| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Business Description The Company is an international
service company with headquarters located in Atlanta, Georgia, providing pest and termite control services through its wholly-owned
subsidiaries to both residential and commercial customers in North America, Australia, and Europe with international franchises
in Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, Canada, Australia, and Mexico. Services
are performed through a contract that specifies the pricing arrangement with the customer. Orkin, LLC. (“Orkin”),
a wholly-owned subsidiary of the Company founded in 1901, is the world’s largest pest and termite control company. It provides
customized services from over 400 locations. Orkin either serves customers directly or through franchise operations, in the United
States, Canada, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and Mexico providing
essential pest control services and protection against termite damage, rodents and insects to homes and businesses, including hotels,
food service establishments, food manufacturers, retailers and transportation companies. Orkin operates under the Orkin ® ® SM ® Orkin Canada, a wholly-owned subsidiary
of Orkin founded in 1952, was acquired by Orkin in 1999. Orkin Canada is Canada’s largest pest control provider and a leader
in the development of fast, effective and environmentally responsible pest control solutions. Western Pest Services (“Western”),
a wholly-owned subsidiary of the Company founded in 1928, was acquired by Rollins, Inc. in 2004. Western is primarily a commercial
pest control service company and its business complements most of the services Orkin offers, focusing on the northeastern United
States. The Industrial Fumigant Company
(“IFC”), a wholly-owned subsidiary of the Company founded in 1937, was acquired by Rollins, Inc. in 2005. IFC is a
leading provider of pest management and sanitation services and products to the food and commodity industries. HomeTeam Pest Defense (“HomeTeam”),
a wholly-owned subsidiary of the Company established in 1996, was acquired by Rollins, Inc. in April 2008. At the time of the acquisition,
HomeTeam, with its unique Taexx ® Rollins Australia (“Rollins Australia”),
a wholly-owned subsidiary of the Company, acquired Allpest WA (“Allpest”), in February 2014. Allpest was established
in 1959 and is headquartered in Perth, Australia. Allpest provides traditional commercial, residential, and termite service as
well as consulting services on border protection related to Australia’s biosecurity program and provides specialized services
to Australia’s mining and oil and gas sectors. Critter Control, a wholly-owned subsidiary of the Company,
was acquired by Rollins, Inc. on February 27, 2015. Critter Control was established in 1983 and is headquartered in Traverse City,
Michigan. The business is primarily franchised, operating in 40 states and 2 Canadian provinces. Rollins UK was formed as a wholly-owned
subsidiary of the Company to acquire Safeguard Pest Control (“Safeguard”). Safeguard, which was acquired in June 2016,
is a pest control company established in the United Kingdom in 1991 with a history of providing superior pest control, bird control,
and specialist services to residential and commercial customers. Northwest Pest Control, LLC,
a wholly-owned subsidiary of the Company founded in 1951, was acquired by Rollins, Inc. in August 2017. Northwest specializes in
residential and commercial termite control, pest control, mosquito control, wildlife services, lawn care, insulation, and HVAC
services, focusing on the Southeast United States. The Company has several smaller wholly-owned
subsidiaries that in total make up less than 5% of the Company’s total revenues. The Company has only one reportable
segment, its pest and termite control business. Revenue, operating profit and identifiable assets for this segment, includes the
United States, Canada, Australia, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and
Mexico. The Company’s results of operations and its financial condition are not reliant upon any single customer, few customers
or foreign operations. Principles of Consolidation Subsequent Events On January 7, 2019, Rollins,
Inc. (the “Company”) and certain of its affiliates entered into certain agreements providing for the acquisition (the
“Acquisition”) of a pest control business as follows: (a) a Stock Purchase Agreement among the Company, Clark Pest
Control of Stockton, Inc. (“Clark Pest Control”), JJT King, Inc., and the stockholders of Clark Pest Control pursuant
to which the Company will acquire all of the issued and outstanding shares of Clark Pest Control, (b) a Real Estate Purchase Agreement
between RCI-King, Inc., a wholly-owned subsidiary of the Company, and Clarkson California Properties pursuant to which an affiliate
of the Company will acquire certain real estate used in Clark Pest Control’s business, and (c) an Asset Purchase Agreement
between King Distribution, Inc., a wholly-owned subsidiary of the Company, and Geotech Supply Co., LLC pursuant to which an affiliate
of the Company will acquire certain assets used in the business of distributing certain equipment and supplies related to the pest
control business of Clark Pest Control. Subject to post-closing adjustments, the final purchase is expected to be in the area of
$400 million including the real estate assets. The purchase price was negotiated at arm’s-length and the agreement contains
customary representations, warranties, noncompetition agreements and holdback provisions. The Closing of the Acquisition
is subject to the satisfaction of customary conditions, including the truth and accuracy of the representations and warranties
of the sellers, the performance of the obligations of the sellers and the receipt of regulatory clearance. The Company intends
to fund purchase of the Acquisition with a combination of cash on hand, use of its revolving credit agreement and a new term loan.
