filings.toolsRollins 10-Q 2023-06-30
Filed 2023-07-27. 8 sections, 160K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-4422
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 51-0068479 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2170 Piedmont Road, N.E., Atlanta, Georgia
(Address of principal executive offices)
30324
(Zip Code)
(404) 888-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock | ROL | NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | x | Accelerated filer | o | |||||||||||
| Non-accelerated filer | o | Smaller reporting company | o | |||||||||||
| Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
Rollins, Inc. had 492,820,761 shares of its $1 par value Common Stock outstanding as of July 17, 2023.
ROLLINS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
ROLLINS, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF JUNE 30, 2023, AND DECEMBER 31, 2022
(in thousands except share data)
(unaudited)
| June 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 154,747 | $ | 95,346 | |||||||
| Trade receivables, net of allowance for expected credit losses of $12,739 and $14,073, respectively | 176,567 | 155,759 | |||||||||
| Financed receivables, short-term, net of allowance for expected credit losses of $2,087 and $1,768, respectively | 37,495 | 33,618 | |||||||||
| Materials and supplies | 32,685 | 29,745 | |||||||||
| Other current assets | 62,489 | 34,151 | |||||||||
| Total current assets | 463,983 | 348,619 | |||||||||
| Equipment and property, net of accumulated depreciation of $346,886 and $333,298, respectively | 123,470 | 128,046 | |||||||||
| Goodwill | 1,045,997 | 846,704 | |||||||||
| Customer contracts, net | 407,205 | 298,559 | |||||||||
| Trademarks & tradenames, net | 148,901 | 111,646 | |||||||||
| Other intangible assets, net | 7,568 | 8,543 | |||||||||
| Operating lease right-of-use assets | 282,598 | 277,355 | |||||||||
| Financed receivables, long-term, net of allowance for expected credit losses of $3,922 and $3,200, respectively | 72,646 | 63,523 | |||||||||
| Other assets | 46,962 | 39,033 | |||||||||
| Total assets | $ | 2,599,330 | $ | 2,122,028 | |||||||
| LIABILITIES | |||||||||||
| Accounts payable | $ | 74,398 | $ | 42,796 | |||||||
| Accrued insurance - current | 40,796 | 39,534 | |||||||||
| Accrued compensation and related liabilities | 94,968 | 99,251 | |||||||||
| Unearned revenues | 183,253 | 158,092 | |||||||||
| Operating lease liabilities - current | 86,918 | 84,543 | |||||||||
| Current portion of long-term debt | — | 15,000 | |||||||||
| Other current liabilities | 95,368 | 54,568 | |||||||||
| Total current liabilities | 575,701 | 493,784 | |||||||||
| Accrued insurance, less current portion | 45,659 | 38,350 | |||||||||
| Operating lease liabilities, less current portion | 200,201 | 196,888 | |||||||||
| Long-term debt | 337,509 | 39,898 | |||||||||
| Other long-term accrued liabilities | 98,035 | 85,911 | |||||||||
| Total liabilities | 1,257,105 | 854,831 | |||||||||
| Commitments and contingencies (see Note 11) | |||||||||||
| 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, 492,820,761 and 492,447,997 shares issued and outstanding, respectively | 492,821 | 492,448 | |||||||||
| Additional paid in capital | 121,005 | 119,242 | |||||||||
| Accumulated other comprehensive loss | (29,051) | (31,562) | |||||||||
| Retained earnings | 757,450 | 687,069 | |||||||||
| Total stockholders’ equity | 1,342,225 | 1,267,197 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,599,330 | $ | 2,122,028 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(in thousands except per share data)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| REVENUES | |||||||||||||||||||||||
| Customer services | $ | 820,750 | $ | 714,049 | $ | 1,478,765 | $ | 1,304,729 | |||||||||||||||
| COSTS AND EXPENSES | |||||||||||||||||||||||
| Cost of services provided (exclusive of depreciation and amortization below) | 384,191 | 336,780 | 711,033 | 632,158 | |||||||||||||||||||
| Sales, general and administrative | 255,331 | 219,987 | 451,762 | 398,772 | |||||||||||||||||||
| Depreciation and amortization | 26,439 | 22,605 | 48,941 | 45,732 | |||||||||||||||||||
| Total operating expenses | 665,961 | 579,372 | 1,211,736 | 1,076,662 | |||||||||||||||||||
| OPERATING INCOME | 154,789 | 134,677 | 267,029 | 228,067 | |||||||||||||||||||
| Interest expense, net | 4,785 | 880 | 5,250 | 1,448 | |||||||||||||||||||
| Other income, net | (1,019) | (1,911) | (5,733) | (3,190) | |||||||||||||||||||
| CONSOLIDATED INCOME BEFORE INCOME TAXES | 151,023 | 135,708 | 267,512 | 229,809 | |||||||||||||||||||
| PROVISION FOR INCOME TAXES | 40,880 | 34,088 | 69,135 | 54,423 | |||||||||||||||||||
| NET INCOME | $ | 110,143 | $ | 101,620 | $ | 198,377 | $ | 175,386 | |||||||||||||||
| NET INCOME PER SHARE - BASIC AND DILUTED | $ | 0.22 | $ | 0.21 | $ | 0.40 | $ | 0.36 | |||||||||||||||
| Weighted average shares outstanding - basic | 492,700 | 492,327 | 492,593 | 492,270 | |||||||||||||||||||
| Weighted average shares outstanding - diluted | 492,891 | 492,440 | 492,764 | 492,382 | |||||||||||||||||||
| DIVIDENDS PAID PER SHARE | $ | 0.13 | $ | 0.10 | $ | 0.26 | $ | 0.20 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(in thousands)
(unaudited)
| Three Months Ending June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| NET INCOME | $ | 110,143 | $ | 101,620 | $ | 198,377 | $ | 175,386 | |||||||||||||||
| Other comprehensive income (loss), net of tax: |
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties and reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors,” of our 2022 Form 10-K and Part II, Item 1A, “Risk Factors” and “Caution Regarding Forward-Looking Statements” included in this report and those discussed in other documents we file from time to time with the SEC.
