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ROLLINS INC - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

Commission File Number 1-4422

ROLLINS, INC.

(Exact name of registrant as specified in its charter)

Delaware

51-0068479

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2170 Piedmont Road, N.E., Atlanta, Georgia

(Address of principal executive offices)

30324

(Zip Code)

(404) 888-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock

 

ROL

 

NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

No

 

Rollins, Inc. had 492,472,436 shares of its $1 par value Common Stock outstanding as of October 17, 2022.

ROLLINS, INC. AND SUBSIDIARIES

PART 1 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 2022, AND DECEMBER 31, 2021

(in thousands except share data)

(unaudited)

    

September 30, 

    

December 31, 

    

2022

    

2021

ASSETS

  

  

Cash and cash equivalents

$

121,876

$

105,301

Trade receivables, net of allowance for expected credit losses of $13,783 and $13,885, respectively

 

170,274

 

139,579

Financed receivables, short-term, net of allowance for expected credit losses of $1,779 and $1,463, respectively

 

32,253

 

26,152

Materials and supplies

 

28,572

 

28,926

Other current assets

 

45,981

52,422

Total current assets

 

398,956

 

352,380

Equipment and property, net of accumulated depreciation of $330,173 and $315,891, respectively

 

130,362

 

133,257

Goodwill

 

772,325

 

721,819

Customer contracts, net

 

319,382

 

325,929

Trademarks & tradenames, net

 

114,016

 

108,976

Other intangible assets, net

 

9,807

 

11,679

Operating lease right-of-use assets

 

270,365

 

244,784

Financed receivables, long-term, net of allowance for expected credit losses of $3,121 and $2,522, respectively

 

58,634

 

47,097

Other assets

 

38,636

 

34,949

Total assets

$

2,112,483

$

1,980,870

LIABILITIES

 

  

 

  

Accounts payable

$

42,874

$

44,568

Accrued insurance - current

 

40,424

 

36,414

Accrued compensation and related liabilities

 

95,694

 

97,862

Unearned revenues

 

166,866

 

145,122

Operating lease liabilities - current

 

82,611

 

75,240

Current portion of long-term debt

 

15,000

 

18,750

Other current liabilities

 

66,300

 

73,206

Total current liabilities

 

509,769

 

491,162

Accrued insurance, less current portion

 

35,257

 

31,545

Operating lease liabilities, less current portion

 

191,565

 

172,520

Long-term debt

 

109,878

 

136,250

Other long-term accrued liabilities

 

69,463

67,345

Total liabilities

 

915,932

 

898,822

Commitments and contingencies (see Note 11)

 

  

 

  

STOCKHOLDERS’ EQUITY

 

  

 

  

Preferred stock, without par value; 500,000 shares authorized, zero shares issued

 

 

Common stock, par value $1 per share; 800,000,000 shares authorized, 492,472,436 and 491,911,087 shares issued and outstanding, respectively

 

492,472

 

491,911

Additional paid in capital

 

113,995

 

105,629

Accumulated other comprehensive loss

 

(43,566)

 

(16,411)

Retained earnings

 

633,650

 

500,919

Total stockholders’ equity

 

1,196,551

 

1,082,048

Total liabilities and stockholders’ equity

$

2,112,483

$

1,980,870

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(in thousands except per share data)

(unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

REVENUES

  

  

  

  

Customer services

$

729,704

$

650,199

$

2,034,433

$

1,823,957

COSTS AND EXPENSES

 

  

 

  

 

  

 

  

Cost of services provided (exclusive of depreciation and amortization below)

 

348,158

 

305,474

 

980,316

 

864,888

Sales, general and administrative

 

213,581

 

194,261

 

612,353

 

539,951

Depreciation and amortization

 

24,282

 

23,617

 

73,454

 

70,519

Total operating expenses

586,021

523,352

1,666,123

1,475,358

OPERATING INCOME

143,683

126,847

368,310

348,599

Interest expense, net

 

