of certain assets and liabilities, including intangible assets and goodwill, as of the acquisition date have not been finalized at this time and are provisional.
2022 Acquisitions
The Company made 31 acquisitions during 2022. The aggregate values of major classes of assets acquired and liabilities assumed recorded at the dates of acquisition, as adjusted during the valuation period, are included in the reconciliation of the total consideration as follows (in thousands):
| 2022 | |||||
| Cash | $ | — | |||
| Accounts receivable, net | 3,736 | ||||
| Materials and supplies | 529 | ||||
| Other current assets | — | ||||
| Equipment and property | 6,741 | ||||
| Goodwill | 64,997 | ||||
| Customer contracts | 49,871 | ||||
| Trademarks & tradenames | 5,615 | ||||
| Other intangible assets | 1,538 | ||||
| Current liabilities | (4,853) | ||||
| Other assets and liabilities, net | (1,948) | ||||
| Assets acquired and liabilities assumed | $ | 126,226 |
Included in the total consideration of $126.2 million are acquisition holdback liabilities of $10.2 million. The Company also made a final payment of $3.1 million for a 2021 acquisition in 2022.
Goodwill from these 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. The recognized goodwill is expected to be deductible for tax purposes.
3. REVENUE
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 of the sales for the periods listed in the following tables. Revenue, classified by the major geographic areas in which our customers are located, was as follows:
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| United States | $ | 2,853,321 | $ | 2,498,363 | $ | 2,240,226 | |||||||||||
| Other countries | 219,957 | 197,460 | 184,074 | ||||||||||||||
| Total Revenues | $ | 3,073,278 | $ | 2,695,823 | $ | 2,424,300 |
Revenue from external customers, classified by significant product and service offerings, was as follows:
| (in thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Residential revenue | $ | 1,409,872 | $ | 1,207,089 | $ | 1,099,360 | |||||||||||
| Commercial revenue | 1,024,176 | 920,625 | 834,624 | ||||||||||||||
| Termite completions, bait monitoring, renewals, & ancillary | 605,533 | 535,494 | 464,043 | ||||||||||||||
| Franchise revenues | 16,475 | 15,590 | 15,532 | ||||||||||||||
| Other revenues | 17,222 | 17,025 | 10,741 | ||||||||||||||
| Total Revenues | $ | 3,073,278 | $ | 2,695,823 | $ | 2,424,300 |
Subsequent to the issuance of the Company's 2022 financial statements, management determined that certain immaterial reclassifications within the product and service offerings were required for the years ended December 31, 2022 and 2021. Revenues classified by significant product and service offerings for the years ended December 31, 2022 and 2021 have been restated from the amounts previously reported to correct the classification of such revenues. There was no impact on our consolidated statements of income, financial position, or cash flows.
Unearned revenues recognized for the year ended December 31, 2023 and 2022 was $231.7 million and $205.3 million, respectively. Changes in unearned revenues were as follows:
| Year Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Beginning balance | $ | 187,994 | $ | 168,607 | |||||||
| Deferral of unearned revenue | 253,776 | 224,647 | |||||||||
| Recognition of unearned revenue | (231,711) | (205,260) | |||||||||
| Ending balance | $ | 210,059 | $ | 187,994 |
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes both unearned revenue and revenue that will be billed and recognized in future periods. The Company has no material contracted but not yet recognized revenue as of December 31, 2023 or December 31, 2022.
At December 31, 2023 and December 31, 2022, the Company had long-term unearned revenue of $37.7 million and $29.9 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 years or less with immaterial amounts recognized through 2033.
Incremental Costs of Obtaining a Contract with a Customer
Incremental costs of obtaining a contract include only those costs that we incur to obtain a contract that we would not have incurred if the contract had not been obtained, primarily sales commissions. These costs are recorded as an asset and amortized to expense over the life of the contract to the extent such costs are expected to be recovered. As of December 31, 2023, we have $22.0 million of unamortized capitalized costs to obtain a contract, of which $15.3 million is recorded within other current assets and $6.7 million is recorded within other assets on our consolidated statement of financial position. During the year ended December 31, 2023, we recorded approximately $8.6 million amortization of capitalized costs, which is recorded within sales, general and administrative expense on our consolidated statement of income. As of December 31, 2022, we had no unamortized capitalized costs to obtain a contract and we recorded no amortization of capitalized costs.
4. ALLOWANCE FOR EXPECTED 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 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 financed 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 creditworthiness 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. Financed receivables include installment receivable amounts, some of which are due subsequent to one year from the balance sheet dates.
Total financed receivables, net were $112.9 million and $97.1 million at December 31, 2023 and December 31, 2022, respectively. Financed receivables are generally charged-off when deemed uncollectible or when 180 days have elapsed since the date of the last full contractual payment. The Company’s charge-off policy has been consistently applied during the periods reported. Management considers the charge-off policy when evaluating the appropriateness of the allowance for expected credit losses. Gross charge-offs as a percentage of average financed receivables were 9.2% and 5.6% for the twelve months ended December 31, 2023 and December 31, 2022, respectively.
The Company offers 90 days same-as-cash financing to some customers based on their creditworthiness. Interest is not recognized until the 91st day at which time it is calculated retrospectively back to the first day if the contract has not been paid in full. In certain circumstances, such as when delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 180 days past due. As of December 31, 2023, there were no accounts greater than 180 days past due.
Included in financed receivables are notes receivable from franchise owners. The majority of these notes are low risk as the repurchase of these franchises is guaranteed by the Company’s wholly-owned subsidiary, Orkin Systems, LLC, and the repurchase price of the franchise is currently estimated and has historically been well above the receivable due from the franchise owner. Also included in notes receivables are franchise notes from other brands which are not guaranteed and do not have the same historical valuation.
The carrying amount of notes receivable approximates fair value as the interest rates approximate market rates for these types of contracts. Long-term installment receivables, net were $75.9 million and $63.5 million at December 31, 2023 and 2022, respectively.
