UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2017March 31, 2018
Commission File Number 1-4422
(Exact name of registrant as specified in its charter)
Delaware |
| |
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)
(Registrant’s telephone number, including area code)
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. Yesxý Noo Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xý No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | |
Large accelerated filer | xý | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | o |
| | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Rollins, Inc. had 217,975,154218,187,939 shares of its $1 par value Common Stock outstanding as of OctoberApril 16, 2017.2018.
ROLLINS, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 2017MARCH 31, 2018 AND DECEMBER 31, 20162017 (in thousands except share data) | | September 30, | | | December 31, | |
| | 2017 | | | 2016 | |
| | (unaudited) | | | | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 113,396 | | | $ | 142,785 | |
Trade receivables, net of allowance for doubtful accounts of $11,922 and $11,443, respectively | | | 110,325 | | | | 88,490 | |
Financed receivables, short-term, net of allowance for doubtful accounts of $1,535 and $1,727, respectively | | | 17,208 | | | | 15,968 | |
Materials and supplies | | | 15,380 | | | | 13,724 | |
Other current assets | | | 26,617 | | | | 29,204 | |
Total current assets | | | 282,926 | | | | 290,171 | |
Equipment and property, net | | | 132,865 | | | | 133,477 | |
Goodwill | | | 372,924 | | | | 255,665 | |
Customer contracts | | | 141,385 | | | | 117,466 | |
Other intangible assets | | | 45,973 | | | | 44,310 | |
Financed receivables, long-term, net of allowance for doubtful accounts of $1,357 and $1,430, respectively | | | 18,995 | | | | 16,748 | |
Deferred income taxes | | | 32,491 | | | | 41,877 | |
Other assets | | | 18,968 | | | | 16,824 | |
Total assets | | $ | 1,046,527 | | | $ | 916,538 | |
LIABILITIES | | | | | | | | |
Accounts payable | | $ | 36,195 | | | $ | 30,284 | |
Accrued insurance | | | 27,830 | | | | 26,201 | |
Accrued compensation and related liabilities | | | 75,087 | | | | 75,839 | |
Unearned revenues | | | 118,950 | | | | 99,820 | |
Other current liabilities | | | 50,724 | | | | 44,847 | |
Total current liabilities | | | 308,786 | | | | 276,991 | |
Accrued insurance, less current portion | | | 34,014 | | | | 32,023 | |
Accrued pension | | | 1,759 | | | | 2,880 | |
Long-term accrued liabilities | | | 51,529 | | | | 36,099 | |
Total liabilities | | | 396,088 | | | | 347,993 | |
Commitments and Contingencies | | | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | | |
Preferred stock, without par value; 500,000 shares authorized, zero shares issued | | | — | | | | — | |
Common stock, par value $1 per share; 375,000,000 shares authorized, 217,975,154 and 217,791,511 shares issued and outstanding, respectively | | | 217,975 | | | | 217,792 | |
Paid in capital | | | 78,482 | | | | 77,452 | |
Accumulated other comprehensive loss | | | (59,601 | ) | | | (70,075 | ) |
Retained earnings | | | 413,583 | | | | 343,376 | |
Total stockholders’ equity | | | 650,439 | | | | 568,545 | |
Total liabilities and stockholders’ equity | | $ | 1,046,527 | | | $ | 916,538 | |
| | | | | | | | |
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (unaudited) | | |
ASSETS | |
| | |
|
Cash and cash equivalents | $ | 84,319 |
| | $ | 107,050 |
|
Trade receivables, net of allowance for doubtful accounts of $10,536 and $11,814, respectively | 96,459 |
| | 97,802 |
|
Financed receivables, short-term, net of allowance for doubtful accounts of $1,581 and $1,535, respectively | 16,979 |
| | 17,263 |
|
Materials and supplies | 15,885 |
| | 14,983 |
|
Other current assets | 27,062 |
| | 25,697 |
|
Total current assets | 240,704 |
| | 262,795 |
|
Equipment and property, net | 136,272 |
| | 134,088 |
|
Goodwill | 364,606 |
| | 346,514 |
|
Customer contracts | 176,447 |
| | 152,869 |
|
Trademarks & Tradenames | 50,198 |
| | 49,998 |
|
Other intangible assets | 11,438 |
| | 11,550 |
|
Financed receivables, long-term, net of allowance for doubtful accounts of $1,406 and $1,357, respectively | 22,305 |
| | 20,414 |
|
Prepaid Pension | 18,237 |
| | 17,595 |
|
Deferred income taxes | 10,428 |
| | 18,420 |
|
Other assets | 20,061 |
| | 19,420 |
|
Total assets | $ | 1,050,696 |
| | $ | 1,033,663 |
|
LIABILITIES | |
| | |
|
Accounts payable | $ | 30,624 |
| | $ | 26,161 |
|
Accrued insurance | 28,462 |
| | 28,018 |
|
Accrued compensation and related liabilities | 64,610 |
| | 73,016 |
|
Unearned revenues | 117,934 |
| | 109,029 |
|
Other current liabilities | 57,443 |
| | 58,345 |
|
Total current liabilities | 299,073 |
| | 294,569 |
|
Accrued insurance, less current portion | 34,787 |
| | 34,245 |
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Long-term accrued liabilities | 54,073 |
| | 50,925 |
|
Total liabilities | 387,933 |
| | 379,739 |
|
Commitments and Contingencies |
|
| |
|
|
STOCKHOLDERS’ EQUITY | |
| | |
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Preferred stock, without par value; 500,000 shares authorized, zero shares issued |
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| |
|
|
Common stock, par value $1 per share; 375,000,000 shares authorized, 218,186,439 and 217,992,177 shares issued and outstanding, respectively | 218,186 |
| | 217,992 |
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Paid in capital | 75,079 |
| | 81,405 |
|
Accumulated other comprehensive loss | (48,908 | ) | | (45,956 | ) |
Retained earnings | 418,406 |
| | 400,483 |
|
Total stockholders’ equity | 662,763 |
| | 653,924 |
|
Total liabilities and stockholders’ equity | $ | 1,050,696 |
| | $ | 1,033,663 |
|
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,MARCH 31, 2018 AND 2017 AND 2016 (in thousands per except share data)
(unaudited)
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
REVENUES | | | | | | | | | | | | | | | | |
Customer services | | $ | 450,442 | | | $ | 423,994 | | | $ | 1,259,244 | | | $ | 1,187,863 | |
COSTS AND EXPENSES | | | | | | | | | | | | | | | | |
Cost of services provided | | | 218,781 | | | | 205,608 | | | | 612,424 | | | | 579,353 | |
Depreciation and amortization | | | 14,313 | | | | 13,083 | | | | 41,630 | | | | 37,073 | |
Sales, general and administrative | | | 134,932 | | | | 125,407 | | | | 379,753 | | | | 364,207 | |
Gain on sale of assets, net | | | (66 | ) | | | (52 | ) | | | (179 | ) | | | (720 | ) |
Interest income, net | | | (79 | ) | | | (18 | ) | | | (342 | ) | | | (156 | ) |
INCOME BEFORE INCOME TAXES | | | 82,561 | | | | 79,966 | | | | 225,958 | | | | 208,106 | |
PROVISION FOR INCOME TAXES | | | 31,131 | | | | 30,315 | | | | 80,569 | | | | 78,744 | |
NET INCOME | | $ | 51,430 | | | $ | 49,651 | | | $ | 145,389 | | | $ | 129,362 | |
NET INCOME PER SHARE - BASIC AND DILUTED | | $ | 0.24 | | | $ | 0.23 | | | $ | 0.67 | | | $ | 0.59 | |
DIVIDENDS PAID PER SHARE | | $ | 0.115 | | | $ | 0.10 | | | $ | 0.345 | | | $ | 0.30 | |
Weighted average participating shares outstanding - basic and diluted | | | 217,988 | | | | 218,039 | | | | 217,987 | | | | 218,386 | |
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| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
REVENUES | |
| | |
|
Customer services | $ | 408,742 |
| | $ | 375,247 |
|
COSTS AND EXPENSES | |
| | |
|
Cost of services provided | 206,143 |
| | 189,163 |
|
Depreciation and amortization | 16,916 |
| | 13,771 |
|
Sales, general and administrative | 126,487 |
| | 115,154 |
|
Gain on sale of assets, net | (56 | ) | | (26 | ) |
Interest expense / (income), net | 58 |
| | (73 | ) |
INCOME BEFORE INCOME TAXES | 59,194 |
| | 57,258 |
|
PROVISION FOR INCOME TAXES | 10,669 |
| | 16,988 |
|
NET INCOME | $ | 48,525 |
| | $ | 40,270 |
|
NET INCOME PER SHARE - BASIC AND DILUTED | $ | 0.22 |
| | $ | 0.18 |
|
DIVIDENDS PAID PER SHARE | $ | 0.14 |
| | $ | 0.12 |
|
Weighted average participating shares outstanding - basic and diluted | 218,163 |
| | 217,971 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2018 AND 2017 AND 2016 (unaudited)
| | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
NET INCOME | | $ | 51,430 | | | $ | 49,651 | | | $ | 145,389 | | | $ | 129,362 | |
Other comprehensive earnings (loss), net of tax | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 4,085 | | | | (2,957 | ) | | | 10,474 | | | | 4,422 | |
Other comprehensive earnings (loss) | | | 4,085 | | | | (2,957 | ) | | | 10,474 | | | | 4,422 | |
Comprehensive earnings | | $ | 55,515 | | | $ | 46,694 | | | $ | 155,863 | | | $ | 133,784 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
NET INCOME | $ | 48,525 |
| | $ | 40,270 |
|
Other comprehensive earnings (loss), net of tax | |
| | |
|
Foreign currency translation adjustments | (2,952 | ) | | 4,007 |
|