GENERAL OPERATING COMMENTS
Below is a summary of the key operating results for the three months ended June 30, 2023:
-
Second quarter revenues were $820.8 million, an increase of 14.9% over the second quarter 2022 with organic revenues* increasing 7.7%. The stronger dollar versus foreign currencies in countries where we operate reduced revenues by 30 basis points during the quarter.
-
Quarterly operating income was $154.8 million, an increase of 14.9% over the second quarter of 2022. Quarterly operating margin was 18.9% of revenue, consistent with the second quarter of 2022. Adjusted operating income* was $160 million, an increase of 18.8% over the prior year. Adjusted operating income margin* was 19.5%, an increase of 60 basis points over the prior year.
-
Quarterly net income was $110.1 million, an increase of 8.4% over the prior year net income. Adjusted net income* was $114.1 million, an increase of 12.2% over the prior year.
-
Quarterly EPS was $0.22 per diluted share, a 4.8% increase over the prior year EPS of $0.21. Adjusted EPS* was $0.23 per diluted share, an increase of 9.5% over the prior year.
-
Adjusted EBITDA* was $183.3 million for the quarter, an increase of 15.1%. Adjusted EBITDA* was 22.3% of sales, which was equal to the second quarter of 2022.
-
Operating cash flow was $147.4 million, an increase of 15.8% compared to the second quarter a year ago. The Company invested $312.4 million in acquisitions, $6.8 million in capital expenditures, and paid dividends totaling $63.9 million for the quarter. Free cash flow* was $140.6 million, an increase of 17.8% compared to the second quarter of 2022.
Demand is favorable to start the third quarter and we continue to maintain a very healthy balance sheet that positions us well to continue to invest in growth programs across our business. Although we continue to navigate a highly uncertain macro-environment, we believe we are positioned well to deliver strong results in 2023.
*Amounts are non-GAAP financial measures. See the schedules below for a discussion of non-GAAP financial metrics including a reconciliation of the most closely correlated GAAP measure.
IMPACT OF ECONOMIC TRENDS
The continued disruption in economic markets due to high inflation, increases in interest rates, business interruptions due to natural disasters, employee shortages, and supply chain issues, all pose challenges which may adversely affect our future performance. The Company continues to carry out various strategies previously implemented to help mitigate the impact of these economic disruptors, including advanced scheduling to compensate for employee and vehicle shortages, and maintaining higher purchasing levels to allow for sufficient inventory.
However, the Company cannot reasonably estimate whether these strategies will help mitigate the impact of these economic disruptors in the future.
The Company’s condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements. The Company considered the impact of economic trends on the assumptions and estimates used in preparing the condensed consolidated financial statements. In the opinion of management, all material adjustments necessary for a fair presentation of the Company’s financial results for the year have been made. These adjustments are of a
ROLLINS, INC. AND SUBSIDIARIES
normal recurring nature but complicated by the continued uncertainty surrounding these macro economic trends. The severity, magnitude and duration of certain economic trends continue to be uncertain and are difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to economic trends and may change materially in future periods.
The extent to which increasing interest rates, inflation and other economic trends will continue to impact the Company’s business, financial condition and results of operations is uncertain. Therefore, we cannot reasonably estimate the full future impacts of these matters at this time.
RESULTS OF OPERATIONS
Quarter ended June 30, 2023, compared to quarter ended June 30, 2022
| Three Months Ended June 30, | ||||||||||||||||||||
| Variance | ||||||||||||||||||||
| (in thousands, except per share data) | 2023 | 2022 | $ | % | ||||||||||||||||
| GAAP Metrics | ||||||||||||||||||||
| Revenues | $ | 820,750 | $ | 714,049 | $ | 106,701 | 14.9 | % | ||||||||||||
| Gross profit (1) | $ | 436,559 | $ | 377,269 | $ | 59,290 | 15.7 | % | ||||||||||||
| Gross profit margin (1) | 53.2 | % | 52.8 | % | 40 bps | |||||||||||||||
| Operating income | $ | 154,789 | $ | 134,677 | $ | 20,112 | 14.9 | % | ||||||||||||
| Operating income margin | 18.9 | % | 18.9 | % | 0 bps | |||||||||||||||
| Net income | $ | 110,143 | $ | 101,620 | $ | 8,523 | 8.4 | % | ||||||||||||
| EPS | $ | 0.22 | $ | 0.21 | $ | 0.01 | 4.8 | % | ||||||||||||
| Operating cash flow | $ | 147,413 | $ | 127,285 | 20,128 | 15.8 | % | |||||||||||||
| Non-GAAP Metrics | ||||||||||||||||||||
| Adjusted operating income (2) | $ | 160,050 | $ | 134,677 | $ | 25,373 | 18.8 | % | ||||||||||||
| Adjusted operating margin (2) | 19.5 | % | 18.9 | % | 60 bps | |||||||||||||||
| Adjusted net income (2) | $ | 114,057 | $ | 101,620 | $ | 12,437 | 12.2 | % | ||||||||||||
| Adjusted EPS (2) | $ | 0.23 | $ | 0.21 | $ | 0.02 | 9.5 | % | ||||||||||||
| Adjusted EBITDA (2) | $ | 183,294 | $ | 159,193 | $ | 24,101 | 15.1 | % | ||||||||||||
| Adjusted EBITDA margin (2) | 22.3 | % | 22.3 | % | 0 bps | |||||||||||||||
| Free cash flow (2) | $ | 140,638 | $ | 119,399 | $ | 21,239 | 17.8 | % |
(1) Exclusive of depreciation and amortization
(2) Amounts are non-GAAP financial measures. See "Non-GAAP Financial Measures" of this Form 10-Q for a discussion of non-GAAP financial metrics including a reconciliation of the most closely correlated GAAP measure.