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 credit losses 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 years ended December 31, 2023, 2022, and 2021.
| Allowance for Credit Losses | |||||||||||||||||
| (in thousands) | Trade Receivables | Financed Receivables | Total Receivables | ||||||||||||||
| Balance at December 31, 2020 | $ | 16,854 | $ | 3,231 | $ | 20,085 | |||||||||||
| Provision for expected credit losses | 11,732 | 3,553 | 15,285 | ||||||||||||||
| Write-offs charged against the allowance | (19,882) | (2,799) | (22,681) | ||||||||||||||
| Recoveries collected | 5,181 | — | 5,181 | ||||||||||||||
| Balance at December 31, 2021 | $ | 13,885 | $ | 3,985 | $ | 17,870 | |||||||||||
| Provision for expected credit losses | 13,701 | 5,740 | 19,441 | ||||||||||||||
| Write-offs charged against the allowance | (18,861) | (4,757) | (23,618) | ||||||||||||||
| Recoveries collected | 5,348 | — | 5,348 | ||||||||||||||
| Balance at December 31, 2022 | $ | 14,073 | $ | 4,968 | $ | 19,041 | |||||||||||
| Provision for expected credit losses | 16,309 | 10,551 | 26,860 | ||||||||||||||
| Write-offs charged against the allowance | (20,397) | (9,917) | (30,314) | ||||||||||||||
| Recoveries collected | 5,812 | — | 5,812 | ||||||||||||||
| Balance at December 31, 2023 | $ | 15,797 | $ | 5,602 | $ | 21,399 |
The following is a summary of the past due financed receivables:
| At December 31, | 2023 | 2022 | |||||||||
| (in thousands) | |||||||||||
| 30-59 days past due | $ | 4,454 | $ | 4,269 | |||||||
| 60-89 days past due | 2,837 | 1,913 | |||||||||
| 90 days or more past due | 4,813 | 3,781 | |||||||||
| Total | $ | 12,104 | $ | 9,963 |
The following is a summary of percentage of gross financed receivables:
| At December 31, | 2023 | 2022 | |||||||||
| Current | 89.7 | % | 90.2 | % | |||||||
| 30-59 days past due | 3.8 | % | 4.2 | % | |||||||
| 60-89 days past due | 2.4 | % | 1.9 | % | |||||||
| 90 days or more past due | 4.1 | % | 3.7 | % | |||||||
| Total | 100.0 | % | 100.0 | % |
5. EQUIPMENT AND PROPERTY, NET
Equipment and property are presented at cost less accumulated depreciation and are detailed as follows:
| December 31, | 2023 | 2022 | |||||||||
| (in thousands) | |||||||||||
| Buildings | $ | 51,339 | $ | 51,223 | |||||||
| Operating equipment | 144,723 | 132,411 | |||||||||
| Furniture and fixtures | 22,035 | 20,389 | |||||||||
| Computer equipment and systems | 247,681 | 233,108 | |||||||||
| 465,778 | 437,131 | ||||||||||
| Less: accumulated depreciation | (360,421) | (333,298) | |||||||||
| 105,357 | 103,833 | ||||||||||
| Land | 21,304 | 24,213 | |||||||||
| Equipment and property, net | $ | 126,661 | $ | 128,046 |
Included in computer equipment and systems at December 31, 2023 and 2022, are costs for internal use software of $153.4 million and $147.1 million, respectively. The related accumulated depreciation was $127.5 million and $117.3 million at December 31, 2023 and 2022, respectively.
Included in equipment and property, net at December 31, 2023 and 2022, are fixed assets held in foreign countries of $12.0 million, and $9.5 million, respectively.
Total depreciation expense was approximately $33.3 million in 2023, $35.6 million in 2022 and $40.6 million in 2021.
6. 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 Topic 842, “Leases” not to include short-term leases with a duration of 12 months or less on the balance sheet. As of December 31, 2023 and 2022, 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.
| (in thousands, except Other Information) | Years Ended December 31, | |||||||||||||||||||||||||
| Components of Lease Expense | Financial Statement Classification | 2023 | 2022 | 2021 | ||||||||||||||||||||||
| Short-term lease cost | Cost of services provided, Sales, general, and administrative expenses | $ | 14,753 | $ | 12,693 | $ | 6,223 | |||||||||||||||||||
| Operating lease cost | Cost of services provided, Sales, general, and administrative expenses | 110,627 | 97,764 | 93,215 | ||||||||||||||||||||||
| Total lease expense | $ | 125,380 | $ | 110,457 | $ | 99,438 | ||||||||||||||||||||
| Cash Flow Information | ||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||||||||
| Operating cash flows for operating leases | $ | 109,631 | $ | 96,700 | $ | 92,032 | ||||||||||||||||||||
| Other Information | ||||||||||||||||||||||||||
| Weighted-average remaining lease term - operating leases | 4.8 Yrs | 5.1 Yrs | ||||||||||||||||||||||||
| Weighted-average discount rate - operating leases | 3.99 | % | 3.67 | % |
Subsequent to the issuance of the Company's 2022 financial statements, management determined that certain immaterial short-term lease costs were omitted from the disclosure of short-term lease costs for the years ended December 31, 2022 and 2021. The disclosure of short-term leases costs has been restated from the amounts previously reported to correct the amount of short-term lease cost for the years ended December 31, 2022 and 2021. There was no impact on our consolidated statements of income, financial position, or cash flows.
Lease Commitments
Future minimum lease payments, including assumed exercise of renewal options at December 31, 2023 were as follows:
| (in thousands) | |||||
| 2024 | $ | 103,977 | |||
| 2025 | 88,839 | ||||
| 2026 | 66,350 | ||||
| 2027 | 36,205 | ||||
| 2028 | 17,279 | ||||
| Thereafter | 51,539 | ||||
| Total future minimum lease payments | 364,189 | ||||
| Less: amount representing interest | (38,617) | ||||
| Total future minimum lease payments, net of interest | $ | 325,572 |
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 $173.5 million for building leases and $190.7 million for
vehicle leases. As of December 31, 2023, the Company had additional future obligations of $17.8 million for leases that had not yet commenced.
7. GOODWILL
Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $1.1 billion as of December 31, 2023 and $846.7 million as of December 31, 2022. Goodwill increased for the year ended December 31, 2023 primarily due to acquisitions. The carrying amount of goodwill in foreign countries was $112.6 million as of December 31, 2023 and $97.4 million as of December 31, 2022.
The changes in the carrying amount of goodwill for the twelve months ended December 31, 2023 and 2022 were as follows (in thousands):
| Goodwill: | |||||
| Balance at December 31, 2021 | $ | 786,504 | |||
| Additions | 64,997 | ||||
| Adjustments due to currency translation and other | (4,797) | ||||
| Balance at December 31, 2022 | 846,704 | ||||
| Additions | 224,014 | ||||
| Dispositions | (2,466) | ||||
| Adjustments due to currency translation and other | 2,058 | ||||
| Balance at December 31, 2023 | $ | 1,070,310 |
8. CUSTOMER CONTRACTS, TRADENAMES AND TRADEMARKS, AND OTHER INTANGIBLE ASSETS
Customer contracts are amortized on a straight-line basis as this best approximates the ratio that current revenues bear to the total of current and anticipated revenues based on the estimated lives of the assets. In accordance with the FASB ASC Topic 350 “Intangibles - Goodwill and other”, the expected lives of customer contracts were analyzed, and it was determined that customer contracts should be amortized over a life of 7 to 20 years dependent upon customer type.
