UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
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 ☒ No ☐
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 ☒ No ☐
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
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
Rollins, Inc. had 492,472,436 shares of its $1 par value Common Stock outstanding as of October 17, 2022.
ROLLINS, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 2022, AND DECEMBER 31, 2021
(in thousands except share data)
(unaudited)
September 30,
December 31,
2022
2021
ASSETS
Cash and cash equivalents
$
121,876
105,301
Trade receivables, net of allowance for expected credit losses of $13,783 and $13,885, respectively
170,274
139,579
Financed receivables, short-term, net of allowance for expected credit losses of $1,779 and $1,463, respectively
32,253
26,152
Materials and supplies
28,572
28,926
Other current assets
45,981
52,422
Total current assets
398,956
352,380
Equipment and property, net of accumulated depreciation of $330,173 and $315,891, respectively
130,362
133,257
Goodwill
772,325
721,819
Customer contracts, net
319,382
325,929
Trademarks & tradenames, net
114,016
108,976
Other intangible assets, net
9,807
11,679
Operating lease right-of-use assets
270,365
244,784
Financed receivables, long-term, net of allowance for expected credit losses of $3,121 and $2,522, respectively
58,634
47,097
Other assets
38,636
34,949
Total assets
2,112,483
1,980,870
LIABILITIES
Accounts payable
42,874
44,568
Accrued insurance - current
40,424
36,414
Accrued compensation and related liabilities
95,694
97,862
Unearned revenues
166,866
145,122
Operating lease liabilities - current
82,611
75,240
Current portion of long-term debt
15,000
18,750
Other current liabilities
66,300
73,206
Total current liabilities
509,769
491,162
Accrued insurance, less current portion
35,257
31,545
Operating lease liabilities, less current portion
191,565
172,520
Long-term debt
109,878
136,250
Other long-term accrued liabilities
69,463
67,345
Total liabilities
915,932
898,822
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, 492,472,436 and 491,911,087 shares issued and outstanding, respectively
492,472
491,911
Additional paid in capital
113,995
105,629
Accumulated other comprehensive loss
(43,566)
(16,411)
Retained earnings
633,650
500,919
Total stockholders’ equity
1,196,551
1,082,048
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(in thousands except per share data)
Three Months Ended
Nine Months Ended
REVENUES
Customer services
729,704
650,199
2,034,433
1,823,957
COSTS AND EXPENSES
Cost of services provided (exclusive of depreciation and amortization below)
348,158
305,474
980,316
864,888
Sales, general and administrative
213,581
194,261
612,353
539,951
Depreciation and amortization
24,282
23,617
73,454
70,519
Total operating expenses
586,021
523,352
1,666,123
1,475,358
OPERATING INCOME
143,683
126,847
368,310
348,599
Interest expense, net
846
222
2,294
1,334
Other (income), net
(1,980)
(447)
(5,170)
(33,598)
CONSOLIDATED INCOME BEFORE INCOME TAXES
144,817
127,072
371,186
380,863
PROVISION FOR INCOME TAXES
37,195
33,219
90,820
95,513
NET INCOME
107,622
93,853
280,366
285,350
NET INCOME PER SHARE - BASIC AND DILUTED
0.22
0.19
0.57
0.58
Weighted average shares outstanding - basic
492,316
492,069
492,285
492,058
Weighted average shares outstanding - diluted
492,430
492,398
DIVIDENDS PAID PER SHARE
0.10
0.08
0.30
0.24
3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three Months Ending
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
(12,417)
(7,207)
(26,203)
(6,924)
Unrealized loss on available for sale securities
(952)
Change in derivatives
632
356
Other comprehensive income (loss), net of tax
(6,575)
(27,155)
(6,568)
Comprehensive income
95,205
87,278
253,211
278,782
4
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated Other
Paid-in-
Comprehensive
Retained
Shares
Amount
Capital
Income / (Loss)
Earnings
Total
Balance at June 30, 2022
492,417
109,070
(31,149)
575,229
1,145,567
Net Income
Other comprehensive income / (loss), net of tax:
Cash dividends
(49,201)
Stock compensation
55
4,902
4,957
Employee stock buybacks
23
Balance at September 30, 2022
Balance at June 30, 2021
492,079
98,842
(10,890)
470,653
1,050,684
(39,945)
(22)
3,942
3,920
(8)
(300)
(308)
Balance at September 30, 2021
492,049
102,484
(17,465)
524,561
1,101,629
Balance at December 31, 2021
Unrealized losses on available for sale securities
(147,635)
786
15,128
15,914
(225)
(6,762)
(6,987)
Balance at December 31, 2020
491,612
101,757
(10,897)
358,888
941,360
(119,677)
728
11,034
11,762
(291)
(10,307)
(10,598)
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense
Provision for expected credit losses
13,593
8,522
Gain on sale of assets, net
Provision for deferred income taxes
2,210
2,221
Changes in operating assets and liabilities:
Trade accounts receivable and other accounts receivable
(40,872)
(34,294)
Financing receivables
(21,021)
(13,041)
295
3,780
(3,580)
(11,426)
Accounts payable and accrued expenses
(669)
(8,564)
Unearned revenue
19,655
20,685
Other long-term assets and liabilities
8,362
(3,005)
Net cash provided by operating activities
342,537
298,911
INVESTING ACTIVITIES
Acquisitions, net of cash acquired
(110,418)
(39,692)
Capital expenditures
(22,921)
(20,031)
Proceeds from sale of assets
9,822
70,967
Other investing activities, net
139
(140)
Net cash (used in) provided by investing activities
(123,378)
11,104
FINANCING ACTIVITIES
Payment of contingent consideration
(11,663)
(19,413)
Borrowings under term loan
252,000
Borrowings under revolving commitment
11,000
82,500
Repayments of term loan
(175,000)
(83,000)
Repayments of revolving commitment
(118,000)
(134,500)
Payment of dividends