Other comprehensive earnings (loss) | (2,952 | ) | | 4,007 |
|
Comprehensive earnings | $ | 45,573 |
| | $ | 44,277 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Rollins, Inc. and Subsidiaries
(In thousands) (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Paid- | | Accumulated Other Comprehensive | | Retained | | |
| Shares | | Amount | | In-Capital | | Income / (Loss) | | Earnings | | Total |
Balance at December 31, 2016 | 217,792 |
| | $ | 217,792 |
| | $ | 77,452 |
| | $ | (70,075 | ) | | $ | 343,376 |
| | $ | 568,545 |
|
Net Income | |
| | |
| | |
| | |
| | 179,124 |
| | $ | 179,124 |
|
Other Comprehensive Income, Net of Tax | |
| | |
| | |
| | |
| | |
| | |
Pension Liability Adjustment | — |
| | — |
| | — |
| | 14,159 |
| | — |
| | $ | 14,159 |
|
Foreign Currency Translation Adjustments | — |
| | — |
| | — |
| | 9,960 |
| | — |
| | $ | 9,960 |
|
Cash Dividends | — |
| | — |
| | — |
| | — |
| | (122,017 | ) | | $ | (122,017 | ) |
Stock Compensation | 434 |
| | 434 |
| | 11,965 |
| | — |
| | — |
| | $ | 12,399 |
|
Employee Stock Buybacks | (234 | ) | | (234 | ) | | (8,012 | ) | | — |
| | — |
| | $ | (8,246 | ) |
Balance at December 31, 2017 | 217,992 |
| | 217,992 |
| | 81,405 |
| | (45,956 | ) | | 400,483 |
| | 653,924 |
|
Net Income | |
| | |
| | |
| | |
| | 48,525 |
| | 48,525 |
|
Other Comprehensive Income, Net of Tax | |
| | |
| | |
| | |
| | |
| | |
|
Foreign Currency Translation Adjustments | — |
| | — |
| | — |
| | (2,952 | ) | | — |
| | (2,952 | ) |
Cash Dividends | — |
| | — |
| | — |
| | — |
| | (30,602 | ) | | (30,602 | ) |
Stock Compensation | 377 |
| | 377 |
| | 2,716 |
| | — |
| | — |
| | 3,093 |
|
Employee Stock Buybacks | (183 | ) | | (183 | ) | | (9,042 | ) | | — |
| | — |
| | (9,225 | ) |
Balance at March 31, 2018 | 218,186 |
| | 218,186 |
| | 75,079 |
| | (48,908 | ) | | 418,406 |
| | 662,763 |
|
| | | | | | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | | | | | | | | Other | | | | | | | |
| | Common Stock | | | Treasury | | | Paid- | | | Comprehensive | | | Retained | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | In-Capital | | | Income / (Loss) | | | Earnings | | | Total | |
Balance at December 31, 2015 | | | 218,753 | | | $ | 218,753 | | | | (200 | ) | | $ | (200 | ) | | $ | 69,762 | | | $ | (71,178 | ) | | $ | 306,892 | | | $ | 524,029 | |
Net Income | | | | | | | | | | | | | | | | | | | | | | | | | | | 167,369 | | | | 167,369 | |
Other Comprehensive Income, Net of Tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pension Liability Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,705 | | | | — | | | | 1,705 | |
Foreign Currency Translation Adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (602 | ) | | | — | | | | (602 | ) |
Cash Dividends | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (109,002 | ) | | | (109,002 | ) |
Common Stock Purchased (1) | | | (836 | ) | | | (836 | ) | | | — | | | | — | | | | — | | | | — | | | | (21,883 | ) | | | (22,719 | ) |
Common Stock Retired | | | (200 | ) | | | (200 | ) | | | 200 | | | | 200 | | | | | | | | | | | | | | | | — | |
Stock Compensation | | | 388 | | | | 388 | | | | — | | | | — | | | | 12,027 | | | | — | | | | — | | | | 12,415 | |
Employee Stock Buybacks | | | (313 | ) | | | (313 | ) | | | — | | | | — | | | | (8,036 | ) | | | — | | | | — | | | | (8,349 | ) |
Excess Tax Benefit on Share-based payments | | | — | | | | — | | | | — | | | | — | | | | 3,699 | | | | — | | | | — | | | | 3,699 | |
Balance at December 31, 2016 | | | 217,792 | | | | 217,792 | | | | — | | | | — | | | | 77,452 | | | | (70,075 | ) | | | 343,376 | | | | 568,545 | |
Net Income | | | | | | | | | | | | | | | | | | | | | | | | | | | 145,389 | | | | 145,389 | |
Other Comprehensive Income, Net of Tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign Currency Translation Adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10,474 | | | | — | | | | 10,474 | |
Cash Dividends | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (75,182 | ) | | | (75,182 | ) |
Stock Compensation | | | 417 | | | | 417 | | | | — | | | | — | | | | 8,989 | | | | — | | | | — | | | | 9,406 | |
Employee Stock Buybacks | | | (234 | ) | | | (234 | ) | | | — | | | | — | | | | (7,959 | ) | | | — | | | | — | | | | (8,193 | ) |
Balance at September 30, 2017 | | | 217,975 | | | | 217,975 | | | | — | | | | — | | | | 78,482 | | | | (59,601 | ) | | | 413,583 | | | | 650,439 | |
(1) Charges to Retained Earnings are from purchases of the Company’s Common Stock.
The accompanying notes are an integral part of these consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED SEPTEMER 30,MARCH 31, 2018 AND 2017 AND 2016 (unaudited)
| | Nine Months Ended | |
| | September 30, | |
| | 2017 | | | 2016 | |
OPERATING ACTIVITIES | | | | | | | | |
Net income | | $ | 145,389 | | | $ | 129,362 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 41,630 | | | | 37,073 | |
Provision for deferred income taxes | | | 9,386 | | | | 4,954 | |
Provision for bad debts | | | 7,222 | | | | 8,320 | |
Stock - based compensation expense | | | 9,406 | | | | 9,429 | |
Excess tax benefits from share-based payments | | | — | | | | (3,536 | ) |
Other, net | | | (728 | ) | | | (700 | ) |
Changes in operating assets and liabilities | | | (22,918 | ) | | | (26,743 | ) |
Net cash provided by operating activities | | | 189,387 | | | | 158,159 | |
INVESTING ACTIVITIES | | | | | | | | |
Cash used for acquisitions of companies, net of cash acquired | | | (127,881 | ) | | | (40,824 | ) |
Purchases of equipment and property | | | (17,217 | ) | | | (27,128 | ) |
Proceeds from sales of franchises | | | 437 | | | | 199 | |
Other | | | 67 | | | | 1,133 | |
Net cash used in investing activities | | | (144,594 | ) | | | (66,620 | ) |
FINANCING ACTIVITIES | | | | | | | | |
Cash paid for common stock purchased | | | (8,193 | ) | | | (31,043 | ) |
Dividends paid | | | (75,182 | ) | | | (65,506 | ) |
Excess tax benefits from share-based payments | | | — | | | | 3,536 | |
Net cash used in financing activities | | | (83,375 | ) | | | (93,013 | ) |
Effect of exchange rate changes on cash | | | 9,194 | | | | 6,163 | |
Net increase/(decrease) in cash and cash equivalents | | | (29,388 | ) | | | 4,689 | |
Cash and cash equivalents at beginning of period | | | 142,785 | | | | 134,574 | |
Cash and cash equivalents at end of period | | $ | 113,397 | | | $ | 139,263 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
OPERATING ACTIVITIES | |
| | |
|
Net income | $ | 48,525 |
| | $ | 40,270 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 16,916 |
| | 13,771 |
|
Provision for deferred income taxes | 4,101 |
| | 5,462 |
|
Provision for bad debts | 932 |
| | 61 |
|
Stock - based compensation expense | 3,093 |
| | 3,267 |
|
Other, net | (1,195 | ) | | (130 | ) |
Changes in operating assets and liabilities | 376 |
| | (5,930 | ) |
Net cash provided by operating activities | 72,748 |
| | 56,771 |
|
INVESTING ACTIVITIES | |
| | |
|
Cash used for acquisitions of companies, net of cash acquired | (43,154 | ) | | (3,020 | ) |
Purchases of equipment and property | (6,134 | ) | | (5,454 | ) |
Proceeds from sales of franchises | 177 |
| | 168 |
|
Other | 76 |
| | 61 |
|
Net cash used in investing activities | (49,035 | ) | | (8,245 | ) |
FINANCING ACTIVITIES | |
| | |
|
Cash paid for common stock purchased | (9,225 | ) | | (7,480 | ) |
Dividends paid | (30,602 | ) | | (25,058 | ) |
Net cash used in financing activities | (39,827 | ) | | (32,538 | ) |
Effect of exchange rate changes on cash | (6,617 | ) | | 3,705 |
|
Net increase/(decrease) in cash and cash equivalents | (22,731 | ) | | 19,693 |
|
Cash and cash equivalents at beginning of period | 107,050 |
| | 142,785 |
|
Cash and cash equivalents at end of period | $ | 84,319 |
| | $ | 162,478 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
NOTE 1. | BASIS OF PREPARATION AND OTHER |
NOTE 1. BASIS OF PREPARATION AND OTHER
Basis of Preparation -The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. There has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Rollins, Inc. (the “Company”) for the year ended December 31, 2016.2017 other than updates related to Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) as noted below. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 20162017 Annual Report on Form 10-K. The preparation of interim financial statements requires management to make estimates and assumptions for the amounts reported in the condensed consolidated financial statements. Specifically, the Company makes estimates in its interim condensed consolidated financial statements for the termite accrual which includes future costs including termiticide life expectancy and government regulations, the insurance accrual which includes self-insurance and worker’s compensation, inventory adjustments, discounts and volume incentives earned, among others.