The carrying amount and accumulated amortization for customer contracts were as follows:
| December 31, | 2023 | 2022 | |||||||||
| (in thousands) | |||||||||||
| Customer contracts | $ | 625,920 | $ | 502,689 | |||||||
| Less: accumulated amortization | (239,768) | (204,130) | |||||||||
| Customer contracts, net | $ | 386,152 | $ | 298,559 |
The net carrying amount of customer contracts in foreign countries was $48.0 million as of December 31, 2023 and $46.1 million as of December 31, 2022.
Trademarks and tradenames are amortized on a straight-line basis over the period of their useful lives. The Company has determined these assets have useful lives between 7 and 20 years. The Company also has non-amortizable, indefinite-lived tradenames of $139.7 million and $104.3 million as of December 31, 2023 and 2022, respectively.
The carrying amount and accumulated amortization for trademarks and tradenames were as follows:
| December 31, | 2023 | 2022 | |||||||||
| (in thousands) | |||||||||||
| Trademarks and tradenames | $ | 161,301 | $ | 121,655 | |||||||
| Less: accumulated amortization | (9,933) | (10,009) | |||||||||
| Trademarks and tradenames, net | $ | 151,368 | $ | 111,646 |
The net carrying amount of trademarks and tradenames in foreign countries was $4.8 million as of December 31, 2023 and $4.2 million as of December 31, 2022.
Other intangible assets include non-compete agreements and patents. Non-compete agreements are amortized on a straight-line basis over periods ranging from 3 to 20 years and patents are amortized on a straight-line basis over 15 years.
The carrying amount and accumulated amortization for other intangible assets were as follows:
| December 31, | 2023 | 2022 | |||||||||
| (in thousands) | |||||||||||
| Other intangible assets | $ | 26,973 | $ | 25,357 | |||||||
| Less: accumulated amortization | (18,759) | (16,814) | |||||||||
| Other intangible assets, net | $ | 8,214 | $ | 8,543 |
The net carrying amount of other intangible assets in foreign countries was $0.9 million as of December 31, 2023 and $0.7 million as of December 31, 2022.
Total amortization expense was approximately $66.5 million in 2023, $55.7 million in 2022 and $46.0 million in 2021.
Estimated amortization expense for the existing carrying amount of customer contracts and other intangible assets for each of the five succeeding fiscal years are as follows:
| (in thousands) | |||||
| 2024 | $ | 77,633 | |||
| 2025 | 68,810 | ||||
| 2026 | 65,043 | ||||
| 2027 | 61,177 | ||||
| 2028 | 59,166 |
9. FAIR VALUE MEASUREMENT
The Company’s financial instruments consist of cash and cash equivalents, trade receivables, financed and notes receivable, accounts payable, other short-term liabilities, and debt. The carrying amounts of these financial instruments approximate their respective fair values. The Company also has financial instruments related to its defined benefit pension plan and deferred compensation plan detailed in Note 11.
The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.
As of December 31, 2023 and 2022, the Company had investments in international bonds of $10.2 million and $10.7 million, respectively. These bonds are accounted for as available for sale securities and are level 2 assets under the fair value hierarchy. At December 31, 2022, $0.5 million was included in other current assets and $10.2 million was included in other assets. At December 31, 2023, $1.0 million was included in other current assets and $9.2 million was included in other assets. The bonds are recorded at fair market value with unrealized losses of $0.7 million included in other comprehensive income during the year ended December 31, 2023.
At December 31, 2023 and 2022, respectively, the Company had $46.1 million and $13.5 million of acquisition holdback and earnout liabilities with the former owners of acquired companies. Acquisition earnouts are generally earned by achieving certain levels of revenue growth while maintaining certain profit margins. The earnout liabilities are discounted to reflect the expected probability of payout, and both earnout and holdback liabilities are 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.
| (in thousands) | |||||
| Acquisition holdback and earnout liabilities at December 31, 2021 | $ | 25,156 | |||
| New acquisitions and measurement adjustments | 10,178 | ||||
| Payouts | (17,334) | ||||
| Interest and fair value adjustments | 398 | ||||
| Charge offset, forfeit and other | (4,902) | ||||
| Acquisition holdback and earnout liabilities at December 31, 2022 | 13,496 | ||||
| New acquisitions and measurement adjustments | 44,548 | ||||
| Payouts | (12,489) | ||||
| Interest and fair value adjustments | 2,981 | ||||
| Charge offset, forfeit and other | (2,432) | ||||
| Acquisition holdback and earnout liabilities at December 31, 2023 | $ | 46,104 |
10. DEBT
On February 24, 2023, the Company entered into a revolving credit agreement ("the Credit Agreement") with, among others, JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), as administrative agent (in such capacity, the “Administrative Agent”), which refinanced its previous credit facility described below. This Credit Agreement replaces the April 2019 facility that was set to expire in April 2024. Our previous facility is more fully discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.
The Credit Agreement provides for a $1.0 billion revolving credit facility (the “Credit Facility”), which may be denominated in U.S. Dollars and other currencies, including Euros, Australian Dollars, Canadian Dollars, New Zealand Dollars, Pounds Sterling and Japanese Yen, subject to a $400 million foreign currency sublimit. The Credit Facility also includes sub-facilities for the issuance of letters of credit of up to $150 million and swing line loans at the Administrative Agent’s discretion of up to $50 million. Certain subsidiaries of Rollins provide unsecured guarantees of the Credit Facility. Rollins has the ability to expand its borrowing availability under the Credit Agreement in the form of increased revolving commitments or one or more tranches of term loans by up to an additional $750 million, subject to the agreement of the participating lenders and certain other customary conditions. The maturity date of the loans under the Credit Agreement is February 24, 2028.
