filings.toolsItem 1. FINANCIAL STATEMENTS
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Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 2023, AND DECEMBER 31, 2022
(in thousands except share data)
(unaudited)
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 142,247 | $ | 95,346 | |||||||
| Trade receivables, net of allowance for expected credit losses of $13,324 and $14,073, respectively | 198,540 | 155,759 | |||||||||
| Financed receivables, short-term, net of allowance for expected credit losses of $2,260 and $1,768, respectively | 38,104 | 33,618 | |||||||||
| Materials and supplies | 33,223 | 29,745 | |||||||||
| Other current assets | 64,676 | 34,151 | |||||||||
| Total current assets | 476,790 | 348,619 | |||||||||
| Equipment and property, net of accumulated depreciation of $353,394 and $333,298, respectively | 124,381 | 128,046 | |||||||||
| Goodwill | 1,053,965 | 846,704 | |||||||||
| Customer contracts, net | 402,349 | 298,559 | |||||||||
| Trademarks & tradenames, net | 150,215 | 111,646 | |||||||||
| Other intangible assets, net | 7,335 | 8,543 | |||||||||
| Operating lease right-of-use assets | 301,774 | 277,355 | |||||||||
| Financed receivables, long-term, net of allowance for expected credit losses of $3,817 and $3,200, respectively | 73,925 | 63,523 | |||||||||
| Other assets | 49,223 | 39,033 | |||||||||
| Total assets | $ | 2,639,957 | $ | 2,122,028 | |||||||
| LIABILITIES | |||||||||||
| Accounts payable | $ | 44,421 | $ | 42,796 | |||||||
| Accrued insurance - current | 46,631 | 39,534 | |||||||||
| Accrued compensation and related liabilities | 99,228 | 99,251 | |||||||||
| Unearned revenues | 183,389 | 158,092 | |||||||||
| Operating lease liabilities - current | 88,668 | 84,543 | |||||||||
| Current portion of long-term debt | — | 15,000 | |||||||||
| Other current liabilities | 119,359 | 54,568 | |||||||||
| Total current liabilities | 581,696 | 493,784 | |||||||||
| Accrued insurance, less current portion | 43,912 | 38,350 | |||||||||
| Operating lease liabilities, less current portion | 217,861 | 196,888 | |||||||||
| Long-term debt | 596,642 | 39,898 | |||||||||
| Other long-term accrued liabilities | 97,003 | 85,911 | |||||||||
| Total liabilities | 1,537,114 | 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, 484,037,858 and 492,447,997 shares issued and outstanding, respectively | 484,038 | 492,448 | |||||||||
| Additional paid in capital | 123,849 | 119,242 | |||||||||
| Accumulated other comprehensive loss | (35,186) | (31,562) | |||||||||
| Retained earnings | 530,142 | 687,069 | |||||||||
| Total stockholders’ equity | 1,102,843 | 1,267,197 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,639,957 | $ | 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 NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(in thousands except per share data)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| REVENUES | |||||||||||||||||||||||
| Customer services | $ | 840,427 | $ | 729,704 | $ | 2,319,192 | $ | 2,034,433 | |||||||||||||||
| COSTS AND EXPENSES | |||||||||||||||||||||||
| Cost of services provided (exclusive of depreciation and amortization below) | 388,533 | 348,158 | 1,099,566 | 980,316 | |||||||||||||||||||
| Sales, general and administrative | 244,906 | 213,581 | 696,668 | 612,353 | |||||||||||||||||||
| Restructuring costs | 5,196 | — | 5,196 | — | |||||||||||||||||||
| Depreciation and amortization | 24,668 | 22,561 | 73,609 | 68,293 | |||||||||||||||||||
| Total operating expenses | 663,303 | 584,300 | 1,875,039 | 1,660,962 | |||||||||||||||||||
| OPERATING INCOME | 177,124 | 145,404 | 444,153 | 373,471 | |||||||||||||||||||
| Interest expense, net | 5,547 | 846 | 10,797 | 2,294 | |||||||||||||||||||
| Other (income), net | (493) | (1,980) | (6,226) | (5,170) | |||||||||||||||||||
| CONSOLIDATED INCOME BEFORE INCOME TAXES | 172,070 | 146,538 | 439,582 | 376,347 | |||||||||||||||||||
| PROVISION FOR INCOME TAXES | 44,293 | 37,595 | 113,428 | 92,018 | |||||||||||||||||||
| NET INCOME | $ | 127,777 | $ | 108,943 | $ | 326,154 | $ | 284,329 | |||||||||||||||
| NET INCOME PER SHARE - BASIC AND DILUTED | $ | 0.26 | $ | 0.22 | $ | 0.66 | $ | 0.58 | |||||||||||||||
| Weighted average shares outstanding - basic | 490,775 | 492,316 | 491,980 | 492,285 | |||||||||||||||||||
| Weighted average shares outstanding - diluted | 490,965 | 492,430 | 492,158 | 492,398 | |||||||||||||||||||
| DIVIDENDS PAID PER SHARE | $ | 0.13 | $ | 0.10 | $ | 0.39 | $ | 0.30 |
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 NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(in thousands)
(unaudited)
| Three Months Ending September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| NET INCOME | $ | 127,777 | $ | 108,943 | $ | 326,154 | $ | 284,329 | |||||||||||||||
| Other comprehensive (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments | (6,199) | (12,417) | (3,740) | (26,203) | |||||||||||||||||||
| Unrealized gain (loss) on available for sale securities | 64 | — | 116 | (952) | |||||||||||||||||||
| Other comprehensive (loss), net of tax | (6,135) | (12,417) | (3,624) | (27,155) | |||||||||||||||||||
| Comprehensive income | $ | 121,642 | $ | 96,526 | $ | 322,530 | $ | 257,174 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(in thousands)