846

 

222

 

2,294

 

1,334

Other (income), net

 

(1,980)

 

(447)

 

(5,170)

 

(33,598)

CONSOLIDATED INCOME BEFORE INCOME TAXES

 

144,817

 

127,072

 

371,186

 

380,863

PROVISION FOR INCOME TAXES

 

37,195

 

33,219

 

90,820

 

95,513

NET INCOME

$

107,622

$

93,853

$

280,366

$

285,350

NET INCOME PER SHARE - BASIC AND DILUTED

$

0.22

$

0.19

$

0.57

$

0.58

Weighted average shares outstanding - basic

 

492,316

 

492,069

 

492,285

 

492,058

Weighted average shares outstanding - diluted

 

492,430

 

492,069

 

492,398

 

492,058

DIVIDENDS PAID PER SHARE

$

0.10

$

0.08

$

0.30

$

0.24

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(in thousands)

(unaudited)

Three Months Ending

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

NET INCOME

$

107,622

$

93,853

$

280,366

$

285,350

Other comprehensive income (loss), net of tax:

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

(12,417)

 

(7,207)

 

(26,203)

 

(6,924)

Unrealized loss on available for sale securities

(952)

Change in derivatives

 

 

632

 

 

356

Other comprehensive income (loss), net of tax

 

(12,417)

 

(6,575)

 

(27,155)

 

(6,568)

Comprehensive income

$

95,205

$

87,278

$

253,211

$

278,782

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(in thousands)

(unaudited)

Accumulated Other

Common Stock

Paid-in-

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income / (Loss)

    

Earnings

    

Total

Balance at June 30, 2022

492,417

$

492,417

$

109,070

$

(31,149)

$

575,229

$

1,145,567

Net Income

107,622

107,622

Other comprehensive income / (loss), net of tax:

 

 

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

 

 

 

(12,417)

 

 

(12,417)

Cash dividends

 

 

 

 

 

(49,201)

 

(49,201)

Stock compensation

 

55

 

55

 

4,902

 

 

 

4,957

Employee stock buybacks

 

 

 

23

 

 

 

23

Balance at September 30, 2022

 

492,472

$

492,472

$

113,995

$

(43,566)

$

633,650

$

1,196,551

Accumulated Other

Common Stock

Paid-in-

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income / (Loss)

    

Earnings

    

Total

Balance at June 30, 2021

492,079

$

492,079

$

98,842

$

(10,890)

$

470,653

$

1,050,684

Net Income

93,853

93,853

Other comprehensive income / (loss), net of tax:

 

 

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

 

 

 

(7,207)

 

 

(7,207)

Change in derivatives

 

 

 

 

632

 

 

632

Cash dividends

 

 

 

 

 

(39,945)

 

(39,945)

Stock compensation

 

(22)

 

(22)

 

3,942

 

 

 

3,920

Employee stock buybacks

 

(8)

 

(8)

 

(300)

 

 

 

(308)

Balance at September 30, 2021

 

492,049

$

492,049

$

102,484

$

(17,465)

$

524,561

$

1,101,629

Accumulated Other

Common Stock

Paid-in-

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income / (Loss)

    

Earnings

    

Total

Balance at December 31, 2021

491,911

$

491,911

$

105,629

$

(16,411)

$

500,919

$

1,082,048

Net Income

280,366

280,366

Other comprehensive income / (loss), net of tax:

Foreign currency translation adjustments

 

 

 

 

(26,203)

 

 

(26,203)

Unrealized losses on available for sale securities

(952)

(952)

Cash dividends

 

 

 

 

(147,635)

 

(147,635)

Stock compensation

 

786

 

786

 

15,128

 

 

 

15,914

Employee stock buybacks

 

(225)

 

(225)

 

(6,762)

 

 

 

(6,987)

Balance at September 30, 2022

 

492,472

$

492,472

$

113,995

$

(43,566)