ROLLINS, INC. AND SUBSIDIARIES
Revenues
The following presents a summary of revenues by product and service offering and revenues by geography:
Revenues for the quarter ended June 30, 2023 were $820.8 million, an increase of $106.7 million, or 14.9%, from 2022 revenues of $714.0 million. Organic revenue* growth was 7.7% with acquisitions adding 7.2% in the quarter. The stronger U.S. Dollar versus the same quarter a year ago reduced current revenues by 30 basis points. The currency headwind was primarily related to a stronger U.S. Dollar versus the Canadian Dollar. Comparing 2023 to 2022, residential pest control revenue increased 19%, commercial pest control revenue increased 11% and termite and ancillary services grew 14%. The Company’s foreign operations accounted for approximately 7% of total revenues for the quarters ended June 30, 2023, and 2022.
On a month-to-month basis, our growth was robust in May before slowing in June. We are back on a healthy trajectory now in July, and that provides a sense of optimism to start the third quarter.
ROLLINS, INC. AND SUBSIDIARIES
Revenues are impacted by the seasonal nature of the Company’s pest and termite control services. The increase in pest activity, as well as the metamorphosis of termites in the spring and summer (the occurrence of which is determined by the change in seasons), has historically resulted in an increase in the Company’s revenues as evidenced by the following chart:
| Consolidated Net Revenues | |||||||||||||||||
| (in thousands) | 2023 | 2022 | 2021 | ||||||||||||||
| First Quarter | $ | 658,015 | $ | 590,680 | $ | 535,554 | |||||||||||
| Second Quarter | 820,750 | 714,049 | 638,204 | ||||||||||||||
| Third Quarter | — | 729,704 | 650,199 | ||||||||||||||
| Fourth Quarter | — | 661,390 | 600,343 | ||||||||||||||
| Year to date | $ | 1,478,765 | $ | 2,695,823 | $ | 2,424,300 |
Gross Profit (exclusive of Depreciation and Amortization)
Gross profit for the quarter ended June 30, 2023, was $436.6 million, an increase of $59.3 million, or 15.7%, compared to $377.3 million for the quarter ended June 30, 2022. Gross margin was 53.2% in 2023 compared to 52.8% in 2022. Gross profit remains strong, and we saw good performance on gross profit as pricing more than offset inflationary pressures.
There are four categories of costs that comprise the majority of cost of services provided: people, materials and supplies, fleet, and insurance and claims. We saw favorable results as a percentage of sales in people, as well as fleet, and materials and supplies, while insurance and legacy claims related primarily to auto accidents continue to be a headwind to quarterly margins.
While the acquisition of Fox Pest Control ("Fox") was accretive to quarterly gross margin, we are making progress on gross margin across our family of brands.
Sales, General and Administrative
For the quarter ended June 30, 2023, SG&A expenses increased $35.3 million, or 16.1%, compared to the quarter ended June 30, 2022. As a percentage of revenue, SG&A increased to 31.1% from 30.8% in the prior year.
There are three categories of costs that comprise the majority of SG&A: people costs, customer acquisition related costs, and insurance and claims. In the quarter, we saw favorable results as a percentage of sales in people, while insurance and legacy claims related primarily to auto accidents continued to be a headwind to margins. We invested more heavily in the quarter in customer acquisition costs to drive improved revenue growth while insurance and claims activity was negatively impacted by a less favorable insurance market combined with less favorable legacy auto claims experience and settlement activity.
The second and third quarters represent peak season for our business and we expect advertising spend, especially on a dollar basis, to be higher to drive customer acquisition during these periods.
We are actively evaluating a number of streamlining initiatives that are aimed at improving the effectiveness of our corporate office and supporting functions. These measures are aimed at modernizing these functions while improving productivity.
Depreciation and Amortization
For the quarter ended June 30, 2023, depreciation and amortization increased $3.8 million, or 17.0%, compared to the quarter ended June 30, 2022. The increase was due to higher amortization of intangible assets from acquisitions, most notably Fox Pest Control, offset by lower depreciation of operating equipment and internal-use software.
Operating Income
For the quarter ended June 30, 2023, operating income increased $20.1 million or 14.9% compared to the prior year.
As a percentage of revenue, operating income was consistent at 18.9%. Operating margin was driven by the pricing actions discussed above which helped provide improved leverage across a number of categories of the income statement as
ROLLINS, INC. AND SUBSIDIARIES
discussed in gross profit and SG&A areas above, offset by higher depreciation and amortization associated with our acquisition of Fox and insurance settlement and claims costs related to legacy auto claims.
Interest Expense, Net
During the quarter ended June 30, 2023, interest expense, net increased $3.9 million compared to the prior year, primarily due to the higher average debt balance, as well as the increase in weighted average interest rates in 2023 compared to 2022. The increase was driven primarily by the increased debt associated with the acquisition of Fox.
We expect interest expense to continue to be elevated in the remainder of the year as we service the higher level of debt as a result of the Fox acquisition.
Other Income, Net
During the quarter ended June 30, 2023, other income decreased $0.9 million primarily due to lower gains on asset sales.
Income Taxes
The Company’s effective tax rate increased to 27.1% in the second quarter of 2023, compared to 25.1% in 2022. The rate was higher due to foreign income taxes compared to the prior year.