Loans under the Credit Agreement bear interest, at Rollins’ election, at (i) for loans denominated in U.S. Dollars, (A) an alternate base rate (subject to a floor of 0.00%), which is the greatest of (x) the prime rate publicly announced from time to time by JPMorgan Chase, (y) the greater of the federal funds effective rate and the Federal Reserve Bank of New York overnight bank funding rate, plus 50 basis points, and (z) Adjusted Term SOFR for a one month interest period, plus a margin ranging from 0.00% to 0.50% per annum based on Rollins’ consolidated total net leverage ratio; or (B) the greater of term SOFR for the applicable interest period plus 10 basis points (“Adjusted Term SOFR”) and zero, plus a margin ranging from 1.00% to 1.50% per annum based on Rollins’ consolidated total net leverage ratio; and (ii) for loans denominated in other currencies, including Euros, Australian Dollars, Canadian Dollars, New Zealand Dollars, Pounds Sterling and Japanese Yen, such interest rates as set forth in the Credit Agreement.
The Credit Agreement contains customary terms and conditions, including, without limitation, certain financial covenants including covenants restricting Rollins’ ability to incur certain indebtedness or liens, or to merge or consolidate with or sell substantially all of its assets to another entity. Further, the Credit Agreement contains a financial covenant restricting Rollins’ ability to permit the ratio of Rollins’ consolidated total net debt to EBITDA to exceed 3.50 to 1.00. Following certain acquisitions, Rollins may elect to increase the financial covenant level to 4.00 to 1.00 temporarily. The ratio is calculated as of the last day of the fiscal quarter most recently ended. The Credit Agreement also contains provisions permitting a future environmental, social and governance amendment, subject to certain terms and conditions contained therein, by which pricing may be adjusted pursuant to the Company's performance measured against certain sustainability-linked metrics. The Company is in compliance with applicable financial debt covenants as of December 31, 2023.
As of December 31, 2023, the Company had outstanding borrowings of $493.0 million under the Credit Facility. Borrowings under the Credit Facility are presented under the long-term debt caption of our consolidated balance sheet, net
of $2.2 million in unamortized debt issuance costs as of December 31, 2023. The aggregate effective interest rate on the debt outstanding as of December 31, 2023 was 6.5%.
The Company maintains $71.7 million in letters of credit as of December 31, 2023. These letters of credit are required by the Company’s insurance companies, due to the Company’s high deductible insurance program, to secure various workers’ compensation and casualty insurance contracts coverage and were increased from $71.3 million as of December 31, 2022. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims.
As of December 31, 2022, the Company had outstanding borrowings of $54.9 million under its previous term loan and there were no outstanding borrowings under the previous revolving commitment. As of December 31, 2023, there were no outstanding borrowings under our previous term loan or revolving commitment. The aggregate effective interest rate on the debt outstanding as of December 31, 2022 was 5.1%.
11. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans
The Company has sponsored noncontributory tax-qualified defined benefit pension plans covering employees meeting certain age and service requirements, the most significant of which was the Rollins, Inc. Plan, which was terminated in 2018. The Company funds its plans with at least the minimum amount required by ERISA.
Waltham Services, LLC Hourly Employee Pension Plan (the “Waltham Plan”)
The Company sponsors the Waltham Plan, which covers less than 80 participants as of December 31, 2023. The Waltham Plan was amended, effective September 1, 2018, to freeze future benefit accruals for all participants. The Company accounts for all defined benefit plans in accordance with the FASB ASC Topic 715 “Compensation Retirement Benefits,” and engages an outside actuary to calculate obligations and costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis, including the estimated future return on plan assets, the discount rate, and other factors, and makes adjustments to these liabilities as necessary. As of December 31, 2023, the fair value of Waltham Plan assets were $1.6 million, with a projected liability of $2.0 million and an unfunded status of $0.4 million. At December 31, 2023 the plan’s assets were comprised of listed common stocks and U.S government and corporate securities and are classified as Level 1 and Level 2 in the fair value hierarchy.
Defined Contribution 401(k) Savings Plan
The Company sponsors a defined contribution 401(k) Savings Plan (“the Plan”) that is available to a majority of the Company’s full-time employees the first day of the calendar quarter following completion of three months of service. The Plan is available to non-full-time employees the first day of the calendar quarter following one year of service upon completion of 1000 hours in that year. The Plan provides for a matching contribution of one dollar ($1.00) for each one dollar ($1.00) of a participant’s contributions to the Plan that do not exceed 3 percent of his or her eligible compensation (which includes commissions, overtime, and bonuses) and fifty cents ($0.50) for each one dollar ($1.00) of a participant’s contributions to the Plan over the initial 3 percent that do not exceed 6 percent of his or her eligible compensation (which includes commissions, overtime and bonuses). The charge to expense for the Company match was approximately $32.9 million, $29.9 million and $25.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. At December 31, 2023, 2022, and 2021 approximately 30.4%, 30.6%, and 28.7%, respectively, of the fair value of plan assets consisted of Rollins, Inc. common stock. Total administrative fees paid by the Company for the Plan were insignificant for each of the years ended December 31, 2023, 2022 and 2021.
Nonqualified Deferred Compensation Plan
The Deferred Compensation Plan provides that participants may defer up to 50% of their base salary and up to 85% of their annual bonus with respect to any given plan year, subject to a $2 thousand per plan year minimum. The Company may make discretionary contributions to participant accounts but has not done so since 2011.
Accounts will be credited with hypothetical earnings, and/or debited with hypothetical losses, based on the performance of certain “Measurement Funds.” Account values are calculated as if the funds from deferrals and Company credits had been converted into shares or other ownership units of selected Measurement Funds by purchasing (or selling, where relevant)
such shares or units at the current purchase price of the relevant Measurement Fund at the time of the participant’s selection. Deferred Compensation Plan benefits are unsecured general obligations of the Company to the participants, and these obligations rank in parity with the Company’s other unsecured and unsubordinated indebtedness. The Company has established a “rabbi trust,” which it uses to voluntarily set aside amounts to indirectly fund any obligations under the Deferred Compensation Plan. To the extent that the Company’s obligations under the Deferred Compensation Plan exceed assets available under the trust, the Company would be required to seek additional funding sources to fund its liability under the Deferred Compensation Plan.
Generally, the Deferred Compensation Plan provides for distributions of any deferred amounts upon the earliest to occur of a participant’s death, disability, retirement or other termination of employment (a “Termination Event”). However, for any deferrals of salary and bonus (but not Company contributions), participants would be entitled to designate a distribution date which is prior to a Termination Event. Generally, the Deferred Compensation Plan allows a participant to elect to receive distributions under the Deferred Compensation Plan in installments or lump-sum payments.