$

633,650

$

1,196,551

Accumulated Other

Common Stock

Paid-in-

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income / (Loss)

    

Earnings

    

Total

Balance at December 31, 2020

491,612

$

491,612

$

101,757

$

(10,897)

$

358,888

$

941,360

Net Income

285,350

285,350

Other comprehensive income / (loss), net of tax:

 

 

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

 

  

 

(6,924)

 

 

(6,924)

Change in derivatives

 

 

  

 

356

 

 

356

Cash dividends

 

 

 

  

 

  

 

(119,677)

 

(119,677)

Stock compensation

 

728

 

728

 

11,034

 

 

 

11,762

Employee stock buybacks

 

(291)

 

(291)

 

(10,307)

 

 

 

(10,598)

Balance at September 30, 2021

 

492,049

$

492,049

$

102,484

$

(17,465)

$

524,561

$

1,101,629

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(in thousands)

(unaudited)

Nine Months Ended

September 30, 

    

2022

    

2021

OPERATING ACTIVITIES

  

  

Net income

$

280,366

$

285,350

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization

 

73,454

 

70,519

Stock-based compensation expense

 

15,914

 

11,762

Provision for expected credit losses

 

13,593

 

8,522

Gain on sale of assets, net

(5,170)

(33,598)

Provision for deferred income taxes

 

2,210

 

2,221

Changes in operating assets and liabilities:

 

 

Trade accounts receivable and other accounts receivable

 

(40,872)

 

(34,294)

Financing receivables

 

(21,021)

 

(13,041)

Materials and supplies

 

295

 

3,780

Other current assets

 

(3,580)

 

(11,426)

Accounts payable and accrued expenses

 

(669)

 

(8,564)

Unearned revenue

 

19,655

 

20,685

Other long-term assets and liabilities

 

8,362

 

(3,005)

Net cash provided by operating activities

 

342,537

 

298,911

INVESTING ACTIVITIES

 

  

 

  

Acquisitions, net of cash acquired

 

(110,418)

 

(39,692)

Capital expenditures

 

(22,921)

 

(20,031)

Proceeds from sale of assets

 

9,822

 

70,967

Other investing activities, net

 

139

 

(140)

Net cash (used in) provided by investing activities

 

(123,378)

 

11,104

FINANCING ACTIVITIES

 

 

  

Payment of contingent consideration

 

(11,663)

 

(19,413)

Borrowings under term loan

 

252,000

 

Borrowings under revolving commitment

 

11,000

 

82,500

Repayments of term loan

 

(175,000)

 

(83,000)

Repayments of revolving commitment

 

(118,000)

 

(134,500)

Payment of dividends

 

(147,635)

 

(119,677)

Cash paid for common stock purchased

 

(6,987)

 

(10,598)

Net cash used in financing activities

 

(196,285)

 

(284,688)

Effect of exchange rate changes on cash

 

(6,299)

 

(6,149)

Net increase in cash and cash equivalents

 

16,575

 

19,178

Cash and cash equivalents at beginning of period

 

105,301

 

98,477

Cash and cash equivalents at end of period

$

121,876

$

117,655

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

3,229

$

681

Cash paid for income taxes, net

$

104,974

$

88,350

Non-cash additions to operating lease right-of-use assets

$

92,365

$

101,720

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

ROLLINS, INC. AND SUBSIDIARIES

NOTE 1.BASIS OF PREPARATION

Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, the instructions to Form 10-Q and applicable sections of SEC regulation S-X, and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. There have been no material changes in the Company’s significant accounting policies or the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Rollins, Inc. (including its subsidiaries unless the context otherwise requires, “Rollins,” “we,” “us,” “our,” or the “Company”) for the year ended December 31, 2021. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2021 Annual Report on Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and certain financial statement disclosures. Estimates and assumptions are used for, but not limited to, accrued insurance, revenue recognition, right-of-use ("ROU") asset and liability valuations, accounts and financing receivable reserves, income tax contingency accruals and valuation allowances, contingency accruals and goodwill and other intangible asset valuations. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from these estimates and assumptions.