Six months ended June 30, 2023 compared to six months ended June 30, 2022
| Six Months Ended June 30, | ||||||||||||||||||||
| Variance | ||||||||||||||||||||
| (in thousands, except per share data) | 2023 | 2022 | $ | % | ||||||||||||||||
| GAAP Metrics | ||||||||||||||||||||
| Revenues | $ | 1,478,765 | $ | 1,304,729 | $ | 174,036 | 13.3 | % | ||||||||||||
| Gross profit (1) | $ | 767,732 | $ | 672,571 | $ | 95,161 | 14.1 | % | ||||||||||||
| Gross profit margin (1) | 51.9 | % | 51.5 | % | 40 bps | |||||||||||||||
| Operating income | $ | 267,029 | $ | 228,067 | $ | 38,962 | 17.1 | % | ||||||||||||
| Operating income margin | 18.1 | % | 17.5 | % | 60 bps | |||||||||||||||
| Net income | $ | 198,377 | $ | 175,386 | $ | 22,991 | 13.1 | % | ||||||||||||
| EPS | $ | 0.40 | $ | 0.36 | $ | 0.04 | 11.1 | % | ||||||||||||
| Operating cash flow | $ | 248,186 | $ | 214,817 | $ | 33,369 | 15.5 | % | ||||||||||||
| Non-GAAP Metrics | ||||||||||||||||||||
| Adjusted operating income (2) | $ | 272,290 | $ | 228,067 | $ | 44,223 | 19.4 | % | ||||||||||||
| Adjusted operating margin (2) | 18.4 | % | 17.5 | % | 90 bps | |||||||||||||||
| Adjusted net income (2) | $ | 202,291 | $ | 175,386 | $ | 26,905 | 15.3 | % | ||||||||||||
| Adjusted EPS (2) | $ | 0.41 | $ | 0.36 | $ | 0.05 | 13.9 | % | ||||||||||||
| Adjusted EBITDA (2) | $ | 322,750 | $ | 276,989 | $ | 45,761 | 16.5 | % | ||||||||||||
| Adjusted EBITDA margin (2) | 21.8 | % | 21.2 | % | 60 bps | |||||||||||||||
| Free cash flow (2) | $ | 233,775 | $ | 198,936 | $ | 34,839 | 17.5 | % |
(1) Exclusive of depreciation and amortization
(2) Amounts are non-GAAP financial measures. See "Non-GAAP Financial Measures" of this Form 10-Q for a discussion of non-GAAP financial metrics including a reconciliation of the most closely correlated GAAP measure.
ROLLINS, INC. AND SUBSIDIARIES
Revenues
The following presents a summary of revenues by product and service offering and revenues by geography:
Revenues for the six months ended June 30, 2023, were $1.5 billion, an increase of $174.0 million, or 13.3%, from 2022 revenues of $1.3 billion. Organic revenue* growth was 8.4% and acquisitions added 4.9% in the six months ended June 30, 2023. The stronger U.S. Dollar reduced year-to-date revenues by 40 basis points versus the same period a year ago. The currency headwind was primarily related to a stronger U.S. Dollar versus the Canadian Dollar. Comparing 2023 to 2022, residential pest control revenue increased 14%, commercial pest control revenue increased 11% and termite and ancillary services grew 14%. The Company’s foreign operations accounted for approximately 7% of total revenues for the six months ended June 30, 2023, and 2022.
Gross Profit (exclusive of Depreciation and Amortization)
Gross profit for the six months ended June 30, 2023, was $767.7 million, an increase of $95.2 million, or 14.1%, compared to $672.6 million for the six months ended June 30, 2022. Gross margin was 51.9% in 2023 compared to 51.5% in 2022.
ROLLINS, INC. AND SUBSIDIARIES
Gross profit remains strong, and we saw good performance as pricing more than offset inflationary pressures. We pulled our price increase forward by a month this year, and we were also more consistent in raising pricing across all our brands.
We saw favorable results in cost of services provided for the six months ended June 30, 2023, as people related costs, fleet costs, and materials and supplies costs were lower as a percentage of sales, while insurance and legacy claims related primarily to auto accidents continue to be a headwind to margins.
Sales, General and Administrative
For the six months ended June 30, 2023, sales, general and administrative (SG&A) expenses increased $53.0 million, or 13.3%, compared to the six months ended June 30, 2022. As a percentage of revenue SG&A decreased slightly to 30.5% from 30.6% in the prior year.
Despite investing in additional people, advertising and other customer facing activities to drive growth, we saw an improvement in SG&A as a percentage of sales as we continue to manage our cost structure. Insurance and legacy claims related primarily to auto accidents continue to be a headwind in costs, as well as a percentage of sales.
Depreciation and Amortization
For the six months ended June 30, 2023, depreciation and amortization increased $3.2 million, or 7.0%, compared to the six months ended June 30, 2022. The increase was due to higher amortization of intangible assets from acquisitions, most notably Fox, offset by lower depreciation of operating equipment and internal-use software.
Operating Income
For the six months ended June 30, 2023, operating income increased $39.0 million, or 17.1%, compared to the six months ended June 30, 2022. As a percentage of revenue, operating income increased to 18.1% from 17.5% in the prior year. The improvement in operating income as a percentage of sales is driven by the pricing actions discussed above, which helped provide improved leverage across a number of categories of the income statement. These improvements were partially offset by higher insurance and claims costs from legacy auto claims.
Interest Expense, Net
For the six months ended June 30, 2023, interest expense, net increased $3.8 million, compared to the six months ended June 30, 2022, due to the increase in the average debt balance associated primarily with the acquisition of Fox and the increase in weighted average interest rates.
We expect interest expense to continue to be elevated in the remainder of the year as we service the higher level of debt as a result of the Fox acquisition.
Other Income, Net
During the six months ended June 30, 2023, other income increased $2.5 million compared to the six months ended June 30, 2022, due to gains on asset sales.
Income Taxes
During the six months ended June 30, 2023, the Company’s effective tax rate increased to 25.8% compared to 23.7% in 2022. The rate was higher due to foreign income taxes compared to the prior year.