In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the interim periods have been made. These adjustments are of a normal recurring nature. The results of operations for the three
and nine month period ended
September 30, 2017March 31, 2018 are not necessarily indicative of results for the entire year.
The Company has only one reportable segment, its pest and termite control business. The Company’s results of operations and its financial condition are not reliant upon any single customer, or a few customers, or the Company’s foreign operations.
| NOTE 2. | RECENT ACCOUNTING PRONOUNCEMENTS |
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Revenue
Service Revenue and Other Revenue
Rollins’ revenues are sourced primarily from the sale of pest control and other protection services to residential and commercial consumers.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which are distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Goods and Services and Performance Obligations
The Company contracts with its customers to provide the following goods and services, each of which is a distinct performance obligation:
Pest control services - Rollins provides pest control services to protect residential and commercial properties from common pests, including rodents and insects. Pest control generally consists of assessing a customer’s property for conditions that invite pests, tackling current infestations, and stopping the life cycle to prevent future invaders. Revenue from pest control services is recognized as services are rendered.
The Company’s revenue recognition policies are designed to recognize revenues upon transfer of control at the time services are performed. For certain revenue types, because of the timing of billing and the receipt of cash versus the timing of performing services, certain accounting estimates are utilized. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. The Company defers recognition of advance payments and recognizes the revenue as the services are rendered. The Company classifies discounts related to the advance payments as a reduction in revenues.
Termite control services (including traditional and baiting) - Rollins provides both conventional and baiting termite protection services. Traditional termite protection uses “Termidor” liquid treatment and/or dry foam and Orkin foam to treat voids and spaces
ROLLINS, INC. AND SUBSIDIARIES
around the property, while baiting termite protection uses baits to disrupt the molting process termites require for growth and offers ongoing protection. Revenue from initial termite treatment services is recognized as services are provided.
Maintenance/monitoring/inspection - In connection with the initial service offerings, Rollins provides recurring maintenance, monitoring or inspection services to help protect consumer’s property for any future sign of termite activities after the original treatment. This recurring service is a service-type warranty under ASC 606 as it is routinely sold and purchased separately from the initial treatment services and is typically purchased or renewed annually.
Termite baiting revenues are recognized based on the transfer of control of the individual units of accounting. At the inception of a new baiting services contract, upon quality control review of the installation, the Company recognizes revenue for the installation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring element. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue that depicts the Company's performance in transferring control of the service. The allocation of the purchase price to the two deliverables is based on the relative stand-alone selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual contract period on a straight-line basis that depicts the Company's performance in transferring control of the service.
Revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term that depicts the Company's performance in transferring control of the service; and, the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company accrues for noticed claims. The costs of providing termite services upon renewal are compared to the expected revenue to be received and a provision is made for any expected losses.
Miscellaneous services (e.g., cleaning, etc.) - In certain agreements with customers, Rollins may offer other miscellaneous services, including restroom cleaning (e.g., eliminating foul odors, grease and grime which could attract pests), training (e.g., seminar covering Good Manufacturing Practices and product stewardship), etc. Revenue from miscellaneous services is recognized when services are provided.
Products - Depending on customer demand, Rollins may separately sell pest control and/or termite protection products, such as baits. Revenue from product sales is recognized upon transfer of control of the asset.
Equipment rental (or lease) - Depending on customer demand, Rollins may lease certain pest control and/or termite protection equipment. Revenue from equipment rentals are recognized over the period of the rental/lease. Revenue from equipment rentals are not material and represent less than 1.0% of the Company's revenues for each reported period.
Right to access intellectual property (Franchise) - The right to access Rollins’ intellectual property is an essential part of Orkin’s franchising agreements. These agreements provide the franchisee (the customer) a license to use the Rollins’ name and trademark when advertising and selling services to end customers in their normal course of business. Orkin Franchise agreements contain a clause allowing Orkin to purchase certain assets of the franchisee. This is only an offer for Orkin to re-purchase the assets originally provided by Orkin to the franchisee and is not a performance obligation or a form of consideration. International and domestic franchising revenue was less than 0.5% of the Company’s annual revenues.
All Orkin domestic franchises have a guaranteed repurchase clause that the Orkin franchise may be repurchased by Orkin at a later date once it has been established. Deferred Orkin franchise fees of $3.4 million at both March 31, 2018 and December 31, 2017 were not material to the Company's financial statements.
Royalties from Orkin franchises are accrued and recognized as revenues are earned on a monthly basis. Revenue from franchises was $2.4 million for each of the three month periods ended March 31, 2018 and 2017, respectively.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. The balance of long-term accounts receivable, net of allowance for doubtful accounts, was $22.3 million as of March 31, 2018. As of December 31, 2017, long-term accounts receivable, net of allowance for doubtful accounts, were $20.4 million and are included in financed receivables as a long-term asset on our consolidated statements of financial position.
ROLLINS, INC. AND SUBSIDIARIES
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Activity in the allowance for doubtful accounts was as follows:
|
| | | |
(In thousands) |
Three Months ended March 31, 2018 |
Balance at December 31, 2017 | $ | 14,706 |
|
Charged to costs and expenses | 932 |
|
Net (deductions) recoveries | (2,115 | ) |
Balance at March 31, 2018 | $ | 13,523 |
|
Unearned revenue is comprised mainly of unearned revenue related to the Company’s termite baiting offering and year-in-advance pest control services for which we have been paid in advance and earn the revenue when we transfer control of the product or service.
Refer to Note 7 - Unearned Revenue for further information, including changes in unearned revenue during the period.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Recently issued accounting standards to be adopted in
20172018 or later
In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The
Financial Accounting Standards Board (“FASB”)updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and
International Accounting Standards Board issued their converged standard on revenue recognition in May 2014. The standard provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries and significantly reduce the complexity inherent in today’s revenue recognition guidance. The various ASUs related to Revenue from Contracts with Customers (Topic 606) have been listed below: | · | ASU No. 2014-09. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five step process. |
| · | ASU No. 2015-14. Deferred the effective date of ASU 2014-09 for all entities by one year to the first quarter of 2018 with early application permitted. |
| · | ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments provide guidance on whether an entity is a principal or agent when providing services to a customer along with another party. |
| · | ASU No. 2016-10, Identifying Performance Obligations and Licensing. The amendments clarify the earlier guidance on identifying performance obligations and licensing implementation. |
| · | ASU No. 2016-11, Rescission of SEC Guidance Because of ASUs 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This ASU rescinds certain SEC guidance related to issues that are currently codified under various topics. |
| · | ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments provide clarifying guidance on certain aspects of the five step process and practical expedients regarding the effect of modifications and status of completed contracts under legacy GAAP and disclosures related to the application of this guidance using the modified retrospective or retrospective transition method. |
| · | ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 and includes among others, loan guarantees, impairment testing of contract costs, performance obligations disclosures and accrual of advertising costs. |
annual periods beginning after December 15, 2019. The Company is currently analyzingevaluating the effect of the standard across all of its revenue streams to evaluate the impact of the new standardguidance will have on its revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. Most of the Company’s services are primarily short-term in nature, and the assessment at this stage is that the Company does not expect the adoption of the new revenue recognition standard to have a material impact on itsconsolidated financial statements. As part of its preparation to adopt the standard, the Company established an initial project governance framework, selected a working group and hired a third party service provider to assist with the evaluation. The Company has completed a preliminary review of a representative sample of contracts with its customers and identified the variable consideration provisions of the new guidance as potentially having the most impact on the Company’s method of recognizing revenue. In the next phases of solution development and implementation, the Company will prepare technical accounting memorandums, draft new formal accounting policies, outline and refine required disclosures, identify new IT system requirements, as well as assess the need for additional contract reviews to ensure a representative sample of how the Company contracts with its customers has been chosen. The Company plans to adopt the standard in the first quarter of 2018 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings.
ROLLINS, INC. AND SUBSIDIARIES
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provides additional implementation guidance on the previously issued ASU 2016-02 Leases (Topic 842). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Based on a preliminary assessment, the Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition of right-of-use assets and lease liabilities on its consolidated balance sheets at the beginning of the earliest period presented. The Company is continuing its assessment, which may identify additional impacts this guidance will have on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods. Earlier adoption is permitted for any entity in any interim or annual reporting period. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations2017-12, Derivatives and Hedging (Topic 805): Clarifying815), which provides new guidance intended to improve the Definitionfinancial reporting of a Business, which requireshedging relationships to better portray the economic results of an entity to evaluate if substantially all of the fair value of the gross assets acquiredentity’s risk management activities in its financial statements. This ASU is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The amendments in the update are effective for the Company’s financial statements issued forCompany beginning in fiscal years beginning after December 15, 2017, and interim periods within those years. Earlyyear 2020. The adoption of this ASU is permitted. We do not expect this standardexpected to have a material impact on the Company’sCompany's consolidated financial statements.
ROLLINS, INC. AND SUBSIDIARIES
NOTE 3. REVENUE
Adoption of ASC Topic 606, "Revenue from Contracts with Customers" On January 1, 2018, and the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported
results of operations or financial position.In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge basedin accordance with our historic accounting under Topic 605.
There was no impact on
the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). The standard in this update is effective for the Company’s financial statements
issued for fiscal years beginning in 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.In February 2017, the FASB issued Accounting Standards Update No. 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), Employee Benefit Plan Master Trust Reporting (“ASU 2017-06”). ASU 2017-06 relates primarily to the reporting by an employee benefit plan (a plan) for its interest in a master trust. A master trust is a trust for which a regulated financial institution (bank, trust company, or similar financial institution that is regulated, supervised, and subject to periodic examination by a state or federal agency) serves as a trusteeresult of adopting Topic 606 for the three months ended March 31, 2018 and 2017, or custodianthe twelve months ended December 31, 2017.