Cash paid for common stock purchased
Net cash used in financing activities
(196,285)
(284,688)
Effect of exchange rate changes on cash
(6,299)
(6,149)
Net increase in cash and cash equivalents
16,575
19,178
Cash and cash equivalents at beginning of period
98,477
Cash and cash equivalents at end of period
117,655
Supplemental disclosure of cash flow information:
Cash paid for interest
3,229
681
Cash paid for income taxes, net
104,974
88,350
Non-cash additions to operating lease right-of-use assets
92,365
101,720
6
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 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, 2021. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2021 Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and certain financial statement disclosures. Estimates and assumptions are used for, but not limited to, accrued insurance, revenue recognition, right-of-use ("ROU") asset and liability valuations, accounts and financing receivable reserves, income tax contingency accruals and valuation allowances, contingency accruals and goodwill and other intangible asset valuations. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from these estimates and assumptions.
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 COVID-19 and other 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 COVID-19 and other economic trends. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the entire year. The severity, magnitude and duration of certain economic trends, as well as the economic consequences of COVID-19, continue to be uncertain and are difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and other economic trends and may change materially in future periods.
The Company operates as one reportable segment and the results of operations and its financial condition are not reliant upon any single customer.
NOTE 2.RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting standards
In November 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-10, “Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance.” The amendments in this Update require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
7
Accounting standards issued but not yet adopted
In March 2022, the FASB issued 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 Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurements of Equity Securities Subject to Contractual Sale Restrictions.” The amendments in this Update clarify the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. This Update also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. These amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. The Company does not currently own any equity securities and therefore the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 3.ACQUISITIONS
The Company made 27 acquisitions during the nine-month period ended September 30, 2022, and 39 acquisitions for the year ended December 31, 2021. For the 27 acquisitions completed through September 30, 2022, the 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 consideration as follows (in thousands):
September 30, 2022
Accounts receivable, net
2,926
439
Equipment and property
6,245
60,962
Customer contracts
44,377
Trademarks & tradenames
5,615
Other intangible assets
1,393
Current liabilities
(4,285)
Other assets and liabilities, net
(1,384)
Total consideration
116,288
Less: Acquisition holdback liabilities
(8,978)
Total cash purchase price
107,310
The Company also made a final payment of $3.1 million for a 2021 acquisition in 2022.
Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. The factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized. For the nine months ended September 30, 2022, $61.0 million of goodwill was added related to the 27 acquisitions noted above. The recognized goodwill is expected to be deductible for tax purposes. The purchase price allocations for these acquisitions are preliminary until the Company obtains final information regarding these fair values.
8
NOTE 4.REVENUE
The following tables present our revenues disaggregated by revenue source (in thousands).
Sales and usage-based taxes are excluded from revenues. No sales to an individual customer or in a country other than the United States accounted for 10% or more of the sales for the periods listed in the following table.
Revenue, classified by the major geographic areas in which our customers are located, was as follows:
United States
676,408
602,336
1,884,571
1,686,371
Other countries
53,296
47,863
149,862
137,586
Total Revenues
Revenue from external customers, classified by significant product and service offerings, was as follows:
Residential revenue
337,878
307,747
922,448
835,871
Commercial revenue
243,478
218,648
683,748
618,183
Termite completions, bait monitoring, & renewals
139,668
117,423
406,155
350,791
Franchise revenues
4,068
4,128
11,960
11,698
Other revenues
4,612
2,253
10,122
7,414
The Company records unearned revenue when we have either received payment or contractually have the right to bill for services in advance of the services or performance obligations being performed. Deferred revenue recognized in the three and nine months ended September 30, 2022 and 2021 was $51.6 million and $47.3 million, respectively and $152.5 and $139.6, respectively. Changes in unearned revenue were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
Beginning balance
192,972
172,951
168,607
149,224
Deferral of unearned revenue
54,946
49,060
180,209
165,094
Recognition of unearned revenue
(51,553)
(47,316)
(152,451)
(139,623)
Ending balance
196,365
174,695
As of September 30, 2022, and December 31, 2021, the Company had long-term unearned revenue of $29.5 million and $18.4 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.