At December 31, 2023, the Deferred Compensation Plan had 75 life insurance policies with a net face value of $48.4 million compared to 75 policies with a face value of $45.8 million at December 31, 2022. The cash surrender value of these life insurance policies was $25.5 million and $23.2 million at December 31, 2023 and 2022, respectively. These policies are valued using the NAV practical expedient.
The following table presents our non-qualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2023 and 2022.
| (in thousands) | Level 1 | Level 2 | Level 3 | NAV | Total | ||||||||||||||||||||||||
| December 31, 2023 | $ | 25 | $ | — | $ | — | $ | 25,461 | $ | 25,486 | |||||||||||||||||||
| December 31, 2022 | $ | 25 | $ | — | $ | — | $ | 23,246 | $ | 23,271 |
Cash and cash equivalents, which are used to pay benefits and deferred compensation plan administrative expenses, are held in money market funds.
Total expense related to deferred compensation was $0.3 million, $1.1 million, and $0.3 million in 2023, 2022, and 2021, respectively. The Company had $25.5 million and $23.3 million in deferred compensation assets as of December 31, 2023 and 2022, respectively, included within other assets on the Company’s consolidated statements of financial position and $19.8 million and $19.0 million in deferred compensation liability as of December 31, 2023 and 2022, respectively, located within other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position. The amounts of assets were marked to fair value.
12. COMMITMENTS AND CONTINGENCIES
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, environmental 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, and claims related to acquisitions and allegations by federal, state or local authorities, including taxing 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 or claims related to the operation of our retirement benefit plans. We are also involved from time to time in certain environmental 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 in accordance with ASC 450.
The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and auto liability. The estimated costs of existing and future claims under the retained loss program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts with an independent third party to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration in establishing the reserve, along with management’s knowledge of changes in business practice and existing claims compared to current balances. Management’s judgment is inherently
subjective as a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events. The accruals and reserves we hold are based on estimates that involve a degree of judgment and are inherently variable and could be overestimated or insufficient. If actual claims exceed our estimates, our operating results could be materially affected, and our ability to take timely corrective actions to limit future costs may be limited.
Item 103 of SEC Regulation S-K requires disclosure of certain environmental legal proceedings if the proceeding reasonably involves potential monetary sanctions of $300,000 or more. The Company has received a notice of alleged violations and information requests from local governmental authorities in California for our Orkin and Clark Pest Control operations and is currently working with several local governments regarding compliance with environmental regulations governing the management of hazardous waste and pesticide disposal. The investigation appears to be part of a broader effort to investigate waste handling and disposal processes of a number of industries. While we are unable to predict the outcome of this investigation, we do not believe the outcome will have a material effect on our results of operations, financial condition, or cash flows.
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.
13. STOCKHOLDERS' EQUITY
During the year ended December 31, 2023, the Company paid $264.3 million, or $0.54 per share, in cash dividends compared to $211.6 million, or $0.43 per share, during the same period in 2022.
On September 6, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with LOR, Inc. (“LOR”) (a company controlled by Mr. Gary W. Rollins and certain members of his family) and Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC, as representatives of the several underwriters (the “Underwriters”), relating to the offer by LOR of 38,724,100 shares of the Company’s common stock, par value $1.00 per share (the “Common Stock”), at a public offering price of $35.00 per share (the “Offering”). In connection with the Offering, LOR granted the Underwriters an option to purchase up to an additional 5,785,714 shares of Common Stock (the “Optional Shares”). The Offering, including the sale of the Optional Shares, closed on September 11, 2023. The Company did not sell any shares in the Offering and did not receive any proceeds from the Offering. In addition, the Company completed the repurchase of 8,724,100 of the shares of Common Stock offered in the Offering for approximately $300 million at $34.39 per share.
As we repurchase our common stock, we reduce common stock for par value of the shares repurchased, with the excess of the purchase price over par value recorded as a reduction to additional paid-in capital and retained earnings.
The Company did not repurchase shares on the open market during the years ended December 31, 2023 and 2022.
The Company repurchases shares from employees for the payment of their taxes on restricted shares that have vested. The Company repurchased $10.8 million and $7.1 million during the years ended December 31, 2023 and 2022, respectively.
During the year ended December 31, 2023, the Company also issued $2.0 million of shares to employees in connection with the Employee Stock Purchase Plan ("ESPP") discussed below.
Stock Compensation Plans
Time-Lapsed Restricted Shares and Performance Share Unit Awards
Time-lapsed restricted share awards and restricted stock units (“restricted shares”) have been issued to officers and other employees, and annual share awards are made to non-employee directors, under the Company’s Employee Stock Incentive Plan. Additionally, in 2023, performance share units ("PSUs") were granted to the Company's executive officers. The PSUs will vest and convert to shares of common stock at the end of a three-year performance period upon the Company's successful achievement of certain financial and market performance goals.
The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on the Company's closing stock price at the grant
date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. For PSUs that are granted with a total shareholder return ("TSR") component, management estimates the fair value using a Monte Carlo simulation valuation model, as these awards are subject to a market condition.
Restricted shares and PSUs provide for the issuance of a share of the Company’s common stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. Restricted shares and PSUs typically vest over approximately one to six-year periods. During these years, grantees of certain awards receive all dividends declared and retain voting rights for the granted shares. The agreements under which the one-time grant of restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed.
The Company issued time-lapsed restricted shares and PSUs of 0.7 million, 0.9 million, and 0.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. The Company issues new shares from its authorized but unissued share pool. At December 31, 2023, approximately 5.9 million shares of the Company’s common stock were reserved for issuance.
The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense:
| (in thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Restricted shares and PSUs: | |||||||||||||||||
| Compensation expense | $ | 24,222 | $ | 20,816 | $ | 14,865 |
The total income tax benefit related to stock-based compensation awards recognized in income was $5.2 million, $4.7 million, and $3.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023 and 2022, $50.0 million and $52.3 million, respectively, of total unrecognized compensation cost related to restricted shares and PSUs are expected to be recognized over a weighted average period of approximately 2.8 years and 3.5 years at December 31, 2023 and 2022, respectively.