The Company’s condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements. The Company considered the impact of COVID-19 and other economic trends on the assumptions and estimates used in preparing the condensed consolidated financial statements. In the opinion of management, all material adjustments necessary for a fair presentation of the Company’s financial results for the quarter have been made. These adjustments are of a normal recurring nature but complicated by the continued uncertainty surrounding COVID-19 and other economic trends. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the entire year. The severity, magnitude and duration of certain economic trends, as well as the economic consequences of COVID-19, continue to be uncertain and are difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and other economic trends and may change materially in future periods.

The Company operates as one reportable segment and the results of operations and its financial condition are not reliant upon any single customer.

NOTE 2.RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting standards

In November 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-10, “Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance.” The amendments in this Update require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

7

ROLLINS, INC. AND SUBSIDIARIES

Accounting standards issued but not yet adopted

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The amendments in this Update eliminate the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, for public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurements of Equity Securities Subject to Contractual Sale Restrictions.” The amendments in this Update clarify the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. This Update also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. These amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. The Company does not currently own any equity securities and therefore the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3.ACQUISITIONS

The Company made 27 acquisitions during the nine-month period ended September 30, 2022, and 39 acquisitions for the year ended December 31, 2021. For the 27 acquisitions completed through September 30, 2022, the preliminary values of major classes of assets acquired and liabilities assumed recorded at the dates of acquisition, as adjusted during the valuation period, are included in the reconciliation of the total consideration as follows (in thousands):

    

September 30, 2022

Accounts receivable, net

$

2,926

Materials and supplies

 

439

Equipment and property

 

6,245

Goodwill

 

60,962

Customer contracts

 

44,377

Trademarks & tradenames

 

5,615

Other intangible assets

 

1,393

Current liabilities

 

(4,285)

Other assets and liabilities, net

 

(1,384)

Total consideration

$

116,288

Less: Acquisition holdback liabilities

 

(8,978)

Total cash purchase price

$

107,310

The Company also made a final payment of $3.1 million for a 2021 acquisition in 2022.

Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. The factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized. For the nine months ended September 30, 2022, $61.0 million of goodwill was added related to the 27 acquisitions noted above. The recognized goodwill is expected to be deductible for tax purposes. The purchase price allocations for these acquisitions are preliminary until the Company obtains final information regarding these fair values.

8

ROLLINS, INC. AND SUBSIDIARIES

NOTE 4.REVENUE

The following tables present our revenues disaggregated by revenue source (in thousands).

Sales and usage-based taxes are excluded from revenues. No sales to an individual customer or in a country other than the United States accounted for 10% or more of the sales for the periods listed in the following table.

Revenue, classified by the major geographic areas in which our customers are located, was as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

United States

$

676,408

$

602,336

$

1,884,571

$

1,686,371

Other countries

 

53,296

 

47,863

 

149,862

 

137,586

Total Revenues

$

729,704

$

650,199

$

2,034,433

$

1,823,957

Revenue from external customers, classified by significant product and service offerings, was as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2022

    

2021

    

2022

    

2021

Residential revenue

$

337,878

$

307,747

$

922,448

$

835,871

Commercial revenue

 

243,478

 

218,648

 

683,748

 

618,183

Termite completions, bait monitoring, & renewals

 

139,668

 

117,423

 

406,155

 

350,791

Franchise revenues

4,068

4,128

11,960

11,698

Other revenues

 

4,612

 

2,253

 

10,122

 

7,414

Total Revenues

$

729,704

$

650,199

$

2,034,433

$

1,823,957

The Company records unearned revenue when we have either received payment or contractually have the right to bill for services in advance of the services or performance obligations being performed. Deferred revenue recognized in the three and nine months ended September 30, 2022 and 2021 was $51.6 million and $47.3 million, respectively and $152.5 and $139.6, respectively. Changes in unearned revenue were as follows:

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2022

    

2021

2022

    

2021

(in thousands)

Beginning balance

$

192,972

$

172,951

$

168,607

$

149,224

Deferral of unearned revenue

 

54,946

 

49,060

 

180,209

 

165,094

Recognition of unearned revenue

 

(51,553)

 

(47,316)

 

(152,451)

 

(139,623)

Ending balance

$

196,365

$

174,695

$

196,365

$

174,695

As of September 30, 2022, and December 31, 2021, the Company had long-term unearned revenue of $29.5 million and $18.4 million, respectively, recorded in other long-term accrued liabilities. Unearned short-term revenue is recognized over the next 12-month period. The majority of unearned long-term revenue is recognized over a period of five years or less with immaterial amounts recognized through 2033.

9

ROLLINS, INC. AND SUBSIDIARIES

NOTE 5.ALLOWANCE FOR CREDIT LOSSES

The Company is exposed to credit losses primarily related to accounts receivables and financed receivables derived from customer services revenue. To reduce credit risk for residential pest control accounts receivable, we promote enrollment in our auto-pay programs. In general, we may suspend future services for customers with past due balances. The Company’s credit risk is generally low with a large number of individuals and entities comprising Rollins’ customer base and dispersion across many different geographical regions.

The Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risks. The Company’s established credit evaluation and monitoring procedures seek to minimize the amount of business we conduct with higher risk customers. The credit quality of a potential obligor is evaluated at the loan origination based on an assessment of the individual’s Beacon/credit bureau score. Rollins requires a potential obligor to have good credit worthiness with low risk before entering into a contract. Depending upon the individual’s credit score, the Company may accept with 100% financing, require a significant down payment or turn down the contract. Delinquencies of accounts are monitored each month. Financing receivables include installment receivable amounts, some of which are due subsequent to one year from the balance sheet dates.

The Company’s allowances for credit losses for trade accounts receivable and financed receivables are developed using historical collection experience, current economic and market conditions, reasonable and supportable forecasts, and a review of the current status of customers’ receivables. The Company’s receivable pools are classified between residential customers, commercial customers, large commercial customers, and financed receivables. Accounts are written off against the allowance for credit losses when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. The Company stops accruing interest to these receivables when they are deemed uncollectible. Below is a roll forward of the Company’s allowance for credit losses for the three and nine months ended September 30, 2022 and 2021 (in thousands).

10

ROLLINS, INC. AND SUBSIDIARIES

Allowance for Credit Losses

    

Trade

    

Financed

    

Total

Receivables

Receivables

Receivables

Balance at June 30, 2022

$

13,666

$

4,554

$

18,220

Provision for expected credit losses

 

3,842

1,316

 

5,158

Write-offs charged against the allowance

 

(5,095)

(970)

 

(6,065)

Recoveries collected

 

1,370

 

1,370

Balance at September 30, 2022

$

13,783

$

4,900

$

18,683

Allowance for Credit Losses

Trade

Financed

Total

    

Receivables

    

Receivables

    

Receivables

Balance at June 30, 2021

$

13,863

$

4,341

$

18,204

Provision for expected credit losses

 

3,526

 

323

 

3,849

Write-offs charged against the allowance

 

(5,163)

 

(657)

 

(5,820)

Recoveries collected

 

1,247

 

 

1,247

Balance at September 30, 2021

$

13,473

$

4,007

$

17,480

Allowance for Credit Losses

Trade

Financed

Total

    

Receivables

    

Receivables

    

Receivables

Balance at December 31, 2021

$

13,885

$

3,985

$

17,870

Provision for expected credit losses

 

9,396

4,195

 

13,591

Write-offs charged against the allowance

 

(13,561)

(3,280)

 

(16,841)

Recoveries collected

 

4,063

 

4,063

Balance at September 30, 2022

$

13,783

$

4,900

$

18,683

Allowance for Credit Losses

Trade

Financed

Total

    