9
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 deemed uncollectible. Below is a roll forward of the Company’s allowance for credit losses for the three and nine months ended September 30, 2022 and 2021 (in thousands).
10
Allowance for Credit Losses
Trade
Financed
Receivables
13,666
4,554
18,220
3,842
1,316
5,158
Write-offs charged against the allowance
(5,095)
(970)
(6,065)
Recoveries collected
1,370
13,783
4,900
18,683
13,863
4,341
18,204
3,526
323
3,849
(5,163)
(657)
(5,820)
1,247
13,473
4,007
17,480
13,885
3,985
17,870
9,396
4,195
13,591
(13,561)
(3,280)
(16,841)
4,063
16,854
3,231
20,085
5,760
2,762
(12,912)
(1,986)
(14,898)
3,771
11
NOTE 6.GOODWILL AND INTANGIBLE ASSETS
The following table summarizes changes in goodwill during the nine months ended September 30, 2022 and the twelve months ended December 31, 2021 (in thousands):
Goodwill:
653,176
Additions
69,264
Adjustments due to currency translation
(621)
Measurement adjustments
65
(10,521)
The carrying amount of goodwill in foreign countries was $88.9 million as of September 30, 2022 and $82.1 million as of December 31, 2021.
The Company completed its most recent annual impairment analysis as of September 30, 2022. Based upon the results of this analysis, the Company concluded that no impairment of its goodwill or other intangible assets was indicated.
The following table sets forth the components of indefinite-lived and amortizable intangible assets as of September 30, 2022 and December 31, 2021 (in thousands):
December 31, 2021
Accumulated
Carrying
Useful Life
Gross
Amortization
Value
in Years
Amortizable intangible assets:
567,698
(248,316)
551,277
(225,348)
3-20
Trademarks and tradenames
18,086
(7,201)
10,885
12,784
(6,492)
6,292
7-20
Non-compete agreements
13,999
(6,927)
7,072
13,125
(5,573)
7,552
Patents
6,934
(6,692)
242
6,946
(5,509)
1,437
3-15
1,910
(1,645)
265
2,150
(1,687)
463
Total amortizable intangible assets
608,628
(270,781)
337,847
586,282
(244,609)
341,673
Indefinite-lived intangible assets:
103,131
102,684
Internet domains
2,227
Total indefinite-lived intangible assets
105,358
104,911
Total customer contracts and other intangible assets
443,205
446,584
The carrying amount of customer contracts in foreign countries was $41.6 million and $42.1 million as of September 30, 2022 and December 31, 2021, respectively. The carrying amount of trademarks and tradenames in foreign countries was $4.1 million and $2.9 million as of September 30, 2022 and December 31, 2021, respectively. The carrying amount of other intangible assets in foreign countries was $0.7 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively.
Amortization expense related to intangible assets was $15.9 million and $13.4 million for the three months ended September 30, 2022 and 2021, respectively. Amortization expense related to intangible assets was $46.7 million and $39.5 million for the nine months ended September 30, 2022 and 2021, respectively. Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives.
12
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, 2022 are as follows:
2022 (excluding the nine months ended September 30, 2022)
16,283
2023
59,772
2024
56,197
2025
47,083
2026
42,670
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, 2022, and December 31, 2021, all leases were classified as operating leases. Building leases generally carry terms of 5 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 the renewal options on its vehicle leases. The measurement of right-of-use assets and liabilities for vehicle leases includes the fixed payments associated with such renewal periods. We separate lease and non-lease components of contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants.
During the nine months ended September 30, 2021, the Company completed multiple sale-leaseback transactions where it sold 17 of its properties related to the Clark Pest Control acquisition for gross proceeds of $67.0 million and a pre-tax gain of $31.5 million, which is included as Other income, net on the income statement. These leases are classified as operating leases with terms of 7 to 15 years.
13
The Company uses the rate implicit in the lease when available; however, most of our leases do not provide a readily determinable implicit rate. Accordingly, we estimate our incremental borrowing rate based on information available at lease commencement.
(in thousands, except Other Information)
Lease Classification
Financial Statement Classification
Short-term lease cost
Cost of services provided, Sales, general, and administrative expenses
46
51
108
176
Operating lease cost
24,419
23,472
72,057
69,497
Total lease expense
24,465
23,523
72,165
69,673
Other Information:
Weighted-average remaining lease term - operating leases
5.2 years
5.5 years
Weighted-average discount rate - operating leases
3.41
%
3.69
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
71,240
68,614
Lease Commitments
Future minimum lease payments, including assumed exercise of renewal options as of September 30, 2022 were as follows:
Operating
24,234
86,079
62,772
44,160
26,286
2027
14,764
Thereafter
48,050
Total Future Minimum Lease Payments
306,345
Less: Amount representing interest
32,169
Total future minimum lease payments, net of interest
274,176
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 $163.5 million for building leases and $142.8 million for vehicle leases. As of September 30, 2022, the Company had additional future obligations of $15.6 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
14
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 using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.