The following table summarizes information on unvested awards outstanding as of December 31, 2023, 2022 and 2021.
| (number of shares in thousands) | Number of Shares | Weighted Average Grant-Date Fair Value | |||||||||
| Unvested as of December 31, 2020 | 2,870 | $ | 20.36 | ||||||||
| Forfeited | (191) | 25.34 | |||||||||
| Vested | (861) | 16.67 | |||||||||
| Granted | 778 | 37.04 | |||||||||
| Unvested as of December 31, 2021 | 2,596 | $ | 26.16 | ||||||||
| Forfeited | (90) | 26.37 | |||||||||
| Vested | (675) | 19.99 | |||||||||
| Granted | 854 | 30.12 | |||||||||
| Unvested as of December 31, 2022 | 2,685 | $ | 28.97 | ||||||||
| Forfeited | (98) | 29.83 | |||||||||
| Vested | (840) | 26.87 | |||||||||
| Granted | 678 | 36.10 | |||||||||
| Unvested as of December 31, 2023 | 2,425 | $ | 31.66 |
Employee Stock Purchase Plan
On April 26, 2022, shareholders approved the Rollins, Inc. 2022 Employee Stock Purchase Plan (“ESPP”) which provides eligible employees with the option to purchase shares of Company common stock, at a discount, through payroll deductions during six-month offering periods. Initially, a maximum of 1,000,000 shares of the Company’s common stock
are authorized for issuance under the ESPP. Under the ESPP, shares of common stock may be purchased by eligible participants during defined purchase periods at 90% of the lesser of the closing price of the Company’s common stock on the first day or last day of each purchase period. The first offering period for the ESPP began on July 1, 2022. The Company recorded compensation expense of $0.4 million in connection with the ESPP for each of the years ended December 31, 2023 and 2022. Compensation expense for the ESPP is included in cost of services provided and sales, general and administrative expenses in our consolidated statements of income.
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following (in thousands):
| Pension Liability Adjustment | Foreign Currency Translation | Interest Rate Swaps | Available for Sale Securities | Total | |||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | (322) | $ | (10,194) | $ | (381) | $ | — | $ | (10,897) | |||||||||||||||||||
| Change during 2021: | |||||||||||||||||||||||||||||
| Before-tax amount | — | (5,895) | 516 | — | (5,379) | ||||||||||||||||||||||||
| Tax benefit | — | — | (135) | — | (135) | ||||||||||||||||||||||||
| Other comprehensive (loss) income | — | (5,895) | 381 | — | (5,514) | ||||||||||||||||||||||||
| Balance at December 31, 2021 | (322) | (16,089) | — | — | (16,411) | ||||||||||||||||||||||||
| Change during 2022: | — | ||||||||||||||||||||||||||||
| Before-tax amount | — | (14,215) | — | (936) | (15,151) | ||||||||||||||||||||||||
| Tax expense | — | — | — | — | — | ||||||||||||||||||||||||
| Other comprehensive loss | — | (14,215) | — | (936) | (15,151) | ||||||||||||||||||||||||
| Balance at December 31, 2022 | (322) | (30,304) | — | (936) | (31,562) | ||||||||||||||||||||||||
| Change during 2023: | |||||||||||||||||||||||||||||
| Before-tax amount | (290) | 4,816 | — | 206 | 4,732 | ||||||||||||||||||||||||
| Tax expense | 75 | — | — | — | 75 | ||||||||||||||||||||||||
| Other comprehensive income (loss) | (215) | 4,816 | — | 206 | 4,807 | ||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | (537) | $ | (25,488) | $ | — | $ | (730) | $ | (26,755) |
15. INCOME TAXES
For the years ended December 31, income (loss) from continuing operations before income taxes consisted of the following:
| (in thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| Income before income taxes | |||||||||||||||||
| Domestic | $ | 548,428 | $ | 465,991 | $ | 449,985 | |||||||||||
| Foreign | 37,829 | 32,926 | 32,500 | ||||||||||||||
| Total income from continuing operations before income taxes | $ | 586,257 | $ | 498,917 | $ | 482,485 |
For the years ended December 31, the Company’s income tax provision consisted of the following:
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 112,647 | $ | 92,793 | $ | 87,888 | |||||||||||
| State | 33,516 | 26,786 | 24,131 | ||||||||||||||
| Foreign | 12,781 | 9,144 | 10,480 | ||||||||||||||
| Total current tax | 158,944 | 128,723 | 122,499 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (2,349) | (333) | 1,735 | ||||||||||||||
| State | (2,925) | 2,011 | 1,795 | ||||||||||||||
| Foreign | (2,370) | (83) | (109) | ||||||||||||||
| Total deferred tax | (7,644) | 1,595 | 3,421 | ||||||||||||||
| Total income tax provision | $ | 151,300 | $ | 130,318 | $ | 125,920 |
The following table presents the principal components of the difference between the effective tax rate and the U.S. federal statutory income tax rate for the years ended December 31,:
| 2023 | 2022 | 2021 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Income tax at statutory rate | $ | 123,114 | $ | 104,773 | $ | 101,485 | |||||||||||
| State income tax expense (net of federal benefit) | 24,167 | 22,750 | 20,482 | ||||||||||||||
| Foreign tax rate differential | 1,948 | 1,907 | 2,837 | ||||||||||||||
| Tax on unremitted earnings | 1,408 | 549 | — | ||||||||||||||
| Federal tax credits | (1,362) | (616) | (548) | ||||||||||||||
| Permanent items | 2,239 | 445 | 311 | ||||||||||||||
| Other reconciling items | (214) | 510 | 1,353 | ||||||||||||||
| Total income tax provision | $ | 151,300 | $ | 130,318 | $ | 125,920 |
Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022 are as follows:
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Deferred tax assets: | |||||||||||
| Employee compensation and benefits | $ | 15,451 | $ | 15,547 | |||||||
| Unearned revenues | 13,998 | 13,060 | |||||||||
| Insurance reserves | 24,152 | 19,938 | |||||||||
| Lease liabilities | 90,486 | 78,389 | |||||||||
| Non-amortizable intangible assets | 6,883 | — | |||||||||
| Other deferred tax assets | 14,944 | 14,771 | |||||||||
| Total deferred tax assets | 165,914 | 141,705 | |||||||||
| Valuation allowance | (6,883) | — | |||||||||
| Net deferred tax assets | $ | 159,031 | $ | 141,705 | |||||||
| Deferred tax liabilities: | |||||||||||
| Fixed assets and depreciation | $ | 12,430 | $ | 17,999 | |||||||
| Intangible assets | 81,194 | 72,752 | |||||||||
| Right of use assets | 81,971 | 72,767 | |||||||||
| Other deferred tax liabilities | — | 549 | |||||||||
| Total deferred tax liabilities | $ | 175,595 | $ | 164,067 | |||||||
| Net deferred taxes | |||||||||||
| Deferred tax assets | 2,294 | 1,792 | |||||||||
| Deferred tax liabilities | (18,858) | (24,154) | |||||||||
| Net deferred taxes | $ | (16,564) | $ | (22,362) |
Certain income tax disclosures for prior periods have been restated to conform to current period presentation. Subsequent to the issuance of the Company's 2022 financial statements, management determined that certain deferred tax assets and deferred tax liabilities presented on a net basis as of December 31, 2022 should have been presented as separate deferred tax assets and deferred tax liabilities in the disclosure. As a result, the presentation of deferred tax assets and deferred tax liabilities as of December 31, 2022 have been restated from the amounts previously reported to separately present certain deferred tax assets and deferred tax liabilities.