The following tables present our revenues disaggregated by revenue source (in thousands, unaudited).
Sales and usage-based taxes are excluded from revenues. No sales to an individual customer or country other than the United States accounted for more than 10% of the three months ended March 31, 2018 and 2017, respectively. Revenue, classified by the major geographic areas in which assets of more than one plan sponsoredour customers are located, was as follows:
|
| | | | | | | |
| (in thousands) |
| Three Months Ended |
| March 31, |
| 2018 |
| | 2017 |
|
United States | $ | 375,959 |
| | $ | 345,580 |
|
Other countries | 32,783 |
| | 29,667 |
|
Total Revenues | $ | 408,742 |
| | $ | 375,247 |
|
Revenue from external customers, classified by
a single employer or by a group of employers under common control are held. Under Topic 960, investments in master trusts are presented in a single line item in the statement of net assets available for benefits. Similar guidance is not provided in Topic 962 or 965, which has resulted in diversity in practice. For each master trust in which a plan holds an interest, the amendments in ASU 2017-06 require a plan’s interest in that master trustsignificant product and
any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in ASU 2017-06 are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. An entity should apply the amendments in ASU 2017-06 retrospectively to each period for which financial statements are presented. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line itemofferings, was as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.
ROLLINS, INC. AND SUBSIDIARIES
|
| | | | | | | |
| (in thousands) |
| Three Months Ended |
| March 31, |
| 2018 |
| | 2017 |
|
Residential contract revenue | $ | 144,197 |
| | $ | 132,344 |
|
Commercial contract revenue | 132,079 |
| | 124,833 |
|
Termite completions, bait monitoring, & renewals | 76,491 |
| | 65,652 |
|
Other revenues | 55,975 |
| | 52,418 |
|
Total Revenues | $ | 408,742 |
| | $ | 375,247 |
|
NOTE
3.4. EARNINGS PER SHARE
The Company follows ASC 260,Earnings Per Share (ASC 260) that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to participating common stockholders by the weighted average number of participating common shares outstanding for the period. Basic and diluted earnings per share attributable to common and restricted shares of common stock for the period were as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Basic and diluted earnings per share | | | | | | | | | | | | | | | | |
Common stock | | $ | 0.24 | | | $ | 0.23 | | | $ | 0.67 | | | $ | 0.59 | |
Restricted shares of common stock | | $ | 0.23 | | | $ | 0.23 | | | $ | 0.65 | | | $ | 0.59 | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Basic and diluted earnings per share | |
| | |
|
Common stock | $ | 0.22 |
| | $ | 0.18 |
|
Restricted shares of common stock | $ | 0.22 |
| | $ | 0.18 |
|
In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the subsidiaries’ services caused damage. In addition, the Company defends employment related cases and
ROLLINS, INC. AND SUBSIDIARIES
claims from time to time. We are involved in certain environmental matters primarily arising in the normal course of business. We are actively contesting each of these matters.
Management does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate will have a material adverse effect on the Company’s financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual quarter or year.
NOTE
5.6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, trade receivables, notes receivable, accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their fair values. The Company has a Revolving Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured line of credit of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $25.0 million swingline subfacility. There were no outstanding borrowings at September 30, 2017March 31, 2018 and December 31, 2016.2017.
NOTE 7. UNEARNED REVENUE
Changes in unearned revenue were as follows:
|
| | | |
(In thousands) |
Three Months ended March 31, 2018 |
Balance at December 31, 2017 | $ | 117,614 |
|
Deferral of unearned revenue | 47,725 |
|
Recognition of unearned revenue | (38,809 | ) |
Balance at March 31, 2018 | 126,530 |
|
| |
Year ended December 31, 2017 | |
Balance at December 31, 2016 | $ | 106,323 |
|
Deferral of unearned revenue | 140,019 |
|
Recognition of unearned revenue | (128,728 | ) |
Balance at December 31, 2017 | 117,614 |
|
Deferred revenue recognized in the three month period ended March 31, 2018 and March 31, 2017 were $38.8 million and $32.6 million, respectively.
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. The Company has no material contracted not recognized revenue as of March 31, 2018 or December 31, 2017.
At March 31, 2018 and December 31, 2017, the Company had long-term unearned revenue of $8.6 million. 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 2025.
NOTE
6. STOCKHOLDERS’8. STOCKHOLDERS' EQUITY
During the
ninethree months ended
September 30, 2017,March 31, 2018, the Company paid
$75.2$30.6 million or
$0.345$0.14 per share in cash dividends compared to
$65.5$25.1 million or
$0.30$0.115 per share during the same period in
2016.2017.
During the
thirdfirst quarter ended
September 30,March 31, 2018 and during the same period in 2017 the Company did not repurchase shares on the open market.
During the same period 2016, the Company repurchased 0.4 million shares on the open market of its $1 par value common stock at a weighted average price of $27.77 per share. The Company did not repurchase shares of its common stock on the open market during the first nine months of 2017. During the first nine months of 2016, the Company repurchased approximately 0.8 million shares at a weighted average price of $27.19.The Company also repurchases shares from employees for the payment of taxes on vesting restricted shares. The Company repurchased
$0.5$9.2 million and
$0.9$7.5 million of common stock for the quarter ended
September 30,March 31, 2018 and 2017,
and 2016, respectively, from employees for the payment of taxes on vesting restricted
shares and $8.2 million and $8.3 million of common stock for the nine months ended September 30, 2017 and 2016, respectively.shares.
ROLLINS, INC. AND SUBSIDIARIES
As more fully discussed in Note 15 of the Company’s notes to the consolidated financial statements in its
20162017 Annual Report on Form 10-K, stock options, time lapse restricted shares and restricted stock units have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plans. The Company issues new shares from its authorized but unissued share pool. At
September 30, 2017,March 31, 2018, approximately
4.33.9 million shares of the Company’s common stock were reserved for issuance.
ROLLINS, INC. AND SUBSIDIARIES
Time Lapse Restricted Shares and Restricted Stock Units
The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
(in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Time lapse restricted stock: | | | | | | | | | | | | | | | | |
Pre-tax compensation expense | | $ | 3,031 | | | $ | 3,049 | | | $ | 9,406 | | | | 9,429 | |
Tax benefit | | | (1,173 | ) | | | (1,180 | ) | | | (3,640 | ) | | | (3,649 | ) |
Restricted stock expense, net of tax | | $ | 1,858 | | | $ | 1,869 | | | $ | 5,766 | | | $ | 5,780 | |
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2018 | | 2017 |
Time lapse restricted stock: | |
| | |
|
Pre-tax compensation expense | $ | 3,093 |
| | $ | 3,267 |
|
Tax benefit | (786 | ) | | (1,264 | ) |
Restricted stock expense, net of tax | $ | 2,307 |
| | $ | 2,003 |
|
The Company adopted the amendments of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accountingduring its first quarter of 2017. Accordingly, the income tax provisions for the quarter ended September 30, 2017 and the nine months ended September 30, 2017 include excess tax benefits of $0.4 million and $5.0 million, respectively. Under prior guidance, these excess tax benefits would have been recorded in additional paid-in capital.The following table summarizes information on unvested restricted stock outstanding as of September 30, 2017:
| | | | | Average Grant- | |
| | Number of | | | Date Fair | |
| | Shares | | | Value | |
Unvested Restricted Stock at December 31, 2016 | | | 2,261 | | | $ | 20.21 | |
Forfeited | | | (31 | ) | | | 22.64 | |
Vested | | | (676 | ) | | | 17.16 | |
Granted | | | 448 | | | | 33.88 | |
Unvested Restricted Stock at September 30, 2017 | | | 2,002 | | | $ | 24.25 | |
March 31, 2018:
|
| | | | | | |
| Number of Shares | | Average Grant- Date Fair Value |
Unvested Restricted Stock at December 31, 2017 | 2,017 |
| | $ | 24.50 |
|
Forfeited | (5 | ) | | 18.68 |
|
Vested | (586 | ) | | 19.69 |
|
Granted | 384 |
| | 47.88 |
|
Unvested Restricted Stock at March 31, 2018 | 1,810 |
| | $ | 31.00 |
|
At September 30, 2017March 31, 2018 and December 31, 2016,2017, the Company had $35.0$48.1 million and $29.9$32.9 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 4.04.5 years and 3.83.9 years, respectively.
NOTE
7.9. PENSION AND POST RETIREMENT BENEFIT PLANS
The following table represents the net periodic pension benefit costs and related components in accordance with FASB ASC 715 “Compensation - Retirement Benefits”:
Components of Net Pension Benefit Gain
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
(in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Interest and service cost | | $ | 2,138 | | | $ | 2,350 | | | $ | 6,414 | | | $ | 7,050 | |
Expected return on plan assets | | | (3,342 | ) | | | (3,305 | ) | | | (10,026 | ) | | | (9,915 | ) |
Amortization of net loss | | | 830 | | | | 816 | | | | 2,490 | | | | 2,448 | |
Net periodic benefit | | $ | (374 | ) | | $ | (139 | ) | | $ | (1,122 | ) | | $ | (417 | ) |
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2018 | | 2017 |
Interest and service cost | $ | 1,995 |
| | $ | 2,138 |
|
Expected return on plan assets | (3,443 | ) | | (3,342 | ) |
Amortization of net loss | 826 |
| | 830 |
|
Net periodic benefit | $ | (622 | ) | | $ | (374 | ) |
During the
ninethree months ended
September 30,March 31, 2018 and the same period 2017 the Company made no contributions to its defined benefit retirement plans (the “Plans”).