As of September 30, 2022, and December 31, 2021, we had investments in international bonds of $10.6 million and $12.6 million, respectively. These bonds are accounted for as available for sale securities and are level 2 assets under the fair value hierarchy. At December 31, 2021, the entire investment was recorded in other current assets. Management reassessed their intentions on the investment and at September 30, 2022, $0.6 million was included in other current assets and $10.0 million was included in other assets. The bonds are recorded at fair market value with unrealized losses of $1.0 million included in other comprehensive income during the nine months ended September 30, 2022.
As of September 30, 2022 and December 31, 2021, the Company had $19.4 million and $25.2 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.
22,742
27,057
25,156
35,744
New acquisitions and revaluations
3,706
1,341
6,457
5,314
Payouts
(6,468)
(6,540)
Interest on outstanding contingencies
79
178
327
715
Charge offset, forfeit and other
(514)
(887)
(838)
19,390
21,522
NOTE 9.DEBT
In April 2019, the Company entered into a Revolving Credit Agreement with Truist Bank N.A. (formerly SunTrust Bank N.A.) and Bank of America, N.A. (the “Credit Agreement”) for an unsecured revolving commitment of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $25.0 million swingline subfacility (the “Revolving Commitment”), and an unsecured variable rate $250.0 million term loan (the “Term Loan”). On January 27, 2022, the Company entered into an amendment (the “Amendment”) to the Credit Agreement with Truist Bank and Bank of America, N.A. whereby additional term loans in an aggregate principal amount of $252.0 million were advanced to the Company. The Amendment also replaced LIBOR as the benchmark interest rate for borrowings with the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) and reset the amortization schedule for all term loans under the Credit Agreement. The maturity of all loans made under the Credit Agreement prior to the Amendment remains unchanged at April 29, 2024 and all other terms of the Credit Agreement remain unchanged in all material respects. In addition, the Credit Agreement has provisions to extend the term of the Revolving Commitment beyond April 29, 2024, as well as the right at any time and from time to time to prepay any borrowing under the Credit Agreement, in whole or in part, without premium or penalty.
As of September 30, 2022, the Company had outstanding borrowings of $124.9 million under the Term Loan and there were no outstanding borrowings under the Revolving Commitment. The aggregate effective interest rate on the debt outstanding as of September 30, 2022 was 3.866%. The effective interest rate is comprised of the BSBY plus a margin of 75.0 basis points as determined by the Company’s leverage ratio calculation. As of December 31, 2021, the Revolving
15
Commitment had outstanding borrowings of $107.0 million and the Term Loan had outstanding borrowings of $48.0 million.
The Company maintains approximately $71.3 million in letters of credit as of September 30, 2022. 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 $37.2 million as of December 31, 2021. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims.
In order to comply with applicable debt covenants, the Company is required to maintain at all times a leverage ratio of not greater than 3.00:1.00. The Leverage Ratio is calculated as of the last day of the fiscal quarter most recently ended. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance throughout 2022.
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 US 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 US dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards were recorded in other income/expense and were equal to net gains of $1.0 million and net losses of $0.1 million for the quarters ended September 30, 2022 and 2021, respectively, and net gains of $1.1 million and net losses of $0.6 million for the nine months ended September 30, 2022 and 2021, respectively. The fair values of the Company’s FX Forwards were recorded as a net asset of $0.8 million in Other Current Assets as of September 30, 2022 and an insignificant net obligation in Other Current Liabilities as of December 31, 2021, respectively.
As of September 30, 2022, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):
Non-Designated Derivative Summary
Number of
Sell
Buy
FX Forward Contracts
Instruments
Notional
Sell AUD/Buy USD Fwd Contract
16
2,300
1,615
Sell CAD/Buy USD Fwd Contract
16,000
12,313
32
13,928
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
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.PENSION PLANS
In September 2019, the Company settled its fully-funded Rollins, Inc. pension plan, and during 2021, all remaining assets were reverted to the Company per ERISA regulations. The Company continues to sponsor its Waltham, Inc. defined benefit plan. This plan had assets of $2.2 million, a projected liability of $2.9 million and an unfunded status of $0.7 million as of September 30, 2022. The Company has not made any employer contributions to its Waltham defined benefit retirement plan in 2022.
NOTE 13.STOCKHOLDERS’ EQUITY
During the nine months ended September 30, 2022, the Company paid $147.6 million, or $0.30 per share, in cash dividends compared to $119.7 million, or $0.24 per share, during the same period in 2021.
During the nine months ended September 30, 2022 and during the same period in 2021, the Company did not repurchase shares on the open market.
The Company repurchases shares from employees for the payment of their taxes on restricted shares that have vested. The Company repurchased $0.0 million and $0.3 million for the quarters ended September 30, 2022 and 2021, and $7.0 million and $10.6 million for the nine-month periods ended September 30, 2022 and 2021, respectively.
As more fully discussed in Note 15 of the Company’s notes to the consolidated financial statements in its 2021 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 2022 grant, restricted shares vest in 20 percent increments over five years from the date of the grant. Prior grants vest over six years from the date of grant. The Company issues new shares from its authorized but unissued share pool. As of September 30, 2022, approximately 5.9 million shares of the Company’s common stock were reserved for issuance.