Deferred tax assets are included in "Other assets" and deferred tax liabilities are included in "Other long-term accrued liabilities" on the balance sheet.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. As of December 31, 2023, the Company increased its valuation allowance by approximately $6.9 million related to deferred tax assets on intangible assets held in Australia. The Company does not expect to recognize such deferred tax assets as it expects to continue its operations in Australia for the foreseeable future and the related intangible assets are not amortizable for tax purposes in Australia.
The changes in the Company’s valuation allowance for deferred tax assets are as follows:
| (in thousands) | |||||
| December 31, 2021 | $ | 192 | |||
| Charged to income tax expense | — | ||||
| Charged to other accounts | (192) | ||||
| December 31, 2022 | — | ||||
| Charged to income tax expense | 962 | ||||
| Charged to other accounts | 5,921 | ||||
| December 31, 2023 | $ | 6,883 |
As of December 31, 2023, the Company has no net operating loss carryforwards in any federal, state, or foreign jurisdictions. The Company has a $1.4 million foreign tax credit carryforward which if not fully utilized will expire in 2026. The Company also has state tax credit carryforwards of $1.8 million which will expire in 2026 if not fully utilized.
We intend to continue to grow the business in the international markets where we have a presence. As of December 31, 2023, we assert that foreign cash earnings in excess of working capital and cash needed for strategic investments and acquisitions are not intended to be indefinitely reinvested offshore and we have included the tax effects of such current and/or future repatriations, including applicable state taxes and foreign withholding tax of such cash earnings in these financial statements. Any non-cash unremitted earnings in our foreign subsidiaries are considered to be permanently reinvested and deferred taxes have not been provided on these earnings.
The total amount of unrecognized tax benefits as of December 31, 2023 that, if recognized, would affect the effective tax rate is $1.8 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| December 31, | 2023 | 2022 | 2021 | ||||||||||||||
| (in thousands) | |||||||||||||||||
| Unrecognized tax benefits at beginning of year | $ | 1,394 | $ | 1,018 | $ | 844 | |||||||||||
| Additions for tax positions of prior years | 653 | 376 | 174 | ||||||||||||||
| Reductions for tax positions of prior years | (263) | — | — | ||||||||||||||
| Unrecognized tax benefits at end of year | $ | 1,784 | $ | 1,394 | $ | 1,018 |
As of December 31, 2023, the Company believes it is reasonably possible that the amount of unrecognized tax benefits may decrease by $0.6 million over the next 12 months as it relates to foreign jurisdictions.
The Company’s policy is to record interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were $0.6 million, $0.2 million and $0.2 million as of December 31, 2023, 2022 and 2021, respectively.
The Company files U.S. federal income tax returns, as well as separate and combined income tax returns in numerous state and foreign jurisdictions. The Company is under examination in certain state jurisdictions for years ranging from 2016 through 2021. The Company regularly assesses the outcomes of both ongoing and future examinations for the current or prior years to ensure the Company’s provision for income taxes is sufficient. The Company recognizes liabilities based on estimates of whether additional taxes will be due and believes its reserves are adequate in relation to any potential assessments. The outcome of any one examination, some of which may conclude during the next 12 months, is not expected to have a material impact on the Company’s financial position or results of operations.
16. RELATED PARTY TRANSACTIONS
Transactions with RPC, Inc.
Until November 20, 2023, when the administrative services agreement was terminated, the Company provided certain administrative services to RPC, Inc. (“RPC”) (a company of which Mr. Gary W. Rollins was Chairman and currently
serves as a Director and a majority of the stock of which is owned by a group that includes Mr. Rollins and Pam Rollins, a director of the Company). The service agreements between RPC and the Company provided for the provision of services on a cost reimbursement basis and were terminable on six months’ notice. The services covered by these agreements included administration of certain employee benefit programs and other administrative services. Charges to RPC (or to corporations which are subsidiaries of RPC) for such services and rent totaled approximately $0.1 million for the years ended December 31, 2022 and 2021, respectively, and less than one thousand dollars for the year ended December 31, 2023.
Registration Rights Agreement and Secondary Offering
On September 6, 2023, the Company entered into the Underwriting Agreement with LOR and the Underwriters, relating to the Offering. In connection with the Offering, LOR granted the Underwriters an option to purchase Optional Shares. The Offering, including the sale of the Optional Shares, closed on September 11, 2023. The Company did not sell any shares in the Offering and did not receive any proceeds from the Offering. In addition, the Company completed the repurchase from LOR of 8,724,100 of the shares of Common Stock offered in the Offering for approximately $300 million at the same per share price paid by the Underwriters to LOR in the Offering, or $34.39 per share.
On June 5 2023, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with LOR and LOR paid $1.5 million to the Company and upon closing the Offering, LOR paid $3.5 million to the Company pursuant to the Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the Company will pay all costs, fees and expenses incident to the Company’s performance or compliance with the Registration Rights Agreement with respect to a total of five (5) requested offerings, and thereafter, LOR will be responsible for all such expenses in connection with any subsequent offering. These cash receipts are included in other financing activities in our consolidated statement of cash flows.
In connection with the Offering, LOR entered into a lock-up agreement with the Underwriters for a period of 365 days from the pricing date of the Offering, during which time LOR is restricted from engaging in certain transactions with respect to its shares of the Company’s common stock. The Offering was made pursuant to the Company’s existing registration statement on Form S-3, previously filed with the SEC and declared effective by the SEC on June 22, 2023, as supplemented by the prospectus supplement dated September 6, 2023, filed with the SEC pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended.
The Underwriting Agreement contains customary representations, warranties and covenants of the Company and LOR and also provides for customary indemnification by each of the Company, LOR and the Underwriters against certain liabilities. The foregoing description of the Underwriting Agreement is not meant to be a complete description and is qualified in its entirety by the Underwriting Agreement.