During the same time frame in prior year the Company made $3.0 million in contributions. The Company made
$3.3 million inno contributions for the year ended December 31,
2016.2017. The Company is adequately funded on its Pension Plans and is not expecting to make further contributions in
2017.ROLLINS, INC. AND SUBSIDIARIES
NOTE
8.10. BUSINESS COMBINATIONS
The Company made
1916 acquisitions during the
ninethree month period ended
September 30, 2017,March 31, 2018, and
3423 acquisitions for the year ended December 31,
2016,2017, respectively,
assome of which have been disclosed on various press releases and related Current Reports on Form 8-K.
On August 1, 2017, Rollins, Inc.the Company completed itsthe acquisition of Northwest Exterminating Co., Inc.’s pest control business. Based Northwest has 23 offices in Marietta, Ga., Northwest5 southeastern states and was established in 1951 and services approximately 120,000 customers in Georgia, South Carolina, Tennessee, Alabama, and North Carolina. Pest control industry trade publication PCT Magazine listed Northwest as the nation’s 17th largest pest control operatormanagement company. Northwest performs services for approximately
ROLLINS, INC. AND SUBSIDIARIES
120,000 customers and will continue to operate as a separate business, as one of Rollins’ Specialty Brands, along with HomeTeam Pest Defense, Western Pest Services and Waltham Pest Services.
On February 28, 2018, the Company announced that it has purchased the stock of AMES Group Limited and Kestrel Pest Control Limited, both companies operating in the countryUK. AMES Group Limited is a long established pest control company, with a rich history of providing superior pest control, bird control, and specialist services to commercial customers throughout the midlands and including London. Kestrel Pest Control provides superior commercial pest control to customers in South Hampton and surrounding areas of the Southwest. Kestrel Pest Control will merge with our Safeguard UK brand.
On March 1, 2018, the Company announced that it had completed its
most recent 2017 list.acquisition of OPC Services. OPC Services will continue to operate as a separate business, and one of Rollins' Specialty Brands, along with HomeTeam Pest Defense, Northwest Exterminating, Western Pest Services and Waltham Pest Services.
The preliminary values of major classes of assets acquired and liabilities assumed recorded at the date of acquisition, as adjusted during the valuation period, are included in the reconciliation of the total consideration as follows (in thousands):
| | September 30, |
| | 2017 |
Accounts Receivable | | $ | 3,595 | |
Current Assets | | | 464 | |
Equipment and property | | | 2,245 | |
Goodwill and other intangible assets | | | 158,513 | |
Current liabilities | | | (21,493 | ) |
Long-term liabilities | | | 151 | |
Total consideration paid | | $ | 143,475 | |
Less: Contingent consideration liability | | | (15,593 | ) |
Total cash purchase price | | $ | 127,882 | |
|
| | | |
| March 31, 2018 |
Accounts Receivable | $ | 1,536 |
|
Current Assets | 273 |
|
Equipment and property | 3,591 |
|
Goodwill | 33,613 |
|
Customer Contracts and other intangible assets | 18,225 |
|
Current liabilities | (9,310 | ) |
Long-term liabilities | (490 | ) |
Total consideration paid | $ | 47,438 |
|
Less: Contingent consideration liability | (4,284 | ) |
Total cash purchase price | $ | 43,154 |
|
Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was
$372.9$364.6 million and
$255.7$346.5 million at
September 30, 2017March 31, 2018 and December 31,
2016,2017, respectively. Goodwill generally changes due to the timing of acquisitions, finalization of allocation of purchase prices of previous acquisitions and foreign currency translations. The carrying amount of goodwill in foreign countries was
$46.4$46.5 million at
September 30, 2017March 31, 2018 and
$42.7$46.3 million at December 31,
2016.2017.
The Company completed its most recent annual impairment
analysesanalysis as of September 30, 2017. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.
The carrying amount of customer contracts was
$141.4$176.4 million and
$117.5$152.9 million at
September 30, 2017March 31, 2018 and December 31,
2016, respectively,2017, respectively. The carrying amount of trademarks and
thetradenames was $50.2 million and $50.0 million at March 31, 2018 and December 31, 2017, respectively. The carrying amount of other intangible assets was
$46.0$11.4 million and
$44.3$11.6 million at
September 30, 2017March 31, 2018 and December 31,
2016,2017, respectively. The carrying amount of customer contracts in foreign countries was
$31.0$33.0 million and
$29.7$29.8 million at
September 30, 2017March 31, 2018 and December 31,
2016, respectively2017, respectively. The carrying amount of trademarks and
thetradenames in foreign countries was $1.7 million at March 31, 2018 and December 31, 2017, respectively. The carrying amount of other intangible assets in foreign countries was
$3.6$1.6 million and
$3.8$1.7 million at
September 30, 2017March 31, 2018 and December 31,
2016,2017, respectively.
Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives. The following table sets forth the components of intangible assets as of
September 30, 2017March 31, 2018 (in thousands):
| | | | | | |
| | Carrying | | | Useful Life | |
Intangible Asset | | Value | | | in Years | |
Customer contracts | | $ | 141,385 | | | | 3 - 12.5 | |
Trademarks and tradenames | | | 35,196 | | | | 0 - 20 | |
Non-compete agreements | | | 4,245 | | | | 3 - 20 | |
Patents | | | 2,676 | | | | 3 - 15 | |
Other assets | | | 1,629 | | | | 10 | |
Internet domains | | | 2,227 | | | | n/a | |
Total customer contracts and other intangible assets | | $ | 187,358 | | | | | |
|
| | | | | | | |
Intangible Asset | | Carrying Value | | Useful Life in Years |
Customer contracts | | $ | 176,447 |
| | 3 - 12 |
|
Trademarks and tradenames | | 50,198 |
| | 0 - 20 |
|
Non-compete agreements | | 4,054 |
| | 3 - 20 |
|
Patents | | 2,405 |
| | 3 - 15 |
|
Other assets | | 2,752 |
| | 10 |
|
Internet domains | | 2,227 |
| | n/a |
|
Total customer contracts and other intangible assets | | $ | 238,083 |
| | |
|
ROLLINS, INC. AND SUBSIDIARIES
NOTE
9.11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain
riskrisks arising from both its business operations and economic conditions. To manage this risk, the Company enters into derivative financial instruments from time to time. Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments from time to time to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.
Hedges of Foreign Exchange Risk
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the U.S. dollar. The Company uses foreign currency derivatives, specifically vanilla foreign currency forwards, to manage its exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in U.S. dollars for their fair value at or close to their settlement date.
ROLLINS, INC. AND SUBSIDIARIES
The Company does not currently designate any of these foreign exchange forwards under hedge accounting, but rather reflects the changes in fair value immediately in earnings. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rates. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and were equal to a
lossgain of
$0.2 million$147,000 for the quarter ended
September 30, 2017March 31, 2018 and a gain of
$0.1 million$30,000 for the same quarter in the prior year.