ROLLINS, INC. AND SUBSIDIARIES
Non-GAAP Financial Measures
Reconciliation of GAAP and non-GAAP Financial Measures
The Company has used the non-GAAP financial measures of organic revenues, adjusted operating income, adjusted operating income margin, adjusted net income, and adjusted earnings per share (“EPS”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, and free cash flow in this Form 10-Q. Organic revenue is calculated as revenue less acquisition revenue. Acquisition revenue is based on the trailing 12-month revenue of our acquired entities. These measures should not be considered in isolation or as a substitute for revenues, net income, earnings per share or other performance measures prepared in accordance with GAAP.
Management uses adjusted operating income, adjusted operating income margin, adjusted net income, adjusted EPS, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, and free cash flow as measures of operating performance because this measure allows the Company to compare performance consistently over various periods. Management also uses organic revenues to compare revenues over various periods excluding the impact of acquisitions.
A non-GAAP financial measure is a numerical measure of financial performance, financial position, or cash flows that either 1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows, or 2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.
ROLLINS, INC. AND SUBSIDIARIES
Set forth below is a reconciliation of non-GAAP financial measures with their most comparable GAAP measures (in thousands, except per share data).
| Three Months Ended June 30, | Variance | Six Months Ended June 30, | Variance | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 (3) | $ | % | 2023 | 2022 (3) | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Reconciliation of Revenues to Organic Revenues | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 820,750 | $ | 714,049 | 106,701 | 14.9 | $ | 1,478,765 | $ | 1,304,729 | 174,036 | 13.3 | |||||||||||||||||||||||||||||||||||
| Revenue growth from acquisitions | (51,148) | — | (51,148) | — | (64,302) | — | (64,302) | — | |||||||||||||||||||||||||||||||||||||||
| Organic revenues | $ | 769,602 | $ | 714,049 | 55,553 | 7.7 | $ | 1,414,463 | $ | 1,304,729 | 109,734 | 8.4 | |||||||||||||||||||||||||||||||||||
| Reconciliation of Operating Income to Adjusted Operating Income and Adjusted Operating Income Margin | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 154,789 | $ | 134,677 | $ | 267,029 | $ | 228,067 | |||||||||||||||||||||||||||||||||||||||
| Fox acquisition-related expenses (1) | 5,261 | — | 5,261 | — | |||||||||||||||||||||||||||||||||||||||||||
| Adjusted operating income | $ | 160,050 | $ | 134,677 | 25,373 | 18.8 | $ | 272,290 | $ | 228,067 | 44,223 | 19.4 | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 820,750 | $ | 714,049 | $ | 1,478,765 | $ | 1,304,729 | |||||||||||||||||||||||||||||||||||||||
| Operating income margin | 18.9 | % | 18.9 | % | 18.1 | % | 17.5 | % | |||||||||||||||||||||||||||||||||||||||
| Adjusted operating income margin | 19.5 | % | 18.9 | % | 18.4 | % | 17.5 | % | |||||||||||||||||||||||||||||||||||||||
| Reconciliation of Net Income to Adjusted Net Income and Adjusted EPS | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 110,143 | $ | 101,620 | $ | 198,377 | $ | 175,386 | |||||||||||||||||||||||||||||||||||||||
| Fox acquisition-related expenses (1) | 5,261 | — | 5,261 | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax impact of adjustments (2) | (1,347) | — | (1,347) | — | |||||||||||||||||||||||||||||||||||||||||||
| Adjusted net income | $ | 114,057 | $ | 101,620 | 12,437 | 12.2 | $ | 202,291 | $ | 175,386 | 26,905 | 15.3 | |||||||||||||||||||||||||||||||||||
| Adjusted EPS - basic and diluted | $ | 0.23 | $ | 0.21 | $ | 0.41 | $ | 0.36 | |||||||||||||||||||||||||||||||||||||||
| Weighted average shares outstanding - basic | 492,700 | 492,327 | 492,593 | 492,270 | |||||||||||||||||||||||||||||||||||||||||||
| Weighted average shares outstanding - diluted | 492,891 | 492,440 | 492,764 | 492,382 | |||||||||||||||||||||||||||||||||||||||||||
| Reconciliation of Net Income to EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 110,143 | $ | 101,620 | $ | 198,377 | $ | 175,386 | |||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 26,439 | 22,605 | 48,941 | 45,732 | |||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 4,785 | 880 | 5,250 | 1,448 | |||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 40,880 | 34,088 | 69,135 | 54,423 | |||||||||||||||||||||||||||||||||||||||||||
| EBITDA | $ | 182,247 | $ | 159,193 | 23,054 | 14.5 | $ | 321,703 | $ | 276,989 | 44,714 | 16.1 | |||||||||||||||||||||||||||||||||||
| Fox acquisition-related expenses (1) | 1,047 | — | 1,047 | — | |||||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 183,294 | $ | 159,193 | 24,101 | 15.1 | $ | 322,750 | $ | 276,989 | 45,761 | 16.5 | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 820,750 | $ | 714,049 | $ | 1,478,765 | $ | 1,304,729 | |||||||||||||||||||||||||||||||||||||||
| EBITDA margin | 22.2 | % | 22.3 | % | 21.8 | % | 21.2 | % | |||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA margin | 22.3 | % | 22.3 | % | 21.8 | % | 21.2 | % | |||||||||||||||||||||||||||||||||||||||
| Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow | |||||||||||||||||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 147,413 | $ | 127,285 | $ | 248,186 | $ | 214,817 | |||||||||||||||||||||||||||||||||||||||
| Capital expenditures | (6,775) | (7,886) | (14,411) | (15,881) | |||||||||||||||||||||||||||||||||||||||||||
| Free cash flow | $ | 140,638 | $ | 119,399 | 21,239 | 17.8 | $ | 233,775 | $ | 198,936 | 34,839 | 17.5 |
(1) Consists of expenses resulting from the amortization of certain intangible assets and adjustments to the fair value of contingent consideration resulting from the acquisition of Fox Pest Control during the quarter. While we exclude such expenses in this non-GAAP measure, the revenue from the acquired company is reflected in this non-GAAP measure and the acquired assets contribute to revenue generation.