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Time Lapse Restricted Shares
The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense:
Time lapse restricted stock:
Pre-tax compensation expense
Tax benefit
(1,298)
(1,025)
(3,894)
(2,950)
Restricted stock expense, net of tax
3,659
2,895
12,020
8,812
The following table summarizes information on unvested restricted stock outstanding as of September 30, 2022:
Weighted
Average
Grant-Date
(number of shares in thousands)
Fair Value
Unvested Restricted Stock at December 31, 2021
2,596
26.26
Forfeited
(68)
26.32
Vested
(666)
19.97
Granted
854
30.12
Unvested Restricted Stock at September 30, 2022
2,716
28.93
As of September 30, 2022, and December 31, 2021, the Company had $57.9 million and $65.2 million of total unrecognized compensation cost, respectively, related to time-lapse restricted shares that are expected to be recognized over a weighted average period of approximately 3.7 years and 4.5 years, respectively.
NOTE 14.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.
A reconciliation of weighted average shares outstanding is as follows (in thousands):
Weighted-average outstanding common shares
489,756
489,306
489,705
489,241
Add participating securities:
Weighted-average time-lapse restricted awards
2,560
2,763
2,580
2,817
Total weighted-average shares outstanding - basic
Dilutive effect of restricted stock units
114
113
Weighted-average shares outstanding - diluted
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NOTE 15.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 $37.2 million and $33.2 million for the three months ended September 30, 2022 and 2021, respectively, and $90.8 million and $95.5 million for the nine months ended September 30, 2022 and 2021, respectively.
The Company’s effective tax rate decreased to 25.7% in the third quarter of 2022 compared to 26.1% in 2021. During the nine months ended September 30, 2022, the Company’s effective tax rate decreased to 24.5% compared to 25.1% in 2021. The rate was lower due to a decrease in foreign taxes from 2021 to 2022.
As of September 30, 2022 and December 31, 2021, we had deferred income tax assets of $2.6 million and $2.9 million, respectively, included in other assets, and deferred income tax liabilities of $15.1 million and $13.3 million, respectively, included in other long-term accrued liabilities.
NOTE 16.SUBSEQUENT EVENTS
Quarterly Dividend
On October 25, 2022, the Company’s Board of Directors declared a regular quarterly cash dividend on its common stock of $0.13 per share payable on December 9, 2022 to stockholders of record at the close of business on November 10, 2022.
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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 2021 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
Revenues for the quarter increased 12.2% percent to $729.7 million compared to $650.2 million for the prior year. Income before income taxes increased 14.0% to $144.8 million compared to $127.1 million the prior year. Net income increased 14.7% to $107.6 million, with earnings per diluted share of $0.22 compared to $93.9 million, or $0.19 per diluted share for the prior year.
During the nine months ended September 30, 2022, revenues increased 11.5% to $2.0 billion compared to $1.8 billion for the prior year. Income before income taxes decreased 2.5% to $371.2 million compared to $380.9 million the prior year. Net income decreased 1.7% to $280.4 million, with earnings per diluted share of $0.57 compared to $285.4 million, or $0.58 per diluted share for the prior year.
As more fully discussed in the results of operations, our residential, commercial, and termite and ancillary services experienced double digit revenue percentage growth for both the quarter and nine months ended September 30, 2022.
IMPACT OF COVID-19 AND OTHER ECONOMIC TRENDS
The global spread and unprecedented impact of the COVID-19 pandemic (“COVID-19”) has created uncertainty and economic disruption around the world. We will continue to monitor COVID-19 and may again take actions that may alter our operations, including those that may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees and customers. We do not know when, or if, it will become practical to eliminate all of these measures entirely as there is no guarantee that COVID-19 will be fully contained.
In addition, continued disruption in economic markets due to high inflation, increased fuel costs, 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 revamping its routing and scheduling process to decrease the number of miles per stop, advanced scheduling to compensate for employee and vehicle shortages, shipping delays, 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.
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The extent to which COVID-19, inflation and other economic trends will continue to impact the Company’s business, financial condition and results of operations is highly uncertain. Therefore, we cannot reasonably estimate the full future impacts of these matters at this time.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2022 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2021
Variance
As a % of Revenue
79,505
12.2
100.0
42,684
14.0
47.7
47.0
19,320
9.9
29.3
29.9
665
2.8
3.3
3.6
62,669
12.0
80.3
80.5
16,836
13.3
19.7
19.5
624
NM
0.1
0.0
(1,533)
(0.3)
(0.1)
17,745
19.8
3,976
5.1
13,769
14.7
14.4
Revenue
Revenues for the third quarter ended September 30, 2022 were $729.7 million, an increase of $79.5 million, or 12.2%, from third quarter 2021 revenues of $650.2 million. Revenue performance was strong in the third quarter despite a resurgence of COVID-19 that affected our business earlier in the quarter as well as the business interruption from Hurricane Ian that impacted the Southeast market in the latter part of the quarter. Comparing 2022 to 2021, residential pest control revenue increased 10%, commercial pest control revenue increased 11% and termite and ancillary services grew 19%. The Company’s revenue mix for the third quarter ended September 30, 2022 consisted primarily of 46% residential pest control, 33% commercial pest control and 19% termite and ancillary revenues (such as moisture control, insulation, deck and gutter work). The Company’s foreign operations accounted for approximately 7% of total revenues for the third quarters ended September 30, 2022 and 2021.