(unaudited)
| Common Stock | Paid-in- Capital | Accumulated Other Comprehensive Income / (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 492,821 | $ | 492,821 | $ | 121,005 | $ | (29,051) | $ | 757,450 | $ | 1,342,225 | ||||||||||||||||||||||||
| Net Income | — | — | — | — | 127,777 | 127,777 | |||||||||||||||||||||||||||||
| Other comprehensive income / (loss), net of tax: | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (6,199) | — | (6,199) | |||||||||||||||||||||||||||||
| Unrealized gain on available for sale securities | — | — | — | 64 | — | 64 | |||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (63,809) | (63,809) | |||||||||||||||||||||||||||||
| Stock compensation | (57) | (57) | 6,153 | — | — | 6,096 | |||||||||||||||||||||||||||||
| Employee stock buybacks | (2) | (2) | (510) | — | — | (512) | |||||||||||||||||||||||||||||
| Repurchase and retirement of common stock, including excise tax | (8,724) | (8,724) | (2,799) | — | (291,276) | (302,799) | |||||||||||||||||||||||||||||
| Balance at September 30, 2023 | 484,038 | $ | 484,038 | $ | 123,849 | $ | (35,186) | $ | 530,142 | $ | 1,102,843 |
| Common Stock | Paid-in- Capital | Accumulated Other Comprehensive Income / (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 492,417 | $ | 492,417 | $ | 109,070 | $ | (31,149) | $ | 607,040 | $ | 1,177,378 | ||||||||||||||||||||||||
| Net Income | — | — | — | — | 108,943 | 108,943 | |||||||||||||||||||||||||||||
| Other comprehensive income / (loss), net of tax: | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (12,417) | — | (12,417) | |||||||||||||||||||||||||||||
| Unrealized (losses) on available for sale securities | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (49,201) | (49,201) | |||||||||||||||||||||||||||||
| Stock compensation | 55 | 55 | 4,902 | — | — | 4,957 | |||||||||||||||||||||||||||||
| Employee stock buybacks | — | — | 23 | — | — | 23 | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 492,472 | $ | 492,472 | $ | 113,995 | $ | (43,566) | $ | 666,782 | $ | 1,229,683 |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(in thousands)
(unaudited)
| Common Stock | Paid-in- Capital | Accumulated Other Comprehensive Income / (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 492,448 | $ | 492,448 | $ | 119,242 | $ | (31,562) | $ | 687,069 | $ | 1,267,197 | ||||||||||||||||||||||||
| Net Income | — | — | — | — | 326,154 | 326,154 | |||||||||||||||||||||||||||||
| Other comprehensive income / (loss), net of tax: | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (3,740) | — | (3,740) | |||||||||||||||||||||||||||||
| Unrealized gains on available for sale securities | — | — | — | 116 | — | 116 | |||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (191,805) | (191,805) | |||||||||||||||||||||||||||||
| Stock compensation | 586 | 586 | 17,841 | — | — | 18,427 | |||||||||||||||||||||||||||||
| Employee stock buybacks | (272) | (272) | (10,435) | — | — | (10,707) | |||||||||||||||||||||||||||||
| Repurchase and retirement of common stock, including excise tax | (8,724) | (8,724) | (2,799) | — | (291,276) | (302,799) | |||||||||||||||||||||||||||||
| Balance at September 30, 2023 | 484,038 | $ | 484,038 | $ | 123,849 | $ | (35,186) | $ | 530,142 | $ | 1,102,843 |
| Common Stock | Paid-in- Capital | Accumulated Other Comprehensive Income / (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 491,911 | $ | 491,911 | $ | 105,629 | $ | (16,411) | $ | 530,088 | $ | 1,111,217 | ||||||||||||||||||||||||
| Net Income | — | — | — | — | 284,329 | 284,329 | |||||||||||||||||||||||||||||
| Other comprehensive income / (loss), net of tax: | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (26,203) | — | (26,203) | |||||||||||||||||||||||||||||
| Unrealized (losses) on available for sale securities | — | — | — | (952) | — | (952) | |||||||||||||||||||||||||||||
| Cash dividends | — | — | — | — | (147,635) | (147,635) | |||||||||||||||||||||||||||||
| Stock compensation | 786 | 786 | 15,128 | — | — | 15,914 | |||||||||||||||||||||||||||||
| Employee stock buybacks | (225) | (225) | (6,762) | — | — | (6,987) | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 492,472 | $ | 492,472 | $ | 113,995 | $ | (43,566) | $ | 666,782 | $ | 1,229,683 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 326,154 | $ | 284,329 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 73,609 | 68,293 | |||||||||
| Stock-based compensation expense | 18,427 | 15,914 | |||||||||
| Provision for expected credit losses | 17,484 | 13,593 | |||||||||
| Gain on sale of assets, net | (6,226) | (5,170) | |||||||||
| Provision for deferred income taxes | 144 | 3,408 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade accounts receivable and other accounts receivable | (58,114) | (40,872) | |||||||||
| Financing receivables | (14,887) | (21,021) | |||||||||
| Materials and supplies | (2,729) | 295 | |||||||||
| Other current assets | (30,496) | (3,580) | |||||||||
| Accounts payable and accrued expenses | 37,428 | (669) | |||||||||
| Unearned revenue | 18,033 | 19,655 | |||||||||
| Other long-term assets and liabilities | (3,286) | 8,362 | |||||||||
| Net cash provided by operating activities | 375,541 | 342,537 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Acquisitions, net of cash acquired | (349,312) | (110,418) | |||||||||