The Company expects the acquisition to close during the first or second quarters of 2019. Estimates Used in the Preparation
of Consolidated Financial Statements Revenue Recognition Nature of Goods and Services and Performance
Obligations The Company contracts with its
customers to provide the following goods and services, each of which is a distinct performance obligation: Pest control services - Rollins
provides pest control services to protect residential and commercial properties from common pests, including rodents and insects.
Pest control generally consists of assessing a customer’s property for conditions that invite pests, tackling current infestations,
and stopping the life cycle to prevent future invaders. Revenue from pest control services is recognized as services are rendered. The Company’s revenue recognition
policies are designed to recognize revenues upon satisfaction of the performance obligation at the time services are performed.
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 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 performance obligation. This portion is recognized as income on a straight-line basis over the remaining
contract term, which results in recognition of revenue that depicts the Company’s performance in transferring control of
the service. The allocation of the 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., seminars 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 traps. 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 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 1.0% 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.
The Company amortizes the initial franchise fee over the initial franchise term. Deferred Orkin franchise fees were $1.6 million
at December 31, 2018 and $3.4 million December 31, 2017. Royalties from Orkin franchises
are accrued and recognized as revenues are earned on a monthly basis. Revenue from Orkin franchises was $8.8 million for the year
ended December 31, 2018 and $5.4 million and $3.0 million for the years ended December 31, 2017 and 2016, respectively. Contract Balances Timing of revenue recognition
may differ from the timing of invoicing to customers. We record unearned revenue when revenue is recognized subsequent to billing.
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 $28.2 million as of December 31, 2018 and $20.4 million
at December 31, 2017 and is included in financed receivables as a long-term asset on our consolidated statements of financial position. 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 can be found on Schedule II-Valuation and Qualifying Accounts. Unearned revenue is comprised
mainly of unearned revenue related to the Company’s termite baiting offering, conventional renewals, and year-in-advance
pest control services for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Refer to Note 12 - Unearned Revenue
for further information, including changes in unearned revenue for the year. 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. All revenues are reported
net of sales taxes. The Company’s foreign operations
accounted for approximately 8% of revenues for each of the years ended December 31, 2018 and 2017. Allowance for Doubtful
Accounts Advertising
Years ended December 31, 2018 2017 2016
(in thousands)
Advertising $ 69,875 $ 66,115 $ 61,258
Cash and Cash Equivalents The Company’s $115.5 million
of total cash at December 31, 2018, is primarily cash held at various banking institutions. Approximately $53.6 million is
held in cash accounts at international bank institutions and the remaining $61.9 million is primarily held in Federal Deposit Insurance
Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times may exceed federally
insured amounts. The Company’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 no third-party debt to service. Rollins maintains adequate liquidity and capital
resources, without regard to its foreign deposits, that are directed to finance domestic operations and obligations and to fund
expansion of its domestic business for the foreseeable future.