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
2020
First Quarter
590,680
535,554
487,901
Second Quarter
714,049
638,204
553,329
Third Quarter
583,698
Fourth Quarter
600,343
536,292
Year to date
2,424,300
2,161,220
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Cost of Services Provided
For the quarter ended September 30, 2022, cost of services provided increased $42.7 million, or 14.0%, compared to the quarter ended September 30, 2021. As a percentage of revenue cost of services increased to 47.7% from 47.0% in the prior year. Cost of services as a percent of revenue increased primarily due to an increase in the casualty reserve. The change in the casualty reserve was driven by a number of asserted auto claims that matured in the quarter. These claims can change from time to time and we either reached resolution or received additional information about the nature of the claim that provided a better estimation of the total liability associated with the claim in the quarter. We also saw a general increase in spending associated with people, materials and supplies and fleet costs, due to an increase in business activity albeit at a slower pace than revenue growth.
Sales, General and Administrative
For the quarter ended September 30, 2022, sales, general and administrative (SG&A) expenses increased $19.3 million, or 9.9%, compared to the quarter ended September 30, 2021. As a percentage of revenue SG&A decreased to 29.3% from 29.9% 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. Although claims activity had an impact on SG&A, it had a lesser impact on SG&A than cost of services.
Depreciation and Amortization
For the quarter ended September 30, 2022, depreciation and amortization increased $0.7 million, or 2.8%, compared to the quarter ended September 30, 2021. The increase was due to the additional amortization from acquisitions.
Operating Income
For the quarter ended September 30, 2022, operating income increased $16.8 million, or 13.3%, compared to the quarter ended September 30, 2021. As a percentage of revenue operating income increased to 19.7% from 19.5% in the prior year. Operating income increased due to an increase in revenue driven by double digit growth in all lines of service, despite a resurgence of COVID-19 that affected our productivity earlier in the quarter as well as the business interruption from Hurricane Ian that impacted the Southeast market in the latter part of the quarter. The improvement in revenue was partially offset by an increase in expenses associated with the casualty reserve as well as an increase in spending associated with people, advertising and customer facing activities.
Other Income, Net
During the quarter ended September 30, 2022, other income increased $1.5 million compared to the quarter ended September 30, 2021 due to gains on asset sales.
Interest Expense, Net
For the quarter ended September 30, 2022, interest expense, net increased $0.6 million, compared to the quarter ended September 30, 2021 due to the increase in the average debt balance and the increase in weighted average interest rates.
Income Taxes
The Company’s effective tax rate decreased to 25.7% in the third quarter of 2022 compared to 26.1% in 2021. The rate was lower due to a decrease in foreign taxes from 2021 to 2022.
22
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2021
210,476
11.5
115,428
48.2
47.4
72,402
13.4
30.1
29.6
2,935
4.2
3.9
190,765
12.9
81.9
80.9
19,711
5.7
18.1
19.1
960
72.0
28,428
84.6
(1.8)
(9,677)
(2.5)
18.2
20.9
(4,693)
(4.9)
4.5
5.2
(4,984)
(1.7)
13.8
15.6
Revenues for the nine months ended September 30, 2022 were $2.0 billion, an increase of $210.5 million, or 11.5%, from 2021 revenues of $1.8 billion. Comparing 2022 to 2021, residential pest control revenue increased 10%, commercial pest control revenue increased 11% and termite and ancillary services grew 16%. The Company’s revenue mix for the nine months ended September 30, 2022 consisted primarily of 45% residential pest control, 34% commercial pest control and 20% termite and ancillary revenues. The Company’s foreign operations accounted for approximately 7% and 8% of total revenues for the nine months ended September 30, 2022 and 2021, respectively.
For the nine months ended September 30, 2022, cost of services provided increased $115.4 million, or 13.3%, compared to the nine months ended September 30, 2021. As a percentage of revenue cost of services increased to 48.2% from 47.4% in the prior year. Cost of Services increased due to an increase in the casualty reserve in the third quarter coupled with an increase in people costs, materials and supplies and fleet costs due to an increase in business activity.
For the nine months ended September 30, 2022, sales, general and administrative (SG&A) expenses increased $72.4 million, or 13.4%, compared to the nine months ended September 30, 2021. As a percentage of revenue SG&A increased to 30.1% from 29.6% in the prior year. SG&A increased due primarily to an increase in people costs, advertising costs and fleet costs due to an increase in business activity.
For the nine months ended September 30, 2022, depreciation and amortization increased $2.9 million, or 4.2%, compared to the nine months ended September 30, 2021. The increase was primarily due to the additional amortization from several acquisitions.