Receivables

    

Receivables

    

Receivables

Balance at December 31, 2020

$

16,854

$

3,231

$

20,085

Provision for expected credit losses

 

5,760

 

2,762

 

8,522

Write-offs charged against the allowance

 

(12,912)

 

(1,986)

 

(14,898)

Recoveries collected

 

3,771

 

 

3,771

Balance at September 30, 2021

$

13,473

$

4,007

$

17,480

11

ROLLINS, INC. AND SUBSIDIARIES

NOTE 6.GOODWILL AND INTANGIBLE ASSETS

The following table summarizes changes in goodwill during the nine months ended September 30, 2022 and the twelve months ended December 31, 2021 (in thousands):

Goodwill:

    

    

Balance at December 31, 2020

    

$

653,176

Additions

 

69,264

Adjustments due to currency translation

 

(621)

Balance at December 31, 2021

 

721,819

Additions

 

60,962

Measurement adjustments

65

Adjustments due to currency translation

 

(10,521)

Balance at September 30, 2022

$

772,325

The carrying amount of goodwill in foreign countries was $88.9 million as of September 30, 2022 and $82.1 million as of December 31, 2021.

The Company completed its most recent annual impairment analysis as of September 30, 2022. Based upon the results of this analysis, the Company concluded that no impairment of its goodwill or other intangible assets was indicated.

The following table sets forth the components of indefinite-lived and amortizable intangible assets as of September 30, 2022 and December 31, 2021 (in thousands):

    

    

September 30, 2022

December 31, 2021

Accumulated

Carrying

Accumulated

Carrying

Useful Life

Gross

Amortization

Value

Gross

Amortization

Value

in Years

Amortizable intangible assets:

Customer contracts

$

567,698

$

(248,316)

$

319,382

$

551,277

$

(225,348)

$

325,929

 

3-20

Trademarks and tradenames

18,086

(7,201)

 

10,885

12,784

(6,492)

 

6,292

 

7-20

Non-compete agreements

13,999

(6,927)

 

7,072

13,125

(5,573)

 

7,552

 

3-20

Patents

6,934

(6,692)

 

242

6,946

(5,509)

 

1,437

 

3-15

Other assets

1,910

(1,645)

 

265

2,150

(1,687)

 

463

 

10

Total amortizable intangible assets

$

608,628

$

(270,781)

337,847

$

586,282

$

(244,609)

341,673

 

  

Indefinite-lived intangible assets:

 

  

 

  

 

  

Trademarks and tradenames

 

103,131

 

102,684

 

  

Internet domains

 

2,227

 

2,227

 

  

Total indefinite-lived intangible assets

 

105,358

 

104,911

 

  

Total customer contracts and other intangible assets

$

443,205

$

446,584

 

  

The carrying amount of customer contracts in foreign countries was $41.6 million and $42.1 million as of September 30, 2022 and December 31, 2021, respectively. The carrying amount of trademarks and tradenames in foreign countries was $4.1 million and $2.9 million as of September 30, 2022 and December 31, 2021, respectively. The carrying amount of other intangible assets in foreign countries was $0.7 million and $0.7 million as of September 30, 2022 and December 31, 2021, respectively.

Amortization expense related to intangible assets was $15.9 million and $13.4 million for the three months ended September 30, 2022 and 2021, respectively. Amortization expense related to intangible assets was $46.7 million and $39.5 million for the nine months ended September 30, 2022 and 2021, respectively. Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives.