(2) The tax effect of the adjustments is calculated using the applicable statutory tax rates for the respective periods.
(3) Certain condensed consolidated financial statement amounts relative to the prior period have been revised as detailed in our annual report on Form 10-K for the year ended December 31, 2022. The impact of this revision on the Company's previously reporting condensed consolidated financial statements for the three and six months ended June 30, 2022, includes a decrease to depreciation and amortization expense of $1.7 million and $3.4 million, respectively, and an increase in the provision for income tax expense of $0.4 million and $0.8 million, respectively. This revision affects these specific line items and subtotals within the consolidated statements of income and cash flows.
ROLLINS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Flow
The Company’s $154.7 million of total cash at June 30, 2023 is held at various banking institutions. Approximately $79.3 million is held in cash accounts at international bank institutions and the remaining $75.4 million is primarily held in Federal Deposit Insurance Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times exceed federally insured amounts.
The Company’s international business is expanding, and we intend to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies. The Company expects to repatriate unremitted foreign earnings from our foreign subsidiaries. The Company asserts that we continue to be permanently reinvested with respect to our investments in our foreign subsidiaries.
On February 24, 2023, the Company entered into a revolving 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.
The Credit Agreement provides for a $1.0 billion revolving 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. 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. Refer to Note 9. Debt, of the Notes to Condensed Consolidated Financial Statements for further details.
As of June 30, 2023, the Company had outstanding borrowings of $340.0 million under the Credit Facility. The aggregate effective interest rate on the debt outstanding as of June 30, 2023, was 6.5%. As of December 31, 2022, the Company had outstanding borrowings of $54.9 million under the previous Term Loan and there were no outstanding borrowings under the previous Revolving Commitment. The aggregate effective interest rate on the debt outstanding as of December 31, 2022 was 5.1%.
The Company maintains $71.7 million in letters of credit as of June 30, 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.
The Company believes its current cash and cash equivalents balances, future cash flows expected to be generated from operating activities, and available borrowings under its Credit Facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future.
The following table sets forth a summary of our cash flows from operating, investing and financing activities for the six month periods presented:
| Six Months Ended June 30, | Variance | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | $ | % | |||||||||||||||||||
| Net cash provided by operating activities | $ | 248,186 | $ | 214,817 | 33,369 | 15.5 | |||||||||||||||||
| Net cash used in investing activities | (331,622) | (62,032) | (269,590) | N/M | |||||||||||||||||||
| Net cash provided by (used in) financing activities | 140,195 | (30,640) | 170,835 | N/M | |||||||||||||||||||
| Effect of exchange rate on cash | 2,642 | (6,482) | 9,124 | N/M | |||||||||||||||||||
| Net increase in cash and cash equivalents | $ | 59,401 | $ | 115,663 | (56,262) | (48.6) |
N/M - calculation not meaningful
ROLLINS, INC. AND SUBSIDIARIES
Cash Provided by Operating Activities
Cash from operating activities is the principal source of cash generation for our businesses. The most significant source of cash in our cash flow from operations is customer-related activities, the largest of which is collecting cash resulting from services sold. The most significant operating use of cash is to pay our suppliers, employees, and tax authorities. The Company’s operating activities generated net cash of $248.2 million and $214.8 million for the six months ended June 30, 2023, and 2022, respectively. The $33.4 million increase was driven primarily by strong operating results and the timing of cash receipts and cash payments to vendors, employees, and tax and regulatory authorities.
Cash Used in Investing Activities
The Company’s investing activities used $331.6 million and $62.0 million for the six months ended June 30, 2023, and 2022, respectively. Cash paid for acquisitions totaled $327.9 million for the six months ended June 30, 2023, as compared to $49.6 million for the six months ended June 30, 2022, driven primarily by the acquisition of Fox Pest Control. The Company invested $14.4 million in capital expenditures during the year, offset by $10.2 million in cash proceeds from the sale of assets, compared with $15.9 million of capital expenditures and $3.3 million in cash proceeds from asset sales in 2022. The Company’s investing activities were funded through existing cash balances, operating cash flows, and borrowings under the Credit Facility.
Cash Provided by or Used in Financing Activities
Cash provided by financing activities was $140.2 million during the six months ended June 30, 2023, while cash of $30.6 million was used by financing activities in the prior year. A total of $128.0 million was paid in cash dividends ($0.26 per share) during the six months ended June 30, 2023, compared to $98.4 million in cash dividends paid ($0.20 per share) during the six months ended June 30, 2022. The Company made net borrowings under its credit agreements of $285.0 million during the six months ended June 30, 2023, compared to net borrowings of $80.0 million during 2022.
In 2012, the Company’s Board of Directors authorized the purchase of up to 5 million shares of the Company’s common stock. After adjustments for stock splits, the total authorized shares under the share repurchase plan are 16.9 million shares. The Company did not repurchase shares of its common stock on the open market during the first six months of 2023 nor during the same period in 2022. However, in 2023 the Company purchased shares on behalf of employees for the Employee Stock Purchase Plan. In total, 11.4 million additional shares may be purchased under the share repurchase program. The Company repurchased $11.8 million and $7.0 million of common stock for the six months ended June 30, 2023, and 2022, respectively, from employees for the payment of taxes on vesting restricted shares.
In addition, the Form S-3 on file with the SEC registers $1.5 billion of the Company’s common stock, preferred stock, debt securities, depositary shares, warrants, rights, purchase contracts and units for future issuance. The Company may offer and sell some or all of such securities from to time or to or through underwriters, brokers or dealers, directly to one or more other purchasers, through a block trade, through agents on a best-efforts basis, through a combination of any of the above methods of sale or through other types of transactions described in the Form S-3. The Company has not sold any securities as of the date of this Form 10-Q.