For the nine months ended September 30, 2022, operating income increased $19.7 million, or 5.7%, compared to the prior year. As a percentage of revenue operating income decreased to 18.1% from 19.1% in the prior year. The increase in revenue was partially offset by an increase in expense associated with the casualty reserve in the third quarter coupled with an increase in spending associated with people, advertising, and fleet costs on the increased business activity.
During the nine months ended September 30, 2022, other income decreased $28.4 million compared to the nine months ended September 30, 2021 due to the Company recognizing a $31.5 million gain in the prior year related to multiple sale-leaseback transactions where the Company sold and leased back properties that it acquired in 2019 with the Clark Pest Control acquisition.
During the nine months ended September 30, 2022, interest expense, net increased $1.0 million compared to the nine months ended September 30, 2021 primarily due to the increase in the average debt balance and the increase in weighted average interest rates for the nine months ended September 30, 2022.
During the nine months ended September 30, 2022, the Company’s effective tax rate decreased to 24.5% compared to 25.1% in 2021. The rate was lower due to a decrease in foreign taxes from 2021 to 2022.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Flow
The Company’s $121.9 million of total cash at September 30, 2022 is primarily money market funds and cash held at various banking institutions. Approximately $65.4 million is held in cash accounts at international bank institutions and the remaining $56.5 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. Repatriation of cash from the Company’s international subsidiaries is not a part of the Company’s current business plan.
As of September 30, 2022, the Company had outstanding borrowings of $124.9 million under the Term Loan and there were no outstanding borrowings under the Revolving Commitment. The aggregate effective interest rate on the debt outstanding as of September 30, 2022 was 3.866%. The effective interest rate is comprised of the BSBY plus a margin of 75.0 basis points as determined by the Company’s leverage ratio calculation. As of December 31, 2021, the Revolving Commitment had outstanding borrowings of $107.0 million and the Term Loan had outstanding borrowings of $48.0 million.
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Rollins maintains adequate liquidity and capital resources, without regard to its foreign deposits, that are directed to finance domestic operations and obligations and to fund expansion of its domestic business. In order to comply with applicable debt covenants, the Company is required to maintain at all times a leverage ratio of not greater than 3.00:1.00. The leverage ratio is calculated as of the last day of the fiscal quarter most recently ended. The Company remained in compliance with applicable debt covenants at September 30, 2022 and expects to maintain compliance throughout 2022.
The Company believes its current cash and cash equivalents balances, future cash flows expected to be generated from operating activities, and available borrowings under its $175 million revolving credit facility and $300 million term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future.
The following table sets forth a summary of our cash flows from operating, investing and financing activities for the nine-month periods presented:
43,626
14.6
(134,482)
88,403
31.1
Effect of exchange rate on cash
(150)
(2.4)
(2,603)
(13.6)
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 $342.5 million and $298.9 million for the nine months ended September 30, 2022 and 2021, respectively. The $43.6 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.
25
Cash Used in or Provided by Investing Activities
The Company’s investing activities used $123.4 million for the nine months ended September 30, 2022 and provided $11.1 million for the nine months ended September 30, 2021. The Company invested approximately $22.9 million in capital expenditures during 2022 compared to $20.0 million during 2021. Capital expenditures for the period consisted primarily of equipment replacements and technology-related projects. Cash paid for acquisitions totaled $110.4 million for the nine months ended September 30, 2022 as compared to $39.7 million for the nine months ended September 30, 2021. The expenditures for the Company’s acquisitions were funded through existing cash balances and operating cash flows. The nine months ended September 30, 2021 included approximately $67 million in cash proceeds from the sale of assets related to the Clark Pest property sale-leaseback transactions.
Cash Provided by or Used in Financing Activities
Cash used by financing activities was $196.3 million during the nine months ended September 30, 2022 compared to cash used of $284.7 million in the prior year. The Company made net debt repayments of $30.0 million during the nine months ended September 30, 2022, compared to net repayments of $135.0 million during 2021. A total of $147.6 million was paid in cash dividends ($0.30 per share) during the nine months ended September 30, 2022 compared to $119.7 million in cash dividends paid ($0.24 per share) during the nine months ended September 30, 2021.
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 nine months of 2022 nor during the same period in 2021. In total, 11.4 million additional shares may be purchased under the share repurchase program. The Company repurchased $7.0 million and $10.6 million of common stock for the nine months ended September 30, 2022 and 2021, respectively, from employees for the payment of taxes on vesting restricted shares.
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.
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CRITICAL ACCOUNTING ESTIMATES
There have been no changes to the Company’s critical accounting estimates since the filing of its Form 10-K for the year ended December 31, 2021.
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:
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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. 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 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, 2021 (the “2021 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 2021 Form 10-K. There were no material changes to our market risk exposure during the three and nine months ended September 30, 2022.
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
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of September 30, 2022 (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.
Changes in Internal Controls Over Financial Reporting
Management’s quarterly evaluation identified no changes in our internal control over financial reporting during the third quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
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, 2021.
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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 July 1, 2022 to September 30, 2022.