| Capital expenditures | (21,279) | (22,921) | |||||||||
| Proceeds from sale of assets | 10,214 | 9,822 | |||||||||
| Other investing activities, net | (1,957) | 139 | |||||||||
| Net cash (used in) investing activities | (362,334) | (123,378) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Payment of contingent consideration | (9,288) | (11,663) | |||||||||
| Borrowings under term loan | — | 252,000 | |||||||||
| Borrowings under revolving commitment | 980,000 | 11,000 | |||||||||
| Repayments of term loan | (55,000) | (175,000) | |||||||||
| Repayments of revolving commitment | (381,000) | (118,000) | |||||||||
| Payment of dividends | (191,805) | (147,635) | |||||||||
| Cash paid for common stock purchased | (314,914) | (6,987) | |||||||||
| Other financing activities, net | 5,750 | — | |||||||||
| Net cash provided by (used in) financing activities | 33,743 | (196,285) | |||||||||
| Effect of exchange rate changes on cash | (49) | (6,299) | |||||||||
| Net increase in cash and cash equivalents | 46,901 | 16,575 | |||||||||
| Cash and cash equivalents at beginning of period | 95,346 | 105,301 | |||||||||
| Cash and cash equivalents at end of period | $ | 142,247 | $ | 121,876 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | 9,746 | $ | 3,229 | |||||||
| Cash paid for income taxes, net | $ | 125,878 | $ | 104,974 | |||||||
| Non-cash additions to operating lease right-of-use assets | $ | 99,061 | $ | 92,365 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
NOTE 1. BASIS OF PREPARATION
Basis of Preparation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, the instructions to Form 10-Q and applicable sections of Securities and Exchange Commission ("SEC") regulation S-X, and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. There have been no material changes in the Company’s significant accounting policies or the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Rollins, Inc. (including its subsidiaries unless the context otherwise requires, “Rollins,” “we,” “us,” “our,” or the “Company”) for the year ended December 31, 2022. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2022 Annual Report on Form 10-K.
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 quarter have been made. These adjustments are of a normal recurring nature but complicated by the continued uncertainty surrounding economic trends. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of results for the entire year. 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.
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 reported condensed consolidated financial statements for the three and nine months ended September 30, 2022, includes a decrease to depreciation and amortization expense of $1.7 million and $5.2 million, respectively, and an increase in the provision for income tax expense of $0.4 million and $1.2 million, respectively. This revision affects these specific line items and subtotals within the consolidated statements of income, comprehensive income, stockholders' equity and cash flows.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting standards
In March 2022, the Financial Accounting Standards Board ("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.
NOTE 3. 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.
ROLLINS, INC. AND SUBSIDIARIES
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 $81.0 million and net earnings of $1.9 million from April 1, 2023, through the period end date, September 30, 2023.
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).
| September 30, 2023 | |||||
| Cash | $ | 4,560 | |||
| Accounts receivable | 1,542 | ||||
| Materials and supplies | 431 | ||||
| Operating lease right-of-use assets | 8,689 | ||||
| Other current assets | 487 | ||||
| Goodwill | 188,176 | ||||
| Customer contracts | 118,000 | ||||
| Trademarks & tradenames | 38,000 | ||||
| Current liabilities | (5,538) | ||||
| 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 nine months ended September 30, 2023, we recognized a charge of $2.1 million related to adjustments to the fair value of 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 6. Goodwill and 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.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Revenues | $ | 840,427 | $ | 765,677 | $ | 2,348,100 | $ | 2,125,738 | |||||||||||||||
| Net income | 126,294 | 108,787 | 314,279 | 278,708 |
ROLLINS, INC. AND SUBSIDIARIES
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 also made 18 other acquisitions during the nine months ended September 30, 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):
| September 30, 2023 | |||||
| Cash | $ | 531 | |||
| Accounts receivable | 988 | ||||
| Materials and supplies | 428 | ||||
| Other current assets | 116 | ||||
| Equipment and property | 4,116 | ||||
| Goodwill | 21,833 | ||||
| Customer contracts | 33,678 | ||||
| Other intangible assets | 624 | ||||
| Current liabilities | (249) | ||||
| Unearned revenue | (1,160) | ||||
| Other assets and liabilities, net | (3,113) | ||||
| Assets acquired and liabilities assumed | $ | 57,792 |
Included in the total consideration of $57.8 million are acquisition holdback liabilities of $6.2 million.
Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. The factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized. 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.
NOTE 4. REVENUE
Revenue, classified by the major geographic areas in which our customers are located, was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||
| United States | $ | 782,073 | $ | 676,408 | $ | 2,155,237 | $ | 1,884,571 | |||||||||||||||||||||||||||
| Other countries | 58,354 | 53,296 | 163,955 | 149,862 | |||||||||||||||||||||||||||||||
| Total Revenues | $ | 840,427 | $ | 729,704 | $ | 2,319,192 | $ | 2,034,433 |
ROLLINS, INC. AND SUBSIDIARIES
Revenue from external customers, classified by significant product and service offerings, was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||
| Residential revenue | $ | 404,305 | $ | 337,878 | $ | 1,073,575 | $ | 922,448 | |||||||||||||||||||||||||||
| Commercial revenue | 272,207 | 243,478 | 762,573 | 683,748 | |||||||||||||||||||||||||||||||
| Termite completions, bait monitoring, & renewals | 155,099 | 139,668 | 458,527 | 406,155 | |||||||||||||||||||||||||||||||
| Franchise revenues | 4,291 | 4,068 | 12,381 | 11,960 | |||||||||||||||||||||||||||||||
| Other revenues | 4,525 | 4,612 | 12,136 | 10,122 | |||||||||||||||||||||||||||||||
| Total Revenues | $ | 840,427 | $ | 729,704 | $ | 2,319,192 | $ | 2,034,433 |
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 above table.
The Company records unearned revenue when we have either received payment or contractually have the right to bill for services in advance of the services or performance obligations being performed. Unearned revenue recognized in the three and nine months ended September 30, 2023, and 2022 was $59.4 million and $51.6 million, respectively and $172.6 million and $152.5 million, respectively. Changes in unearned revenue were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||
| Beginning balance | $ | 218,274 | $ | 192,972 | $ | 187,994 | $ | 168,607 | |||||||||||||||||||||||||||
| Deferral of unearned revenue | 61,354 | 54,946 | 204,891 | 180,209 | |||||||||||||||||||||||||||||||
| Recognition of unearned revenue | (59,375) | (51,553) | (172,632) | (152,451) | |||||||||||||||||||||||||||||||
| Ending balance | $ | 220,253 | $ | 196,365 | $ | 220,253 | $ | 196,365 |
As of September 30, 2023 and December 31, 2022, the Company had long-term unearned revenue of $36.9 million and $29.9 million, respectively, recorded in other long-term accrued liabilities. 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.
NOTE 5. ALLOWANCE FOR CREDIT LOSSES
The Company is exposed to credit losses primarily related to accounts receivables and financed receivables derived from customer services revenue. To reduce credit risk for residential pest control accounts receivable, we promote enrollment in our auto-pay programs. In general, we may suspend future services for customers with past due balances. The Company’s credit risk is generally low with a large number of individuals and entities comprising Rollins’ customer base and dispersion across many different geographical regions.
The Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risks. The Company’s established credit evaluation and monitoring procedures seek to minimize the amount of business we conduct with higher risk customers. The credit quality of a potential obligor is evaluated at the loan origination based on an assessment of the individual’s Beacon/credit bureau score. Rollins requires a potential obligor to have good credit worthiness with low risk before entering into a contract. Depending upon the individual’s credit score, the Company may accept with 100% financing, require a significant down payment or turn down the contract. Delinquencies of accounts are monitored each month. Financing receivables include installment receivable amounts, some of which are due subsequent to one year from the balance sheet dates.