For the nine month period ending September 30, 2017 and September 30, 2016, the Company recorded a loss of $0.3 million and $0.5 million, respectively. As of
September 30, 2017,March 31, 2018, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (in thousands except for number of instruments):
| | | | | | | | | |
Non-Designated Derivative Summary |
| | Number of | | | | | | | |
| | Instruments | | | Sell Notional | | | Buy Notional | |
FX Forward Contracts | | | | | | | | | | | | |
Sell AUD/Buy USD Fwd Contract | | | 6 | | | $ | 650 | | | $ | 493 | |
Sell CAD/Buy USD Fwd Contract | | | 10 | | | $ | 6,050 | | | $ | 4,714 | |
Total | | | 16 | | | $ | 6,700 | | | $ | 5,207 | |
|
| | | | | | | | | | |
Non-Designated Derivative Summary |
| Number of Instruments | | Sell Notional | | Buy Notional |
FX Forward Contracts | |
| | |
| | |
|
Sell AUD/Buy USD Fwd Contract | 3 |
| | $ | 550 |
| | $ | 425 |
|
Sell CAD/Buy USD Fwd Contract | 6 |
| | $ | 4,800 |
| | $ | 3,808 |
|
Total | 9 |
| | $ | — |
| | $ | 4,233 |
|
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2017March 31, 2018 and December 31, 20162017 (in thousands): | | Tabular Disclosure of Fair Values of Derivative Instruments | |
| | Derivatives Asset | | | Derivative Liabilities | |
| | | | | Fair Value as of: | | | | |
| | September 30, | | | December 31, | | | September 30, | | | December 31, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | |
FX Forward Contracts | | | | | | | | | | | | |
Balance Sheet Location | | | | | | | | Other Current | | | Other Current | |
| | Other Assets | | | Other Assets | | | Liabilities | | | Liabilities | |
Sell AUD/Buy USD Fwd Contract | | $ | — | | | $ | — | | | $ | 16 | | | $ | — | |
Sell CAD/Buy USD Fwd Contract | | $ | — | | | $ | — | | | $ | 137 | | | $ | — | |
Total | | $ | — | | | $ | — | | | $ | 153 | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| Tabular Disclosure of Fair Values of Derivative Instruments |
| Derivatives Asset | | Derivative Liabilities |
| | | Fair Value as of: | | |
| March 31, 2018 | | December 31, 2017 | | March 31, 2018 | | December 31, 2017 |
Derivatives Not Designated as Hedging Instruments | | | | | | | |
FX Forward Contracts | | | | | | | |
Balance Sheet Location | | | | | | | |
| Other Assets | | Other Assets | | Other Current Liabilities | | Other Current Liabilities |
Sell AUD/Buy USD Fwd Contract | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | (9 | ) |
Sell CAD/Buy USD Fwd Contract | $ | 73 |
| | $ | — |
| | $ | — |
| | $ | (61 | ) |
Total | $ | 75 |
| | $ | — |
| | $ | — |
| | $ | (70 | ) |
The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of
September 30,March 31, 2018 and March 31, 2017
and September 30, 2016 (in thousands):
ROLLINS, INC. AND SUBSIDIARIES
Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated
as Hedging Instruments for the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016 | | | | Amount of Gain or | | | | |
| | | | (Loss) Recognized | | | Amount of Gain or | |
| | | | in Income | | | (Loss) Recognized in | |
| | Location of Gain or | | Three Months | | | Income | |
Derivatives Not Designated as | | (Loss) Recognized | | Ended | | | Nine Months Ended | |
Hedging Instruments | | in Income | | September 30, | | | September 30, | |
| | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Sell AUD/Buy USD Fwd Contract | | Other Inc/(Exp) | | $ | (11 | ) | | $ | (9 | ) | | $ | (29 | ) | | $ | (36 | ) |
Sell CAD/Buy USD Fwd Contract | | Other Inc/(Exp) | | | (224 | ) | | | 103 | | | | (319 | ) | | | (476 | ) |
Total | | | | $ | (235 | ) | | $ | 94 | | | $ | (348 | ) | | $ | (512 | ) |
ROLLINS, INC. AND SUBSIDIARIES
|
| | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income | | Amount of Gain or (Loss) Recognized in Income Three Months Ended March 31, |
| | | 2018 | | 2017 |
Sell AUD/Buy USD Fwd Contract | Other Inc/(Exp) | | $ | 11 |
| | $ | (8 | ) |
Sell CAD/Buy USD Fwd Contract | Other Inc/(Exp) | | 136 |
| | 38 |
|
Total | | | $ | 147 |
| | $ | 30 |
|
The table below presents the total fair value classification within the fair value hierarchy for the complete portfolio of derivative transactions at
September 30, 2017March 31, 2018 (in thousands):
| | Recurring Fair Value Measurements | |
| | Quoted Prices in Active | | | | | | | | | | | | | | | | | | | |
| | Markets for Identical | | | Significant Other | | | Significant | | | | | | | |
| | Assets and Liabilities | | | Observable Inputs | | | Unobservable Inputs | | | | | | | |
| | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total Fair Value at As of | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Financial Instruments | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Financial Instruments | | $ | — | | | $ | — | | | $ | (153 | ) | | $ | (122 | ) | | $ | — | | | $ | — | | | $ | (153 | ) | | $ | (122 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recurring Fair Value Measurements |
| Quoted Prices in Active | | | | | | | | | | | | |
| Markets for Identical Assets and Liabilities | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | |
| (Level 1) March 31, | | (Level 2) March 31, | | (Level 3) March 31, | | Total Fair Value at As of March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Assets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Derivative Financial Instruments | $ | — |
| | $ | — |
| | $ | 75 |
| | $ | 36 |
| | $ | — |
| | $ | — |
| | $ | 75 |
| | $ | 36 |
|
Liabilities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Derivative Financial Instruments | $ | — |
| | $ | — |
| | $ | — |
| | $ | (21 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (21 | ) |
As of September 30, 2017,March 31, 2018, the fair value of derivatives in a net liabilityasset position was $0.2 million$75,000 inclusive of counterparty credit risk. As of the balance sheet date, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2017,March 31, 2018, it could have been required to settle its obligations under the agreements at their termination value of $0.2 million.$75,000.
NOTE
10.12. SUBSEQUENT EVENTS
On OctoberApril 24, 2017,2018, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $0.115$0.14 per share plus a special year-end dividend of $0.10 per share both payable DecemberJune 11, 20172018 to stockholders of record at the close of business NovemberMay 10, 2017.2018.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On
OctoberApril 25,
2017,2018, the Company reported its
46th48th consecutive quarter of improved revenue and earnings.
Net income was $51.4The Company recorded first quarter revenues of $408.7 million,
for the third quarter ended September 30, 2017, as compared to $49.7 million foran increase of 8.9% over the prior
yearyear’s first quarter
a 3.6% improvement. Revenuesrevenue of $375.2 million. Rollins’ net income increased
by 6.2%20.5% to
$450.4$48.5 million
for the third quarter 2017 as compared to $424.0 million for the prior year third quarter. The Company saw a negative impact on the exchange rate of the Canadian and Australian dollars and British pounds to U.S. dollars reducing revenues by $8.4 million and $9.0 million for the third quarters ended September 30, 2017 and 2016, respectively and reduced pre-tax earnings by $1.6 million and $1.5 million, for the third quarters ended September 30, 2017 and 2016, respectively. Earnings for the quarter ended September 30, 2017 increased 4.3% to $0.24or $0.22 per diluted share
asfor the first quarter ended March 31, 2018, compared to
$0.23$40.3 million or $0.18 per diluted share for the same period in
2016.We were disappointed with2017. The Northern U.S. region experienced major snow storms during the impact to revenue and profitabilityfirst quarter of 2018, which makes the 48th consecutive quarter of improved earnings all the more encouraging as weather normalizes.
On April 17, the Company announced that Hurricane Harvey had on severalit will use part of the Company’s regions: Southwestsavings from the 2017 Tax Cuts and North Texas, South Central Commercial, Oklahoma, Louisiana,Jobs Act to improve employee benefits. These changes include an enhanced 401(k) match, stock grants, additional paid time off and Mississippi. These areas were negatively impacted by pre-hurricane preparation, flood conditions, closed branches,additional employee scholarship opportunities.
On February 28, 2018, the Company announced that it has purchased the stock of AMES Group Limited and
our inability to service many of our customers.Fortunately our people were unharmed, and, where appropriate, we compensated them even when they were unable to work. Our Employee Relief Fund has also been beneficial to many impacted employees. Hurricane Irma followed atKestrel Pest Control Limited, both companies operating in the end of AugustUK. AMES Group Limited is a long established pest control company, with a similar effectrich history of providing superior pest control, bird control, and specialist services to commercial customers throughout the midlands and including London. Kestrel Pest Control provides superior commercial pest control to customers in Florida, Georgia, Alabama, Mississippi,South Hampton and Louisiana.
surrounding areas of the Southwest. Kestrel Pest Control will merge with our Safeguard UK brand.
ROLLINS, INC. AND SUBSIDIARIES
On
AugustMarch 1,
2017,2018, the Company
announced that it had completed
theits acquisition of
Northwest Exterminating Co., Inc. Northwest has 23 offices in 5 southeastern states and was the nation’s 17th largest pest management company. Northwest performs services for approximately 120,000 customers andOPC Services. OPC Services will continue to operate as a separate business,
asand one of
Rollins’Rollins' Specialty Brands, along with HomeTeam
Pest Defense, Northwest Exterminating, Western Pest Services and
Waltham.Waltham Pest Services.
Rollins continued its solid financial performance generating
$189.4$72.7 million in cash from operations year to date.
ROLLINS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
SEPTEMBER 30, 2017MARCH 31, 2018 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2016MARCH 31, 2017
Revenue
Revenues for the
thirdfirst quarter ended
September 30, 2017March 31, 2018 increased
$26.4$33.5 million or
6.2%8.9% to
$450.4$408.7 million compared to
$424.0$375.2 million for the
thirdfirst quarter ended
September 30, 2016.March 31, 2017. Growth occurred across all service lines. Approximately
2.34.2 percentage points of the
6.2%8.9% increase came from acquisitions while growth in customers and pricing made up the remaining
3.94.7 percentage points.
The Company has three primary service offerings: commercial pest control, residential pest control and termite, including ancillary services. During the
thirdfirst quarter ended
September 30, 2017,March 31, 2018, commercial pest control revenue approximated
39%40% of the Company’s revenues, residential pest control approximated
43%40% of the Company’s revenues, and termite and ancillary service revenue approximated
17%19% of the Company’s revenues. Comparing
thirdfirst quarter
20172018 to
thirdfirst quarter
2016,2017, the Company’s commercial pest control revenue grew
4.9%5.6%, residential pest control revenue grew
6.1%8.4%, and termite and ancillary services revenue grew
10.1%16.2%. Foreign operations accounted for approximately 8% of total revenues during the
thirdfirst quarters of both
2018 and 2017,
and 2016.respectively.