Aircraft and Administrative Arrangements
In 2014, P.I.A. LLC, a company then owned by our late Chairman of the Board of Directors, R. Randall Rollins, purchased a Lear Model 35A jet and entered into a lease arrangement with the Company for company use of the aircraft for business purposes. P.I.A. LLC is now owned by a trust for the benefit of the late Mr. Rollins’ family. The lease is terminable by either party on 30 days’ notice. The Company pays $100 per month in rent for the leased aircraft, and pays all variable costs and expenses associated with the leased aircraft, such as the costs for fuel, maintenance, storage and pilots. The Company has the priority right to use of the aircraft on business days, and Rollins family members and guests have the right to use the aircraft for personal use through the terms of an Aircraft Time Sharing Agreement with the Company. During the years ended December 31, 2023, 2022 and 2021, the Company paid or incurred approximately $0.6 million, $0.3 million, and $0.3 million in rent and operating costs under the Aircraft Time Sharing Agreement, respectively.
In August 2023, GWR 450, LLC (the “GWR LLC”), a company wholly-owned by Gary W. Rollins, purchased a Gulfstream 450 aircraft (the “G450”). In connection with the G450 purchase, the Company entered a lease arrangement with GWR LLC to lease the G450 for corporate purposes from time to time. The initial term of the lease is one year from the date of the agreement and the same renews for another year, unless terminated sooner.
During 2023, the Company amended its existing Pilot Sharing Agreement with LOR to include GWR LLC whereby the Company’s employee pilots may be used by LOR and GWR LLC from time to time to operate their aircrafts. LOR will reimburse the Company for 50% of the costs of the pilots, including salary, benefits and training. In addition, LOR and the
Company are each responsible for their own fuel costs. Charges to LOR under the Pilot Sharing Agreement total $0.5 million, $0.6 million and $0.8 million for the years ended December 31, 2023, 2022 and 2021, respectively.
During 2023, the existing administrative services agreement (the “Administrative Services Agreement”) between the Company and LOR was amended to include GWR LLC. According to the amended agreement, the Company shall provide certain administrative services to LOR and GWR LLC and rents office, hanger and storage space to LOR and GWR LLC. Charges to LOR and GWR LLC for rent and administrative services totaled $1.1 million, $0.8 million and $0.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.
The foregoing aircraft and administrative services arrangements were previously approved by the Company’s Nominating and Corporate Governance Committee.
Related Party Franchise Agreement
On December 1, 2019, Orkin, a subsidiary of the Company entered into a franchise agreement with Wilson Pest Management, Inc. The franchise is owned 100% by John Wilson IV. During the years ended December 31, 2023, 2022 and 2021, the Company received a total of approximately $0.2 million, $0.2 million and $0.1 million, respectively. During the year ended December 31, 2019 the Company received $0.8 million which included payment for the franchise and an initial franchise fee of seventy-five thousand dollars in connection with the transaction. The franchise agreement provides for a monthly royalty fee of 9.0% of the franchisee’s reported revenue. John Wilson IV is the son of John F. Wilson, Vice Chairman of the Company. The Company's Nominating and Corporate Governance Committee approved the agreement in accordance with its Related Party Transactions policy.
17. RESTRUCTURING COSTS
During 2023, the Company executed a restructuring program to modernize its workforce. These changes were primarily across corporate-related functions and will enable us to make more strategic improvements in our support functions. As a result of this program, the Company incurred $5.2 million in restructuring costs, consisting mainly of one-time termination benefits, including severance and outplacement services, stock-based compensation, and other benefits-related costs. These costs are recorded within restructuring costs in our consolidated statement of income. As of December 31, 2023, the Company had accrued restructuring costs of $2.1 million, which are included in accrued compensation and related liabilities in our consolidated balance sheet.
18. EARNINGS PER SHARE
The Company reports 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. Diluted earnings per share is calculated by dividing the net income available to participating common stockholders by the diluted weighted average number of shares outstanding for the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive equity.
The following table sets forth the computation of basic and diluted earnings per share under the two-class method (in thousands, except per share data):
| Year Ended December 31, | 2023 | 2022 | 2021 | ||||||||||||||
| Net income available to stockholders | $ | 434,957 | $ | 368,599 | $ | 356,565 | |||||||||||
| Less dividends paid: | |||||||||||||||||
| Common stock | (263,016) | (210,509) | (207,482) | ||||||||||||||
| Time-lapse restricted awards | (1,332) | (1,109) | (1,174) | ||||||||||||||
| Undistributed earnings for the period | $ | 170,609 | $ | 156,981 | $ | 147,909 | |||||||||||
| Allocation of undistributed earnings: | |||||||||||||||||
| Common stock | $ | 169,687 | $ | 156,123 | $ | 147,069 | |||||||||||
| Time-lapse restricted awards | 859 | 823 | 840 | ||||||||||||||
| Restricted stock units | 63 | 35 | — | ||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||
| Weighted-average outstanding common shares | 487,480 | 489,719 | 489,259 | ||||||||||||||
| Add participating securities: | |||||||||||||||||
| Weighted-average time-lapse restricted awards | 2,469 | 2,581 | 2,795 | ||||||||||||||
| Total weighted-average shares outstanding – basic | 489,949 | 492,300 | 492,054 | ||||||||||||||
| Dilutive effect of restricted stock units | 181 | 113 | — | ||||||||||||||
| Total weighted-average shares outstanding – diluted | 490,130 | 492,413 | 492,054 | ||||||||||||||
| Basic earnings per share: | |||||||||||||||||
| Common stock: | |||||||||||||||||
| Distributed earnings | $ | 0.54 | $ | 0.43 | $ | 0.42 | |||||||||||
| Undistributed earnings | 0.35 | 0.32 | 0.30 | ||||||||||||||
| $ | 0.89 | $ | 0.75 | $ | 0.72 | ||||||||||||
| Diluted earnings per share: | |||||||||||||||||
| Common stock: | |||||||||||||||||
| Distributed earnings | $ | 0.54 | $ | 0.43 | $ | 0.42 | |||||||||||
| Undistributed earnings | 0.35 | 0.32 | 0.30 | ||||||||||||||
| $ | 0.89 | $ | 0.75 | $ | 0.72 | ||||||||||||
19. SUBSEQUENT EVENTS
Quarterly Dividend
On January 22, 2024, the Company’s Board of Directors declared a regular quarterly cash dividend on its common stock of $0.15 payable March 11, 2024 to stockholders of record at the close of business February 21, 2024. The Company expects to continue to pay cash dividends to the common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.
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