The Company’s allowances for credit losses for trade accounts receivable and financed receivables are developed using historical collection experience, current economic and market conditions, reasonable and supportable forecasts, and a review of the current status of customers’ receivables. The Company’s receivable pools are classified between residential customers, commercial customers, large commercial customers, and financed receivables. Accounts are written off against the allowance for 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
ROLLINS, INC. AND SUBSIDIARIES
deemed uncollectible. Below is a roll forward of the Company’s allowance for credit losses for the three and nine months ended September 30, 2023, and 2022.
| Allowance for Credit Losses | |||||||||||||||||
| (in thousands) | Trade Receivables | Financed Receivables | Total Receivables | ||||||||||||||
| Balance at December 31, 2022 | $ | 14,073 | $ | 4,968 | $ | 19,041 | |||||||||||
| Provision for expected credit losses | 1,461 | 2,435 | 3,896 | ||||||||||||||
| Write-offs charged against the allowance | (4,687) | (1,927) | (6,614) | ||||||||||||||
| Recoveries collected | 1,629 | — | 1,629 | ||||||||||||||
| Balance at March 31, 2023 | $ | 12,476 | $ | 5,476 | $ | 17,952 | |||||||||||
| Provision for expected credit losses | 3,185 | 2,865 | 6,050 | ||||||||||||||
| Write-offs charged against the allowance | (4,271) | (2,332) | (6,603) | ||||||||||||||
| Recoveries collected | 1,349 | — | 1,349 | ||||||||||||||
| Balance at June 30, 2023 | $ | 12,739 | $ | 6,009 | $ | 18,748 | |||||||||||
| Provision for expected credit losses | 4,739 | 2,799 | $ | 7,538 | |||||||||||||
| Write-offs charged against the allowance | (5,582) | (2,731) | $ | (8,313) | |||||||||||||
| Recoveries collected | 1,428 | — | $ | 1,428 | |||||||||||||
| Balance at September 30, 2023 | $ | 13,324 | $ | 6,077 | $ | 19,401 |
| Allowance for Credit Losses | |||||||||||||||||
| (in thousands) | Trade Receivables | Financed Receivables | Total Receivables | ||||||||||||||
| Balance at December 31, 2021 | $ | 13,885 | $ | 3,985 | $ | 17,870 | |||||||||||
| Provision for expected credit losses | 3,204 | 1,054 | 4,258 | ||||||||||||||
| Write-offs charged against the allowance | (4,248) | (1,189) | (5,437) | ||||||||||||||
| Recoveries collected | 1,329 | — | 1,329 | ||||||||||||||
| Balance at March 31, 2022 | $ | 14,170 | $ | 3,850 | $ | 18,020 | |||||||||||
| Provision for expected credit losses | 2,350 | 1,825 | 4,175 | ||||||||||||||
| Write-offs charged against the allowance | (4,218) | (1,121) | (5,339) | ||||||||||||||
| Recoveries collected | 1,364 | — | 1,364 | ||||||||||||||
| Balance at June 30, 2022 | $ | 13,666 | $ | 4,554 | $ | 18,220 | |||||||||||
| Provision for expected credit losses | 3,842 | 1,316 | 5,158 | ||||||||||||||
| Write-offs charged against the allowance | (5,095) | (970) | (6,065) | ||||||||||||||
| Recoveries collected | 1,370 | — | 1,370 | ||||||||||||||
| Balance at September 30, 2022 | $ | 13,783 | $ | 4,900 | $ | 18,683 | |||||||||||
ROLLINS, INC. AND SUBSIDIARIES
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
The following table summarizes changes in goodwill during the nine months ended September 30, 2023, and the twelve months ended December 31, 2022 (in thousands):
| Goodwill: | |||||
| Balance at December 31, 2021 | $ | 786,504 | |||
| Additions | 64,997 | ||||
| Measurement adjustments | (9) | ||||
| Adjustments due to currency translation | (4,788) | ||||
| Balance at December 31, 2022 | 846,704 | ||||
| Additions | 209,487 | ||||
| Measurement adjustments | 522 | ||||
| Adjustments due to currency translation | (2,748) | ||||
| Balance at September 30, 2023 | $ | 1,053,965 |
The carrying amount of goodwill in foreign countries was $105.6 million as of September 30, 2023, and $97.4 million as of December 31, 2022.
The following table sets forth the components of indefinite-lived and amortizable intangible assets as of September 30, 2023, and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Gross | Accumulated Amortization | Carrying Value | Gross | Accumulated Amortization | Carrying Value | Useful Life in Years | |||||||||||||||||||||||||||||||||||
| Amortizable intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Customer contracts | $ | 623,917 | $ | (221,568) | $ | 402,349 | $ | 502,689 | $ | (204,130) | $ | 298,559 | 3-20 | ||||||||||||||||||||||||||||
| Trademarks and tradenames | 19,805 | (9,322) | 10,483 | 17,351 | (10,009) | 7,342 | 7-20 | ||||||||||||||||||||||||||||||||||
| Non-compete agreements | 14,141 | (9,118) | 5,023 | 14,180 | (8,226) | 5,954 | 3-20 | ||||||||||||||||||||||||||||||||||
| Patents | 6,888 | (6,877) | 11 | 6,934 | (6,802) | 132 | 3-15 | ||||||||||||||||||||||||||||||||||
| Other assets | 1,904 | (1,830) | 74 | 2,016 | (1,786) | 230 | 10 | ||||||||||||||||||||||||||||||||||
| Total amortizable intangible assets | $ | 666,655 | $ | (248,715) | 417,940 | $ | 543,170 | $ | (230,953) | 312,217 | |||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Trademarks and tradenames | 139,732 | 104,304 | |||||||||||||||||||||||||||||||||||||||
| Internet domains | 2,227 | 2,227 | |||||||||||||||||||||||||||||||||||||||
| Total indefinite-lived intangible assets | 141,959 | 106,531 | |||||||||||||||||||||||||||||||||||||||
| Total customer contracts and other intangible assets | $ | 559,899 | $ | 418,748 |
The carrying amount of customer contracts in foreign countries was $52.0 million and $46.1 million as of September 30, 2023 and December 31, 2022, respectively. The carrying amount of trademarks and tradenames in foreign countries was $3.8 million and $4.2 million as of September 30, 2023 and December 31, 2022, respectively. The carrying amount of other intangible assets in foreign countries was $0.6 million and $0.7 million as of September 30, 2023 and December 31, 2022, respectively.