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, and tax and other regulatory matters relating to, and arising out of, our businesses and our operations. These matters may involve, but are not limited to, allegations that our services or vehicles caused damage or injury, claims that our services did not achieve the desired results, claims related to acquisitions and allegations by federal, state or local authorities, 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. We are also involved from time to time in certain environmental and tax matters primarily arising in the normal course of business. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.
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
ROLLINS, INC. AND SUBSIDIARIES
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.
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.
CRITICAL ACCOUNTING ESTIMATES
Except as described below, there have been no significant changes in our identified critical accounting estimates as disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" of our 2022 Form 10-K. During the second quarter of 2023, we concluded to add business combination accounting as one of our critical accounting estimates.
Business Combinations
We account for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition date fair value. In valuing certain acquired assets and liabilities, fair value estimates use Level 3 inputs, including future expected cash flows and discount rates. Goodwill is measured as the excess of consideration transferred over the fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments arising from new facts and circumstances are recorded to the consolidated statements of operations. The results of operations of acquisitions are reflected in our consolidated financial statements from the date of acquisition.
Accounting for business combinations requires our management to make significant estimates and assumptions about intangible assets, assets and obligations assumed, contingent consideration, and other contingencies. Critical inputs and assumptions in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer contracts; the acquired Company’s trademarks & tradenames, and competitive position, as well as assumptions about the period of time the acquired trademarks & tradenames will continue to be used in the combined Company’s product portfolio; and discount rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties concerning the business and financial results of Rollins, Inc. We have based these forward-looking statements largely on our current opinions, expectations, beliefs, plans, objectives, assumptions and projections about future events and financial trends affecting the operating results and financial condition of our business. Such forward looking-statements include, but are not limited to, statements regarding: our healthy organic growth trajectory in July and our sense of optimism to start the third quarter; our progress on gross margin across our family of brands; our expectation that advertising spend, especially on a dollar basis, will be higher during our peak season to drive customer acquisition during such period; our expectation that interest expense will continue to be elevated in the remainder of the year as we service the higher level of debt as a result of the Fox acquisition; our belief that the Fox acquisition will expand the Rollins family of brands and drive long term value given Fox’s attractive financial profile and complementary end market exposure; our belief that recognized goodwill from the Fox acquisition and from acquisitions generally is expected to be deductible for tax purposes; our plans to exercise the renewal options on our vehicle leases; our belief that its accounting estimates and assumptions may materially change over time in future periods in response to economic trends; our belief that no pending claim, proceeding or litigation, regulatory
ROLLINS, INC. AND SUBSIDIARIES
action or investigation, either alone or in the aggregate, will have a material adverse effect on our financial position, results of operations or liquidity; our evaluation of pending and threatened claims and establishment of loss contingency reserves based upon outcomes it currently believes to be probable and reasonably estimable; our evaluations of a number of streamlining initiatives that are aimed at improving the effectiveness of our corporate office and supporting functions; our belief that we do not expect the resolution of the alleged violations and information requests from governmental authorities in California for its Orkin and Clark Pest Control operations to have a material adverse effect on our results of operations, financial condition, or cash flows; our belief that it will continue to be involved in various claims, arbitrations, contractual disputes, investigations, and regulatory and litigation matters relating to, and arising out of, its businesses and its operations. the Company’s reasonable certainty that it will exercise the renewal options on its operating leases; our belief that our current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings under our Credit Facility will be sufficient to finance our current operations and obligations, and fund expansion of the business for the foreseeable future; the Company’s ability to remain in compliance with applicable debt covenants under the Credit Facility throughout 2023; our international business expansion efforts and our intent to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies, our expectations to repatriate unremitted foreign earnings from its foreign subsidiaries, and our plans to continue to be permanently reinvested with respect to its investments in our foreign subsidiaries; our belief that no changes in our internal control over financial reporting during the second quarter are reasonably likely to materially affect our internal control over financial reporting; our expectation that total unrecognized compensation cost related to restricted shares and PSUs will be recognized over a weighted average period of approximately 3.3 years; our conclusion that there are no impairments of its goodwill or other intangible assets; our belief that the factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized; our belief that we have adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims; our belief that demand remains favorable to start the third quarter and that we continue to maintain a very healthy balance sheet that positions us well to continue to invest in growth programs across our business; our belief that we are positioned well to deliver strong operating results in 2023; and our belief that continued disruptions in economic markets due to high inflation, increases in interest rates, business interruptions due to natural disasters, employee shortages and supply chain issues, all pose current and future challenges which may adversely affect our future performance, and that we cannot reasonably estimate whether our current strategies will help mitigate the impact of these economic disruptors in the future.
Forward-looking statements are based on information available at the time those statements are made and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements, including, but not limited to, risks regarding: our ability to maintain our competitive position in the pest control industry in the future; our inability to identify, complete or successfully integrate acquisitions or guarantee that any acquisitions will achieve the anticipated financial benefits; our ability to expand into international markets; our ability to maintain and enhance our brands and develop a positive client reputation; labor shortages and/or our ability to attract and retain skilled workers; climate change and unfavorable weather conditions; the effects of a pandemic, including the COVID-19 pandemic; adverse economic conditions; cybersecurity incidents; noncompliance with, changes to, or increased enforcement of federal, state and local laws and regulations pertaining to environmental, public health and safety matters, including those related to the pest control industry; and our capital and ownership structure. Such risks and uncertainties are beyond our ability to control, and in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements.
The reader should consider the factors discussed above and more specifically under Item 1A., “Risk Factors,” of Part I of the Company’s Annual Report on Form 10 K, filed with the U.S. Securities and Exchange Commission, for the year ended December 31, 2022 (the “2022 Annual Report”) that could cause the Company’s actual results and financial condition to differ materially from estimated results and financial condition. The Company does not undertake to update its forward-looking statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7.A of our 2022 Form 10-K. There were no material changes to our market risk exposure during the six months ended June 30, 2023.