At December 31, 2018 2017
(in thousands) (in US dollars)
Cash held in foreign bank accounts $ 53,613 $ 57,790
Marketable Securities Management determines the appropriate
classification of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt
securities are classified as available-for-sale because the Company does not have the intent to hold the securities to maturity.
Available-for-sale securities are stated at their fair values, with the unrealized gains and losses reported as in earnings. Realized
gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included as a component
of interest income. The Company had no marketable
securities other than those held in the defined benefit pension plan and the non-qualified deferred compensation plan at December 31,
2018 and 2017. See Note 16 for further details. Materials and Supplies Income Taxes Equipment and Property
Years ended December 31, 2018 2017 2016
(in thousands)
Depreciation $ 30,364 $ 27,381 $ 24,725
Goodwill and Other Intangible
Assets “Intangibles - Goodwill and other” Impairment of Long-Lived Assets
- “Property, Plant and Equipment” Insurance Accrual for Termite Contracts Contingency Accruals “Contingencies,” Three-for-two stock split Earnings Per Share “Earnings Per Share-Overall,” The Company has periodically issued
share-based payment awards that contain non-forfeitable rights to dividends and therefore are considered participating securities.
See Note 17 for further information on restricted stock granted to employees. The basic and diluted calculations are
the same as there were no stock options included in diluted earnings per share as we have no stock options outstanding. Basic and
diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the
respective periods. A reconciliation of weighted average
shares outstanding along with the earnings per share attributable to restricted shares of common stock (participating securities)
is as follows (in thousands except per share data). All share and per share information in the following chart are restated for
the stock split effective December 10, 2018:
Years Ended December 31, 2018 2017 2016
Net income available to stockholders $ 231,663 $ 179,124 $ 167,369
Less: Dividends paid
Common Stock (151,458 ) (120,930 ) (107,880 )
Restricted shares of common stock (1,284 ) (1,087 ) (1,122 )
Undistributed earnings for the period $ 78,921 $ 57,107 $ 58,367
Allocation of undistributed earnings:
Common stock $ 78,255 $ 56,567 $ 57,722
Restricted shares of common stock 666 540 645
Basic and diluted shares outstanding:
Common stock 324,529 323,890 323,745
Restricted shares of common stock 2,762 3,091 3,619
327,291 326,981 327,366
Basic and diluted earnings per share:
Common stock:
Distributed earnings $ 0.47 $ 0.37 $ 0.33
Undistributed earnings 0.24 0.18 0.18
$ 0.71 $ 0.55 $ 0.51
Restricted shares of common stock
Distributed earnings $ 0.47 $ 0.35 $ 0.31
Undistributed earnings 0.24 0.18 0.18
$ 0.71 $ 0.53 $ 0.49 Translation of Foreign Currencies Stock-Based Compensation Compensation –
Stock Compensation TLRSs provide for the issuance
of a share of the Company’s Common Stock at no cost to the holder and generally vest after a certain stipulated number of
years from the grant date, depending on the terms of the issue. Outstanding TLRSs vest in 20 percent increments starting with the
second anniversary of the grant, over six years from the date of grant. During these years, grantees receive all dividends declared
and retain voting rights for the granted shares. The agreements under which the restricted stock is issued provide that shares
awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed. The fair value of
these awards is recognized as compensation expense, net of forfeitures, on a straight-line basis over six years. Comprehensive Income (Loss) Franchising Program 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 1.0% of the Company’s annual revenues. The Company amortizes the initial
franchise fee over the initial franchise term. Deferred Orkin franchise fees of $1.6 million at December 31, 2018 and $3.4 million
December 31, 2017. Royalties from Orkin franchises
are accrued and recognized as revenues are earned on a monthly basis. Revenue from Orkin franchises was $8.8 million for the year
ended December 31, 2018 and $5.4 million and $5.1 million for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2018, 2017 and
2016, Orkin had 86, 81, and 70 international franchises, respectively. Orkin’s international franchise program began with
its first international franchise in 2000 and since has expanded to Central America, South America, the Caribbean, the Middle East,
Asia, the Mediterranean, Europe, Africa and Mexico. The Company’s maximum exposure
to loss (notes receivable from franchises less deferred franchise fees) relating to the Orkin franchises was $4.9 million, $2.5
million, and $2.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. Rollins’ wholly-owned subsidiary,
Critter Control, had 80 and 89 franchises in the United States and Canada as of December 31, 2018 and 2017, respectively.