12

ROLLINS, INC. AND SUBSIDIARIES

Estimated amortization expense for the existing carrying amount of customer contracts and other intangible assets for each of the five succeeding fiscal years as of September 30, 2022 are as follows:

(in thousands)

    

  

2022 (excluding the nine months ended September 30, 2022)

    

$

16,283

2023

 

59,772

2024

 

56,197

2025

 

47,083

2026

 

42,670

NOTE 7.LEASES

The Company leases certain buildings, vehicles, and equipment. The Company elected the practical expedient approach permitted under Accounting Standards Codification Topic 842 “Leases”, not to include short-term leases with a duration of 12 months or less on the balance sheet. As of September 30, 2022, and December 31, 2021, all leases were classified as operating leases. Building leases generally carry terms of 5 to 15 years with annual rent escalations at fixed amounts per the lease. Vehicle leases generally carry a fixed term of one year with renewal options to extend the lease on a monthly basis resulting in lease terms up to 7 years depending on the class of vehicle. The exercise of renewal options is at the Company’s sole discretion. It is reasonably certain that the Company will exercise the renewal options on its vehicle leases. The measurement of right-of-use assets and liabilities for vehicle leases includes the fixed payments associated with such renewal periods. We separate lease and non-lease components of contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants.

During the nine months ended September 30, 2021, the Company completed multiple sale-leaseback transactions where it sold 17 of its properties related to the Clark Pest Control acquisition for gross proceeds of $67.0 million and a pre-tax gain of $31.5 million, which is included as Other income, net on the income statement. These leases are classified as operating leases with terms of 7 to 15 years.

13

ROLLINS, INC. AND SUBSIDIARIES

The Company uses the rate implicit in the lease when available; however, most of our leases do not provide a readily determinable implicit rate. Accordingly, we estimate our incremental borrowing rate based on information available at lease commencement.

Three Months Ended September 30, 

Nine Months Ended September 30, 

(in thousands, except Other Information)

Lease Classification

    

Financial Statement Classification

    

2022

    

2021

    

2022

    

2021

Short-term lease cost

 

Cost of services provided, Sales, general, and administrative expenses

$

46

$

51

$

108

$

176

Operating lease cost

 

Cost of services provided, Sales, general, and administrative expenses

 

24,419

 

23,472

 

72,057

 

69,497

Total lease expense

$

24,465

$

23,523

$

72,165

$

69,673

Other Information:

 

  

 

  

 

  

 

  

 

  

Weighted-average remaining lease term - operating leases

 

5.2 years

 

5.5 years

Weighted-average discount rate - operating leases

 

3.41

%

 

3.69

%

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases

$

71,240

$

68,614

Lease Commitments

Future minimum lease payments, including assumed exercise of renewal options as of September 30, 2022 were as follows:

    

Operating

(in thousands)

2022 (excluding the nine months ended September 30, 2022)

$

24,234

2023

86,079

2024

 

62,772

2025

 

44,160

2026

 

26,286

2027

 

14,764

Thereafter

 

48,050

Total Future Minimum Lease Payments

 

306,345

Less: Amount representing interest

 

32,169

Total future minimum lease payments, net of interest

$

274,176

Future commitments presented in the table above include lease payments in renewal periods for which it is reasonably certain that the Company will exercise the renewal option. Total future minimum lease payments for operating leases, including the amount representing interest, are comprised of $163.5 million for building leases and $142.8 million for vehicle leases. As of September 30, 2022, the Company had additional future obligations of $15.6 million for leases that had not yet commenced.

NOTE 8.FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, financed and notes receivable, accounts payable, other short-term liabilities, and debt. The carrying amounts of these financial instruments

14

ROLLINS, INC. AND SUBSIDIARIES

approximate their respective fair values. The Company also has derivative instruments as further discussed in Note 10. Derivative Instruments and Hedging Activities.

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.

As of September 30, 2022, and December 31, 2021, we had investments in international bonds of $10.6 million and $12.6 million, respectively. These bonds are accounted for as available for sale securities and are level 2 assets under the fair value hierarchy. At December 31, 2021, the entire investment was recorded in other current assets. Management reassessed their intentions on the investment and at September 30, 2022, $0.6 million was included in other current assets and $10.0 million was included in other assets. The bonds are recorded at fair market value with unrealized losses of $1.0 million included in other comprehensive income during the nine months ended September 30, 2022.