Total number of
Weighted-
shares purchased as
Maximum number of
average
part of publicly
shares that may yet be
shares
price paid
announced
purchased under the
Period
purchased
per share
repurchases (1)
repurchase plan (1)
July 1 to 31, 2022
11,415,625
August 1 to 31, 2022
September 1 to 30, 2022
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ITEM 6.EXHIBITS
Exhibit No.
Exhibit Description
Incorporated By Reference
Filed Herewith
Form
Date
Number
2.1
Stock Purchase Agreement by and among Rollins, Inc., Clark Pest Control of Stockton, Inc., the Stockholders of Clark Pest Control of Stockton, Inc. the Principals and the Stockholders Representative
10-Q
April 26, 2019
10.1
2.2
Asset Purchase Agreement among King Distribution, Inc., a Delaware corporation, Geotech Supply Co., LLC, a California limited liability company, and Clarksons California Properties, California limited partnership
10.2
2.3
Real Estate Purchase Agreement by and between RCI – King, Inc., and Clarksons California Properties, a California limited partnership
10.3
3.1
Restated Certificate of Incorporation of Rollins, Inc., dated July 28, 1981
August 1, 2005
(3)(i)(A)
3.2
Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated August 20, 1987
10-K
March 11, 2005
(3)(i)(B)
Certificate of Change of Location of Registered Office and of Registered Agent, dated March 22, 1994
(3)(i)(C)
3.4
Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated April 26, 2011
February 25, 2015
(3)(i)(E)
3.5
Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated April 28, 2015
July 29, 2015
(3)(i)(F)
Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated April 23, 2019
(3)(i)(G)
3.7
Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated April 27, 2021
July 30, 2021
(3)(i)(H)
3.8
Amended and Restated By-laws of Rollins, Inc., dated May 20, 2021
8-K
May 24, 2021
4.1
Form of Common Stock Certificate of Rollins, Inc.
March 26, 1999
(4)
Description of Registrant’s Securities
February 28, 2020
4(b)
10.1+
Membership Interest Purchase Agreement by and among Rollins, Inc., Northwest Exterminating Co., Inc. NW Holdings, LLC and the stockholders of Northwest Exterminating Co., Inc. dated as of July 24, 2017
October 27, 2017
10.2*
Rollins, Inc. Amended and Restated Deferred Compensation Plan
S-8
November 18, 2005
10.3*
Form of Plan Agreement pursuant to the Rollins, Inc. Amended and Restated Deferred Compensation Plan
10.4*
Written description of Rollins, Inc. Performance-Based Incentive Cash Compensation Plan for Executive Officer
February 1, 2021
10(a)
10.5*
2018 Stock Incentive Plan
DEF 14A
March 21, 2018
Appendix A
10.6*
Form of Restricted Stock Grant Agreement
April 28, 2008
10(d)
10.7*
Form of Time-Lapse Restricted Stock Agreement
April 27, 2012
10.8*
Summary of Compensation Arrangements with Executive Officers
February 25, 2011
(10)(q)
10.9*
Summary of Compensation Arrangements with Non-Employee Directors
10(i)
10.10
Revolving Credit Agreement dated as of April 30, 2019 between Rollins, Inc. and SunTrust Bank and Bank of America, N.A.
10.11
Amended Credit Agreement dated as of January 27, 2022 between Rollins, Inc. and Truist Bank in its capacity as Administrative Agent and as a Lender and Bank of America, N.A. as a Lender
February 25, 2022
10.12
Annex A to the Credit Agreement dated as of January 27, 2022 between Rollins, Inc. and Truist Bank in its capacity as
10.13
Administrative Agent and as a Lender and Bank of America, N.A. as a Lender
Annex B to the Credit Agreement dated as of January 27, 2022 between Rollins, Inc. and Truist Bank in its capacity as Administrative Agent and as a Lender and Bank of America, N.A. as a Lender
10.14
10.14*
Form of Rollins, Inc. 2022 Executive Bonus Plan
10.15
10.15*
Rollins, Inc. 2022 Executive Bonus Plan - Jerry Gahlhoff
10.16
10.16*
Confidential Settlement and General Release Agreement dated as of April 5, 2022 between the Company and Paul E. Northen
April 28, 2022
10.17
10.17*
Form of Time-Lapse Restricted Stock Agreement for Non-Section 16 Reporting Person
X
10.18*
Form of Time-Lapse Restricted Stock Agreement For Section 16 Reporting Persons
10.19*
Offer Letter dated July 25, 2022, between Kenneth D. Krause and the Company
Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Schema Document
101.CAL
Inline XBRL Calculation Linkbase Document
101.LAB
Inline XBRL Labels Linkbase Document
101.PRE
Inline XBRL Presentation Linkbase Document
101.DEF
Inline XBRL Definition Linkbase Document
104
Cover Page Interactive Data File (embedded with the Inline XBRL document)
+
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
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.
(Registrant)
Date: October 27, 2022
By:
/s/ Gary W. Rollins
Gary W. Rollins
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Traci Hornfeck
Traci Hornfeck
Chief Accounting Officer
(Principal Accounting Officer)