Amortization expense related to intangible assets was $16.5 million and $14.2 million for the three months ended September 30, 2023 and 2022, respectively. Amortization expense related to intangible assets was $48.5 million and $41.5 million for the nine months ended September 30, 2023 and 2022, respectively. Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives.
ROLLINS, INC. AND SUBSIDIARIES
Estimated amortization expense for the existing carrying amount of customer contracts and other intangible assets for each of the five succeeding fiscal years as of September 30, 2023 are as follows:
| (in thousands) | |||||
| 2023 (excluding the nine months ended September 30, 2023) | $ | 19,946 | |||
| 2024 | 76,652 | ||||
| 2025 | 67,846 | ||||
| 2026 | 64,311 | ||||
| 2027 | 60,592 |
Change in Annual Assessment Date for Goodwill and Indefinite-lived Intangible Assets
Effective January 1, 2023, we reorganized our reporting structure including the transition of Jerry E. Gahlhoff, Jr. to the role of Chief Executive Officer. As a result of the transition, we reevaluated our segment reporting and determined that we now have two operating segments and two goodwill reporting units, but we continue to operate under one reportable segment which contains our residential, commercial, and termite business lines. We performed an assessment of whether there was an indication of goodwill impairment before and after the reorganization. In that analysis, we determined that no goodwill impairment existed.
Following the reorganization of our reporting structure 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 us additional time for the completion of our annual impairment testing in advance of our year-end reporting.
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, noting no impairment. We performed an analysis of our indefinite-lived intangible assets on September 30, 2023, noting no impairment. We will perform an annual assessment for goodwill and indefinite-lived intangible assets as of October 1, 2023.
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.
NOTE 7. LEASES
The Company leases certain buildings, vehicles, and equipment. The Company elected the practical expedient approach permitted under Accounting Standards Codification Topic 842 “Leases”, not to include short-term leases with a duration of 12 months or less on the balance sheet. As of September 30, 2023 and December 31, 2022, all leases were classified as operating leases. Building leases generally carry terms of 1 to 15 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 certain 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.
ROLLINS, INC. AND SUBSIDIARIES
| (in thousands, except Other Information) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
| Lease Classification | Financial Statement Classification | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||
| Short-term lease cost | Cost of services provided, Sales, general, and administrative expenses | $ | 42 | $ | 46 | $ | 190 | $ | 108 | |||||||||||||||||||||||
| Operating lease cost | Cost of services provided, Sales, general, and administrative expenses | 28,020 | 24,419 | 81,687 | 72,057 | |||||||||||||||||||||||||||
| Total lease expense | $ | 28,062 | $ | 24,465 | $ | 81,877 | $ | 72,165 | ||||||||||||||||||||||||
| Other Information: | ||||||||||||||||||||||||||||||||
| Weighted-average remaining lease term - operating leases | 5.02 years | 5.2 years | ||||||||||||||||||||||||||||||
| Weighted-average discount rate - operating leases | 3.89 | % | 3.41 | % | ||||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||||||||||||||
| Operating cash flows from operating leases | $ | 80,997 | $ | 71,240 |
Lease Commitments
Future minimum lease payments, including assumed exercise of renewal options as of September 30, 2023, were as follows:
| (in thousands) | |||||
| 2023 (excluding the nine months ended September 30, 2023) | $ | 27,043 | |||
| 2024 | 93,654 | ||||
| 2025 | 75,157 | ||||
| 2026 | 53,726 | ||||
| 2027 | 27,096 | ||||
| 2028 | 15,829 | ||||
| Thereafter | 50,095 | ||||
| Total future minimum lease payments | 342,600 | ||||
| Less: Amount representing interest | 36,071 | ||||
| Total future minimum lease payments, net of interest | $ | 306,529 |
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 $177.3 million for building leases and $165.3 million for vehicle leases. As of September 30, 2023, the Company had additional future obligations of $15.3 million for leases that had not yet commenced.
NOTE 8. FAIR VALUE MEASUREMENTS
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 derivative instruments as further discussed in Note 10. Derivative Instruments and Hedging Activities.
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
ROLLINS, INC. AND SUBSIDIARIES
using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.