Revenues are impacted by the seasonal nature of the Company’s pest and termite control services. The increase in pest activity, as well as the metamorphosis of termites in the spring and summer (the occurrence of which is determined by the change in seasons), has historically resulted in an increase in the Company’s revenues as evidenced by the following chart:
Consolidated Net Revenues | |
(in thousands) | |
| | 2017 | | | 2016 | | | 2015 | |
First Quarter | | $ | 375,247 | | | $ | 352,736 | | | $ | 330,909 | |
Second Quarter | | | 433,555 | | | | 411,133 | | | | 392,150 | |
Third Quarter | | | 450,442 | | | | 423,994 | | | | 399,746 | |
Fourth Quarter | | | — | | | | 385,614 | | | | 362,500 | |
Year ended December 31, | | $ | 1,259,244 | | | $ | 1,573,477 | | | $ | 1,485,305 | |
|
| | | | | | | | | | | |
Consolidated Net Revenues |
(in thousands) |
| 2018 | | 2017 | | 2016 |
First Quarter | $ | 408,742 |
| | $ | 375,247 |
| | $ | 352,736 |
|
Second Quarter | — |
| | 433,555 |
| | 411,133 |
|
Third quarter | — |
| | 450,442 |
| | 423,994 |
|
Fourth Quarter | — |
| | 414,713 |
| | 385,614 |
|
Year ended December 31, | $ | 408,742 |
|
| $ | 1,673,957 |
|
| $ | 1,573,477 |
|
Cost of Services Provided
Cost of Services provided for the
thirdfirst quarter ended
September 30, 2017March 31, 2018 increased
$13.2$17.0 million or
6.4%9.0% to
$218.8$206.1 million, compared to
$205.6$189.2 million the quarter ended
September 30, 2016.March 31, 2017. Gross margin for the
third quarter was
51.4%flat at 49.6%,
a decrease of 0.1 percentage points compared to the prior year
thirdfirst quarter gross
margin of 51.5%.margin. The margin for the quarter was negatively affected by the
stormssevere weather in the
Southeast and Southwest.Northeast. The Company paid $2.2 million to employees via a 401(k) match that decreased first quarter 2018 gross margin by 1 percentage point. The quarter
benefittedbenefited from improved efficiencies in routing and scheduling technology which also helped to lower
service salaries as a percent of
revenue. Service salaries were down compared to revenue,
specifically as there was a decrease in service salariesbut we expect this to rise second quarter with the arrival of spring and
administrative salaries as a percent of revenues from the prior year.summer months. Insurance and claims were lower than prior year as a percent of
revenue.revenue as we reduced our exposure in litigation. These gains
the Company experienced were offset by higher personnel related costs
as we integrate acquisitions and payroll taxes and group insurance increases.from the aforementioned 401(k) plan Company match. Fleet expenses
are up as gasoline costs are up an average of $0.25 per gallon and increased
duelease expenses. Bad debt increased as compared to
the increased cost of gasoline, increased leased vehicle costs, and higher maintenance fees. Materials and supplies were higher as we increased our termite baiting customers.2017.
Depreciation and Amortization
Depreciation and Amortization expenses for the
thirdfirst quarter ended
September 30, 2017March 31, 2018 increased
$1.2$3.1 million to
$14.3$16.9 million, an increase of
9.4%22.8%. Depreciation increased
$0.3 million due to
expenditures associated with the 2016 rollout of BOSS, the Company’s customer relationship management system, as well as acquisitions and equipment purchases while amortization of intangible assets increased
$2.8 million due to amortization of customer contracts included in
various acquisitions.several acquisitions which reduced the Company’s earnings per share by approximately $0.01 per diluted share after taxes.
ROLLINS, INC. AND SUBSIDIARIES
Sales, General and Administrative
Sales, General and Administrative Expenses for the
thirdfirst quarter ended
September 30, 2017March 31, 2018 increased
$9.5$11.3 million or
7.6%9.8%, to
30.0%30.9% of revenues, up
0.40.2 percentage points from
29.6%30.7% for the
thirdfirst quarter ended
September 30, 2016.March 31, 2017. The increase in the percent of revenue is due to higher
planned sales commissionsadministrative salaries and personnel related expenses due to acquisitions, fleet costs due to increased gasoline prices, and professional service costs related to
increased revenue and higher planned outside contractor costs to enhance the BOSS system.IT projects. The increases were partially offset by
efficiencies in administrative salaries as a percent of revenues as we maintain a quality support staff, while continuinglower insurance and claims expense, due to
grow revenues. Fleet expensesclaims and
telephone costs were up as we integrated several acquisitions.Gain on Sale of assets, Net
Gain on sales of assets, net was a net gain of $66,000 for the third quarter ended September 30, 2017, up from $52,000 prior year. The gains were for the sales of Company owned vehicles and equipment.
ROLLINS, INC. AND SUBSIDIARIES
Income Taxes for the
thirdfirst quarter ended
September 30, 2017 increased $0.8March 31, 2018 decreased $6.3 million or
2.7%37.2% to
$31.1$10.7 million from
$30.3$17.0 million reported for
thirdfirst quarter ended
September 30, 2016.March 31, 2017. The effective tax rate was
37.7%18.0% for the
thirdfirst quarter ended
September 30, 2017March 31, 2018 and
37.9%29.7% for the
thirdfirst quarter ended
September 30, 2016.March 31, 2017. The
differences weredecrease in the effective rate was primarily due to
a reduction in the federal income tax
credits,rate enacted under the Tax Cuts and Jobs Act of 2017 (the Tax Act). The Tax Act has significant complexities and the Company, under Staff Accounting Bulletin 118, has made certain reasonable estimates that could be adjusted in future periods as required. Implementation guidance from the Internal Revenue Service, clarifications of state tax
rateslaw and
the adoption during first quarter 2017 of the amendments of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. Accordingly, the income tax provisions for the quarter ended September 30, 2017 include excess tax benefits of $0.4 million. Under prior guidance, these excess tax benefits would have been recorded in additional paid-in capital.NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2016
Revenue
Revenues for the nine months ended September 30, 2017 increased $71.4 million or 6.0% to $1.259 billion compared to $1.188 billion for the nine months ended September 30, 2016. The Company saw an increase in lead closure on sales to new customers while average price remained relatively flat in most categories. Approximately 1.4 percentage points of the 6.0% increase came from acquisitions while growth in customers and pricing made up the remaining 4.6 percentage points. The Company’s customer base continued to grow. The higher sales to new customers resulted in growth across all service lines.
Commercial pest control revenue approximated 39%completion of the Company’s revenues during the nine months ended September 30, 2017 residential pest control revenue approximated 42% of revenues, and termite and ancillary service revenues, made up approximately 18% oftax return filings could all impact these estimates. The Company does not believe potential adjustments in future periods would materially impact the Company’s revenues. The Company’s commercial pest control revenue grew 5.1%, residential pest control revenue grew 6.3%, and termite and ancillary services revenue grew 7.9%. Foreign operations accounted for approximately 8% and 7%financial condition or results of total revenues foroperations. Management believes that the first nine months of 2017 and 2016, respectively.
Cost of Services Provided
Cost of Services provided for the nine months ended September 30, 2017 increased $33.1 million or 5.7% to $612.4 million compared to $579.4 million for the nine months ended September 30, 2016. Gross margin increased to 51.4%, an increase of 0.2 percentage points from 51.2% of revenues for the prior year-to-date. The year-to-date increase in gross margin was due to the Company’s lower service salaries and administrative salaries as a percent of revenue as we leveraged our existing employees over increased revenues and had good cost control. The Company recorded lower insurance expense as a percent of revenue compared to 2016. Fleet expenses were greater as a percent of revenue as gasoline expense and lease vehicle costs increase. The Company maintained good cost controls across most spending categories.
Depreciation and Amortization
Depreciation and Amortization expenses for the nine months ended September 30, 2017 increased $4.6 million to $41.6 million, an increase of 12.3%, increasing 0.2 percentage points as a percent of revenue to 3.3% of revenue compared to 3.1% of revenue the prior year. Depreciation increased due to the investment associated with the 2016 rollout of BOSS as well as acquisitions and equipment purchases. Amortization of intangible assets increased due to amortization of customer contracts purchased in various acquisitions.
Sales, General and Administrative
Sales, General and Administrative (SG&A) expenses for the nine months ended September 30, 2017 increased $15.5 million or 4.3% to $379.8 million or 30.2% of revenues, from $364.2 million or 30.7% of revenues in the prior year period. The decrease in SG&A as a percent of revenue was due primarily to lower administrative salaries and personnel related cost, and reductions in bad debt expense. The gains in SG&A as a percent of revenues were partially offset by higher sales salaries due to increased commissions on higher revenues. The Company’s higher fleet expense was due to gasoline price increases and lease vehicle costs increase. Higher professional services fees increased as we use outside consultants on various projects and our BOSS system.
Gain on Sale of assets, Net
Gain on sales of assets, net was a net gain of $0.2 million for the nine month period ended September 30, 2017 and a decrease of $0.5 million from $0.7 million for the nine months ended September 30, 2016 due to the 2016 sale of our wildlife services franchise supply distributor and the sale of a branch location. The Company recognized net gains from the sale of Company owned vehicles and property in 2017 and 2016.
ROLLINS, INC. AND SUBSIDIARIES
Income Taxes
Income Taxes for the nine months ended September 30, 2017 increased $1.8 million or 2.3% to $80.6 million from $78.7 million reported for nine months ended September 30, 2016. The Company adopted the amendments of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accountingduring 2017. Accordingly, the income tax provisions for the nine months ended September 30, 2017 include excess tax benefits of $5.0 million. Under prior guidance, this excess tax benefits would have been recorded in additional paid-in capital. Thecorporate effective tax rate was 35.7% for 2018 will be in the nine months ended September 30, 2017 and 37.8% for the nine months ended September 30, 2016 primarily due to differences in tax credits, state tax rates and the adoption of ASU 2016-09.
mid 20% range.
Liquidity and Capital Resources
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 $175.0 million credit facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future. The Company’s operating activities generated net cash of
$189.4$72.7 million and
$158.2$56.8 million for the
ninethree months ended
September 30,March 31, 2018, and 2017,
and 2016, respectively. During the
ninethree months ended
September 30,March 31, 2018 and the same period in 2017 the Company made no contribution to its defined benefit retirement
plan while making $3.0 million in contributions for the same period in 2016.plans. The Company is adequately funded on its Pension Plans and is not expecting to make further contributions in
2017.2018.