ROLLINS, INC. AND SUBSIDIARIES
Item 4. CONTROLS AND PROCEDURES
The Disclosure Committee, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2023 (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation Date to ensure that the information required to be included in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
During the second quarter, the Company acquired FPC Holdings, LLC (“Fox Pest Control”, or "Fox"). The Company is currently in the process of integrating Fox into its assessment of its internal control over financial reporting. In accordance with the SEC’s published guidance, management’s assessment, and conclusions on the effectiveness of our disclosure controls and procedures as of June 30, 2023, excludes an assessment of the internal control over financial reporting of Fox.
Changes in Internal Controls Over Financial Reporting
Other than as described above with respect to Fox, management’s quarterly evaluation of design and operation of our disclosure controls and procedures as of June 30, 2023 identified no changes in our internal control over financial reporting during the second quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
ROLLINS, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Company and its subsidiaries are involved in, and will continue to be involved in, various claims, arbitrations, contractual disputes, investigations, litigation, and tax and other regulatory matters relating to, and arising out of, our businesses and our operations. These matters may involve, but are not limited to, allegations that our services or vehicles caused damage or injury, claims that our services did not achieve the desired results, claims related to acquisitions and allegations by federal, state or local authorities, 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. We are also involved from time to time in certain environmental and tax matters primarily arising in the normal course of business. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.
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.
Item 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2022.
ROLLINS, INC. AND SUBSIDIARIES
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Rollins, Inc did not purchase any equity securities reportable under Item 703 of Regulation S-K during the period from April 1, 2023 to June 30, 2023.
| Period | Total number of shares purchased (1) | Weighted- average price paid per share | Total number of shares purchased as part of publicly announced repurchases (2) | Maximum number of shares that may yet be purchased under the repurchase plan (2) | ||||||||||||||||||||||
| April 1 to 30, 2023 | 6,761 | $ | 36.63 | — | 11,415,625 | |||||||||||||||||||||
| May 1 to 31, 2023 | 2,762 | $ | 41.29 | — | 11,415,625 | |||||||||||||||||||||
| June 1 to 30, 2023 | 84 | $ | 39.57 | — | 11,415,625 | |||||||||||||||||||||
| Total | 9,607 | — | 11,415,625 |
(1)Includes shares withheld by the Company in connection with tax withholding obligations of its employees upon vesting of such employees’ equity awards.
(2)The Company has a share repurchase plan, adopted in 2012, to repurchase up to 16.9 million shares of the Company’s common stock. The plan has no expiration date. As of June 30, 2023, the Company had a remaining authorization to repurchase 11.4 million shares of the Company's common stock under this program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ROLLINS, INC. AND SUBSIDIARIES
Item 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
Securities Trading Plans of Directors and Executive Officers
During the three months ended June 30, 2023, the following executive officers entered into, modified or terminated, contracts, instructions or written plans for the sale of the Company’s securities, each of which is intended to satisfy the affirmative defense conditions of Rule 10b5-1 of the Exchange Act, referred to as Rule 10b5-1 trading plans.
| Name and Title | Date of Adoption of the Rule 10b5-1 Trading Plan | Scheduled Expiration Date of the Rule 10b5-1 Trading Plan | Total Amount of Securities to Be Sold | Transactions Pursuant to 10b5-1 Trading Plan | Early Termination of the Rule 10b5-1 Trading Plan | ||||||||||||
| Jerry E. Gahlhoff, Jr. Chief Executive Officer and President | June 12, 2023 | August 30, 2024 | 17,000 | Sales to occur on or after September 11, 2023, if certain limit prices are met | If all 17,000 shares of Company common stock are sold prior to the scheduled expiration date, the trading plan will terminate on such earlier date | ||||||||||||
| Kenneth D. Krause Executive Vice President, Chief Financial Officer and Treasurer | March 13, 2023 | February 28, 2024 | 12,000 | Sales occurred on June 12, 2023, once certain limit prices were met | Immediately after sales occurred, the trading plan terminated on June 12, 2023 | ||||||||||||
| Elizabeth B. Chandler Vice President, General Counsel and Corporate Secretary | June 13, 2023 | June 14, 2024 | 10,000 | Sales to occur on or after February 21, 2024, if certain limit prices are met | If all 10,000 shares of Company common stock are sold prior to the scheduled expiration date, the trading plan will terminate on such earlier date |
In addition to the material terms noted in the table, pursuant to each of these trading plans, in accordance with Rule 10b5-1 of the Exchange Act, there is a mandatory waiting period or “cooling-off period” before the transactions contemplated by each trading plan can begin consisting of the later of (i) ninety days after the adoption date of the applicable trading plan or (ii) two business days following the disclosure of the Company’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which such plan was adopted. In addition, each trading plan disclosed in this Item 5 includes certain representations made by the applicable officer as to (a) the possession of material, non-public information about the Company; (b) the fact that officer is adopting the plan in good faith and will continue to act in good faith with respect to all transactions contemplated by the plan; and (c) the existence of other trading arrangements pursuant to Rule 10b5-1 currently in effect or scheduled to take effect.
ROLLINS, INC. AND SUBSIDIARIES
Item 6. EXHIBITS
+ Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K, Item 601(b)(10)
- Indicates management contract or compensatory plans or arrangements.
** Furnished with this report
ROLLINS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ROLLINS, INC. | ||||||||
| (Registrant) | ||||||||
| Date: July 27, 2023 | By: | /s/ Kenneth D. Krause | ||||||
| Kenneth D. Krause | ||||||||
| Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | ||||||||
| Date: July 27, 2023 | By: | /s/ Traci Hornfeck | ||||||
| Traci Hornfeck | ||||||||
| Chief Accounting Officer (Principal Accounting Officer) |