As of September 30, 2023 and December 31, 2022, we had investments in international bonds of $9.5 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 September 30, 2023, $0.9 million was included in other current assets and $8.6 million was included in other assets. At December 31, 2022, $0.5 million was included in other current assets and $10.2 million was included in other assets. The bonds are recorded at fair market value with an insignificant amount of unrealized gains included in other comprehensive income during the three and nine months ended September 30, 2023. No gain or loss was recognized during the three months ended September 30, 2022 and losses of $1.0 million are included in other comprehensive income during the nine months ended September 30, 2022.
As of September 30, 2023 and December 31, 2022, the Company had $47.5 million and $13.5 million of acquisition holdback and earnout liabilities payable to former owners of acquired companies, respectively. The earnout liabilities were discounted to reflect the expected probability of payout, and both earnout and holdback liabilities were discounted to their net present value on the Company’s books and are considered level 3 liabilities. The table below presents a summary of the changes in fair value for these liabilities.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Beginning balance | $ | 49,308 | $ | 22,742 | $ | 13,496 | $ | 25,156 | |||||||||||||||
| New acquisitions and measurement adjustments | 2,872 | 3,706 | 42,903 | 6,457 | |||||||||||||||||||
| Payouts | (4,938) | (6,468) | (9,288) | (11,663) | |||||||||||||||||||
| Interest and fair value adjustments | 910 | 79 | 2,016 | 327 | |||||||||||||||||||
| Charge offset, forfeit and other | (607) | (669) | (1,582) | (887) | |||||||||||||||||||
| Ending balance | $ | 47,545 | $ | 19,390 | $ | 47,545 | $ | 19,390 |
NOTE 9. 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.
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.
As of September 30, 2023, the Company had outstanding borrowings of $599.0 million under the Credit Facility. Borrowings under the Credit Facility are presented under the long-term debt caption of our condensed consolidated balance
ROLLINS, INC. AND SUBSIDIARIES
sheet, net of $2.4 million in unamortized debt issuance costs as of September 30, 2023. The aggregate effective interest rate on the debt outstanding as of September 30, 2023 was 6.4%. 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 September 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 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 debt covenants as of September 30, 2023.
NOTE 10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to certain interest rate risks on our outstanding debt and foreign currency risks arising from our international business operations and global economic conditions. The Company enters into certain derivative financial instruments to lock in certain interest rates, as well as to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the U.S. dollar. We use foreign currency derivatives, specifically foreign currency forward contracts (“FX Forwards”), to manage our exposure to fluctuations in the USD-CAD and USD-AUD exchange rates. FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX Forwards are typically settled in U.S. dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards were recorded in other income/expense and were insignificant for the three and nine month periods ended September 30, 2023. Changes in the fair value of FX Forwards during the three and nine month periods ended September 30, 2022 resulted in net gains of $1.0 million and $1.1 million, respectively. The fair values of the Company’s FX Forwards were recorded as net assets of $0.1 million and $0.3 million in Other Current Assets as of September 30, 2023 and December 31, 2022, respectively.
As of September 30, 2023, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):
Non-Designated Derivative Summary
| FX Forward Contracts | Number of Instruments | Sell Notional | Buy Notional | |||||||||||||||||
| Sell AUD/Buy USD Fwd Contract | 16 | 1,900 | $ | 1,262 | ||||||||||||||||
| Sell CAD/Buy USD Fwd Contract | 16 | 16,000 | 11,913 | |||||||||||||||||
| Total | 32 | $ | 13,175 |
NOTE 11. 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, and regulatory and litigation matters relating to, and arising out of, our businesses and our operations. These matters may involve, but are not limited to, allegations that our
ROLLINS, INC. AND SUBSIDIARIES
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 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.
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.
NOTE 12. STOCKHOLDERS’ EQUITY
During the nine months ended September 30, 2023, the Company paid $191.8 million, or $0.39 per share, in cash dividends compared to $147.6 million, or $0.30 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”), and Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC, as representatives of the several underwriters (the “Underwriters”), relating to the sale 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 nine months ended September 30, 2022.
The Company repurchases shares from employees for the payment of their taxes on restricted shares that have vested. The Company repurchased $10.7 million and $7.0 million during the nine month periods ended September 30, 2023 and 2022, respectively.
During the nine months ended September 30, 2023, the Company also purchased shares on behalf of employees for the Employee Stock Purchase Plan ("ESPP") discussed below.
Restricted Shares and Performance Share Unit Awards
As more fully discussed in Note 14 of the Company’s notes to the consolidated financial statements in its 2022 Annual Report on Form 10-K, time-lapse restricted awards and restricted stock units (“restricted shares”) have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plans. Beginning with the 2023
ROLLINS, INC. AND SUBSIDIARIES
grant, restricted shares vest in 25 percent increments over four years from the date of the grant. Prior grants vest either over five years or over six years from the date of grant, depending on the year of the grant. Additionally, during 2023, certain executives were granted Performance Share Unit awards (PSUs) in addition to restricted shares. These awards will be expensed on a straight-line basis over the three-year vesting period.