The Company invested approximately
$17.2$6.1 million in capital expenditures, exclusive of expenditures for business acquisitions, during the
ninethree months ended
September 30, 2017,March 31, 2018, compared to
$27.1$5.5 million during the same period in
2016,2017, and expects to invest approximately
$8.0$22.0 million for the remainder of
2017.2018. Capital expenditures for the first
ninethree months consisted primarily of the purchase of operating equipment replacements and technology related projects. During the
ninethree months ended
September 30, 2017,March 31, 2018, the Company made expenditures for acquisitions totaling
$127.9$43.2 million, compared to
$40.8$3.0 million during the same period in
2016.2017. A total of
$75.2$30.6 million was paid in cash dividends ($
0.3450.14 per share)
a 21.7% increase during the first
ninethree months of
2017,2018, compared to
$65.5$25.1 million or ($
0.300.115 per share) during the same period in
2016.2017. On
OctoberApril 24,
2017,2018, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of
$0.115$0.14 per share
plus a special year-end dividend of $0.10 per share both payable
DecemberJune 11,
20172018 to stockholders of record at the close of business
NovemberMay 10,
20172018 to be funded with existing cash balances. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company did not repurchase shares of its common stock on the open market during the first
ninethree months of
2017 compared to the repurchase of approximately 0.8 million shares at a weighted average price of $27.192018 and during the
first nine months of 2016.same period in 2017. The Company has had a buyback program in place for a number of years and has routinely purchased shares when it felt the opportunity was desirable. The Board authorized the purchase of 7.5 million additional shares of the Company’s common stock in July 2012. These authorizations enable the Company to continue the purchase of Company common stock when appropriate, which is an important benefit resulting from the Company’s strong cash flows. The stock buy-back program has no expiration date. In total, 5.1 million additional shares may be purchased under the share repurchase program. The Company repurchased
$8.2$9.2 million and
$8.3$7.5 million of common stock for the
ninethree months ended
September 30,March 31, 2018 and 2017,
and 2016, respectively, from employees for the payment of taxes on vesting restricted shares. The acquisitions, capital expenditures, share repurchases and cash dividends were funded through existing cash balances and operating activities.
The Company’s balance sheet as of September 30, 2017March 31, 2018 and December 31, 20162017 includes short-term unearned revenues of $119.0$117.9 million and $99.8$109.0 million, respectively, representing approximately 7% of our annual revenue. This represents cash paid to the Company by its customers in advance of services that will be recognized over the next twelve months. The Company’s $113.4$84.3 million of total cash at September 30, 2017,March 31, 2018, is held at various banking institutions. Approximately $64.7$62.7 million is held in cash accounts at foreign bank institutions and the remaining $48.7$21.6 million is primarily held in non-interest-bearing accounts at various domestic banks. 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 foreign subsidiaries is not a part of the Company’s current business plan. The Company maintains a large cash position in the United States while having little third-partyfirst-party debt to service. The Company maintains adequate liquidity
ROLLINS, INC. AND SUBSIDIARIES
and capital resources that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future without regard to its foreign deposits.
On October 31, 2012, the Company entered into a Revolving Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured line of credit of up to $175.0 million, which includes a $75.0 million letter of credit subfacility, and a $25.0 million swingline subfacility. The Company had no outstanding borrowings under the line of credit or under the swingline subfacility as of
September 30, 2017.March 31, 2018. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance through
2017.2018.
In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the subsidiaries’ services caused damage. In addition, the Company defends employment related cases and claims from time to time. We are involved in certain environmental matters primarily arising in the normal course of business. We are actively contesting each of these matters.
Management does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate will have a material adverse effect on the Company’s financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual quarter or year.
ROLLINS, INC. AND SUBSIDIARIES
Critical Accounting Policies
There have been no changes to the Company’s critical accounting policies since the filing of its Form 10-K for the year ended December 31,
2016.
2017, other than Topic 606.
See Note 2 of the Notes to Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, the effect of the future adoption of recent accounting pronouncements on the Company’s financial statements; statements regarding management’s expectation regarding the effect of the ultimate resolution of pending claims, proceedings or litigation on the Company’s financial position, results of operation and liquidity; the Company’s belief that its current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future; our expectation that the Company will continue to pay dividends; our intention 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 and that repatriation of cash is not a part of the Company’s business plan; possiblethe expectation of no defined benefit retirement plan contributions and their effect on the Company’s financial position, results of operations and liquidity;contributions: the Company’s expectation regarding capital expenditure for the remainder of 2017;2018; the Company's expectations regarding our corporate tax rate for 2018; the expectation of sales salaries to rise in the second quarter; the Company’s expectation to maintain compliance with debt covenants; and the Company’s belief that interest rate exposure and foreign exchange rate risk will not have a material effect on the Company’s results of operations going forward. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, the possibility of an adverse ruling against the Company in pending litigation; general economic conditions; actions taken by our franchisees, subcontractors or vendors that may harm our business; market risk; changes in industry practices or technologies; a breach of data security; the degree of success of the Company’s termite process and pest control selling and treatment methods; damage to our brands or reputation; our ability to protect our intellectual property and other proprietary rights; the Company’s ability to identify and successfully integrate potential acquisitions; climate and weather conditions; competitive factors and pricing practices; our ability to attract and retain skilled workers, and potential increases in labor costs; and changes in various government laws and regulations, including environmental regulations.regulations; and the existence of certain anti-takeover provisions in our governance documents, which could make a tender offer, change in control or takeover attempt that is opposed by the Company’s Board of Directors more difficult or expensive. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. A more detailed discussion
ROLLINS, INC. AND SUBSIDIARIES
of potential risks facing the Company can be found in the Company’s Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2016.2017. The Company does not undertake to update its forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2017,March 31, 2018, the Company maintained an investment portfolio (included in cash and cash equivalents) subject to short-term interest rate risk exposure. The Company is subject to interest rate risk exposure through borrowings on its $175 million credit facility. The Company is also exposed to market risks arising from changes in foreign exchange rates. See Note 911 to Part I, Item 1 for a discussion of the Company’s investments in derivative financial instruments to manage risks of fluctuations in foreign exchange rates. The Company believes that this foreign exchange rate risk will not have a material impact upon the Company’s results of operations going forward. There have been no material changes to the Company’s market risk exposure since the end of fiscal year 2016.2017.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 30, 2017March 31, 2018 (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
ROLLINS, INC. AND SUBSIDIARIES
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.
ROLLINS, INC. AND SUBSIDIARIES
In addition, management’s quarterly evaluation identified no changes in our internal control over financial reporting during the
thirdfirst quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As of
September 30, 2017,March 31, 2018, we did not identify any material weaknesses in our internal controls, and therefore no corrective actions were taken.
PART II OTHER INFORMATION |
| |
Item 1. | Legal Proceedings. |
| |
See Note 4 to Part I, Item 1 for discussion of certain litigation. |
| |
Item 1A. | Risk Factors |
|
See the Company’s risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. |
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 to Part I, Item 1 for discussion of certain litigation.
Item 1A. Risk Factors
See the Company’s risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Shares repurchased by Rollins and affiliated purchases during the
thirdfirst quarter ended
September 30, 2017March 31, 2018 were as follows:
| | | | | | | | Total number of | | | | |
| | | | | | | | shares purchased | | | Maximum number of | |
| | Total Number | | | Weighted-Average | | | as part of publicly | | | shares that may yet be | |
| | of shares | | | Price paid per | | | announced | | | purchased under the | |
Period | | Purchased (1) | | | Share | | | repurchases (2) | | | repurchase plans | |
July 1 to 31, 2017 | | | — | | | $ | — | | | | — | | | | 5,073,611 | |
August 1 to 31, 2017 | | | — | | | | — | | | | — | | | | 5,073,611 | |
September 1 to 30, 2017 | | | 10,841 | | | | 46.14 | | | | — | | | | 5,073,611 | |
Total | | | 10,841 | | | $ | 46.14 | | | | — | | | | 5,073,611 | |
|
| | | | | | | | | | | | |
| Total Number of shares | | Weighted-Average Price paid per | | Total number of shares purchased as part of publicly announced | | Maximum number of shares that may yet be purchased under the repurchase plans |
Period | Purchased (1) | | Share | | repurchases (2) | |
January 1 to 31, 2018 | 165,852 |
| | $ | 49.92 |
| | — |
| | 5,073,611 |
|
February 1 to 28, 2018 | 3,589 |
| | 50.85 |
| | — |
| | 5,073,611 |
|
March 1 to 31, 2018 | 15,277 |
| | 49.87 |
| | — |
| | 5,073,611 |
|
Total | 184,718 |
| | $ | 49.94 |
| | — |
| | 5,073,611 |
|
| |
(1) | Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts:July 2017: 0; August 2017: 0; January 2018: 165,852; February 2018: 3,589; and September 2017: 10,841March 2018: 15,277 |
| |
(2) | The Company has a share repurchase plan, adopted in 2012, to repurchase up to 7.5 million shares of the Company’s common stock. The plan has no expiration date. |
ROLLINS, INC. AND SUBSIDIARIES
|
| | |
| (31.1) | |
| | (31.2) |
| (31.2) | |
| | (32.1) |
| (32.1) | |
| | |
| (101.INS) | XBRL Instance Document |
| | | |
| | (101.SCH) | XBRL Taxonomy Extension Schema Document |
| | |
| (101.CAL) | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | |
| | (101.DEF) | XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| | (101.LAB) | XBRL Taxonomy Extension Label Linkbase Document |
| | |
| (101.PRE) | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
+ | | Confidential treatment has been requested for certain portions of this exhibit (indicated by asterisks). Such information has been omitted and was filed separately with the securities and Exchange Commission. |
ROLLINS, INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | |
| | ROLLINS, INC. | |
| | (Registrant) | |
| | | | |
Date: OctoberApril 27, 20172018 | By: | /s/ Gary W. Rollins | |
| | | Gary W. Rollins | |
| | | Vice Chairman and Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
Date: OctoberApril 27, 20172018 | By: | /s/ Paul E. Northen | |
| | | Paul E. Northen | |
| | | Vice President, Chief Financial Officer and Treasurer | |
| | | (Principal Financial and Accounting Officer) | |