Transactions with Critter Control franchises involve sales of territories to establish new franchises, initial franchise fees and
royalties. The territories and initial franchise fees are typically sold for a combination of cash and notes. Notes receivable
from Critter Control franchises were $0.6 million and $0.2 million at December 31, 2018 and 2017, respectively. These notes
are not guaranteed. The Company anticipates that should there be any losses from franchisees these losses would be recouped by
removing the individual franchisee and re-selling the abandoned territory. These amounts are included as financing receivables
in the accompanying Consolidated Statements of Financial Position. Recent Accounting Guidance Recently adopted accounting
standards In May 2014, the Financial Accounting
Standards Board (“FASB”) and International Accounting Standards Board issued their converged standard on revenue recognition
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU replaces
nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue,
the application of which will require significant judgment. The FASB issued ASU 2015-14 in August 2015 which resulted in a deferral
of the original effective date of ASU 2014-09. During 2016, the FASB issued four ASUs that address implementation issues and correct
or improve certain aspects of the new revenue recognition guidance, including ASU 2016-08, Principal versus Agent Considerations
(Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope
Improvements and Practical Expedients and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers. These ASUs do not change the core principles in the revenue recognition guidance outlined above. ASU
No. 2014-09 and the related ASUs referenced above are effective for Rollins, Inc. beginning January 1, 2018. The Company has completed
its detailed review of all global revenue arrangements in accordance with these ASUs and the adoption of these ASUs January 1,
2018 has had no impact on its consolidated financial statements. 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 adopted this ASU on January 1, 2018
it had no impact on its consolidated financial statements. Recently issued accounting
standards to be adopted in 2019 or later In February 2016, the FASB issued
ASU 2016-02, Leases (ASC 842), which requires a lessee to recognize right-of-use assets (ROUs) and liabilities on the balance sheet
for leases with lease terms greater than 12 months. Leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the statement of income. ASU 2016-02 is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2018. An entity may elect to adopt the new standard
using either 1) a modified retrospective approach with restated comparative period financial statements or 2) a prospective approach
with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the date of adoption. We anticipate
adopting this standard on January 1, 2019, using the prospective approach. Consequently, the reporting for the comparative periods
presented in the financial statements in which the new leases standard has been adopted will continue to be presented in accordance
with current GAAP (Topic 840, Leases). The new standard provides certain
practical expedients in transition. We have elected the transition package of practical expedients, which permits us not to reassess
under the new standard our prior conclusions about lease identification, lease classification and initial direct cost. The new
standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition
exemption. Accordingly, the Company does not recognize right of use assets or lease liabilities, for existing short-term leases
of those assets in transition. 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. The recognition and measurement of expenses and cash flows will not be materially
impacted by the new standard. Upon adoption, the Company expects to recognize operating lease ROUs and liabilities of between $175.0
million and $195.0 million. The new standard has enhanced disclosure requirements, including additional disclosures regarding the
nature of an entity’s leases, significant judgments and assumptions made when applying the standard, and the amounts recognized
in the financial statements. The disclosure requirements will have a material impact on our financial statements. In June of 2016, the FASB issued
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
The 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 annual periods beginning after December 15, 2019.
The Company is currently evaluating the effect the guidance will have on its consolidated financial statements. 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 based 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. The adoption of this ASU is not expected to have a material
impact on the Company’s consolidated financial statements. In August 2017, the FASB issued
ASU 2017-12, Derivatives and Hedging (Topic 815), which provides new guidance intended to improve the financial reporting
of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial
statements. This ASU is effective for the Company beginning in fiscal year 2020. The adoption of this ASU is not expected to have
a material impact on the Company’s consolidated financial statements. |