The Company issues new shares from its authorized but unissued share pool. As of September 30, 2023, approximately 5.3 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:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Restricted shares and PSUs: | |||||||||||||||||||||||
| Pre-tax compensation expense | $ | 6,096 | $ | 4,957 | $ | 18,044 | $ | 15,914 | |||||||||||||||
| Tax benefit | (1,572) | (1,298) | (4,655) | (3,894) | |||||||||||||||||||
| Compensation expense, net of tax | $ | 4,524 | $ | 3,659 | $ | 13,389 | $ | 12,020 |
The following table summarizes information on unvested awards outstanding as of September 30, 2023:
| (number of shares in thousands) | Number of Shares | Weighted Average Grant-Date Fair Value | |||||||||
| Unvested restricted shares and PSUs at December 31, 2022 | 2,685 | $ | 28.97 | ||||||||
| Forfeited | (86) | 29.77 | |||||||||
| Vested | (823) | 26.90 | |||||||||
| Granted | 673 | 36.40 | |||||||||
| Unvested restricted shares and PSUs at September 30, 2023 | 2,449 | $ | 31.68 |
As of September 30, 2023 and December 31, 2022, the Company had $56.3 million and $52.3 million of total unrecognized compensation cost, respectively, related to restricted shares and PSUs that are expected to be recognized over a weighted average period of approximately 3 years and 3.5 years, respectively.
Employee Stock Purchase Plan
As more fully discussed in Note 14 of the Company’s notes to the consolidated financial statements in its 2022 Annual Report on Form 10-K, shareholders approved the Rollins, Inc. 2022 Employee Stock Purchase Plan which provides eligible employees with the option to purchase shares of Company common stock, at a discount, through payroll deductions. The most recent purchase period for the ESPP began on July 1, 2023, and will end on December 31, 2023. The Company recorded compensation expense associated with its ESPP of $0.4 million during the nine months ended September 30, 2023. Compensation expense for the ESPP is included in cost of services provided and sales, general and administrative expenses in our condensed consolidated statements of income.
NOTE 13. 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 shareholders 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.
ROLLINS, INC. AND SUBSIDIARIES
A reconciliation of weighted average shares outstanding is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Weighted-average outstanding common shares | 488,304 | 489,756 | 489,467 | 489,705 | |||||||||||||||||||
| Add participating securities: | |||||||||||||||||||||||
| Weighted-average time-lapse restricted awards | 2,471 | 2,560 | 2,513 | 2,580 | |||||||||||||||||||
| Total weighted-average shares outstanding - basic | 490,775 | 492,316 | 491,980 | 492,285 | |||||||||||||||||||
| Dilutive effect of restricted stock units and PSUs | 190 | 114 | 178 | 113 | |||||||||||||||||||
| Weighted-average shares outstanding - diluted | 490,965 | 492,430 | 492,158 | 492,398 |
NOTE 14. INCOME TAXES
The Company’s provision for income taxes is recorded on an interim basis based upon the Company’s estimate of the annual effective income tax rate for the full year applied to “ordinary” income or loss, adjusted each quarter for discrete items. The Company recorded a provision for income taxes of $44.3 million and $37.6 million for the three months ended September 30, 2023 and 2022, and $113.4 million and $92.0 million for the nine months ended September 30, 2023 and 2022, respectively.
The Company’s effective tax rate was 25.7% in the third quarter of 2023, consistent with the 25.7% rate in the third quarter of 2022. During the nine months ended September 30, 2023, the Company’s effective tax rate increased to 25.8% compared to 24.5% in 2022. The rate was higher due to higher foreign income taxes compared to the prior year.
NOTE 15. RELATED PARTY TRANSACTIONS
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. Upon closing the Offering, LOR paid $3.5 million to the Company pursuant to the Registration Rights Agreement (the “Registration Rights Agreement”) between the Company and LOR dated as of June 5, 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 the same per share price paid by the Underwriters to LOR in the Offering, or $34.39 per share.
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 will be 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, which is filed as Exhibit 1.1 to the Current Report on Form 8-K filed September 11, 2023. The foregoing description of the Registration Rights Agreement is not meant to be a complete description and is qualified in its entirety by the Registration Rights Agreement, which is filed as Exhibit 4.11 to the Registration Statement on Form S-3 filed June 5, 2023.
ROLLINS, INC. AND SUBSIDIARIES
NOTE 16. RESTRUCTURING COSTS
During the third quarter of 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 condensed consolidated statement of income. As of September 30, 2023, the Company had accrued restructuring costs of $3.3 million, which are included in other current liabilities in our condensed consolidated balance sheet.
NOTE 17. SUBSEQUENT EVENTS
Quarterly Dividend
On October 24, 2023, the Company’s Board of Directors declared a regular quarterly cash dividend on its common stock of $0.15 per share payable on December 11, 2023 to stockholders of record at the close of business on November 10, 2023.
ROLLINS, INC. AND SUBSIDIARIES
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