As of September 30, 2022 and December 31, 2021, the Company had $19.4 million and $25.2 million of acquisition holdback and earnout liabilities payable to former owners of acquired companies, respectively. The earnout liabilities were discounted to reflect the expected probability of payout, and both earnout and holdback liabilities were discounted to their net present value on the Company’s books and are considered level 3 liabilities. The table below presents a summary of the changes in fair value for these liabilities.

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2022

    

2021

    

2022

    

2021

Beginning balance

$

22,742

$

27,057

$

25,156

$

35,744

New acquisitions and revaluations

 

3,706

 

1,341

 

6,457

 

5,314

Payouts

 

(6,468)

 

(6,540)

 

(11,663)

 

(19,413)

Interest on outstanding contingencies

 

79

 

178

 

327

 

715

Charge offset, forfeit and other

 

(669)

 

(514)

 

(887)

 

(838)

Ending balance

$

19,390

$

21,522

$

19,390

$

21,522

NOTE 9.DEBT

In April 2019, the Company entered into a Revolving Credit Agreement with Truist Bank N.A. (formerly SunTrust Bank N.A.) and Bank of America, N.A. (the “Credit Agreement”) for an unsecured revolving commitment of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $25.0 million swingline subfacility (the “Revolving Commitment”), and an unsecured variable rate $250.0 million term loan (the “Term Loan”). On January 27, 2022, the Company entered into an amendment (the “Amendment”) to the Credit Agreement with Truist Bank and Bank of America, N.A. whereby additional term loans in an aggregate principal amount of $252.0 million were advanced to the Company. The Amendment also replaced LIBOR as the benchmark interest rate for borrowings with the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) and reset the amortization schedule for all term loans under the Credit Agreement. The maturity of all loans made under the Credit Agreement prior to the Amendment remains unchanged at April 29, 2024 and all other terms of the Credit Agreement remain unchanged in all material respects. In addition, the Credit Agreement has provisions to extend the term of the Revolving Commitment beyond April 29, 2024, as well as the right at any time and from time to time to prepay any borrowing under the Credit Agreement, in whole or in part, without premium or penalty.

As of September 30, 2022, the Company had outstanding borrowings of $124.9 million under the Term Loan and there were no outstanding borrowings under the Revolving Commitment. The aggregate effective interest rate on the debt outstanding as of September 30, 2022 was 3.866%. The effective interest rate is comprised of the BSBY plus a margin of 75.0 basis points as determined by the Company’s leverage ratio calculation. As of December 31, 2021, the Revolving

15

ROLLINS, INC. AND SUBSIDIARIES

Commitment had outstanding borrowings of $107.0 million and the Term Loan had outstanding borrowings of $48.0 million.

The Company maintains approximately $71.3 million in letters of credit as of September 30, 2022. These letters of credit are required by the Company’s insurance companies, due to the Company’s high deductible insurance program, to secure various workers’ compensation and casualty insurance contracts coverage and were increased from $37.2 million as of December 31, 2021. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims.

In order to comply with applicable debt covenants, the Company is required to maintain at all times a leverage ratio of not greater than 3.00:1.00. The Leverage Ratio is calculated as of the last day of the fiscal quarter most recently ended. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance throughout 2022.

NOTE 10.DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to certain interest rate risks on our outstanding debt and foreign currency risks arising from our international business operations and global economic conditions. The Company enters into certain derivative financial instruments to lock in certain interest rates, as well as to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. We use foreign currency derivatives, specifically foreign currency forward contracts (“FX Forwards”), to manage our exposure to fluctuations in the USD-CAD and USD-AUD exchange rates. FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX Forwards are typically settled in US dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards were recorded in other income/expense and were equal to net gains of $1.0 million and net losses of $0.1 million for the quarters ended September 30, 2022 and 2021, respectively, and net gains of $1.1 million and net losses of $0.6 million for the nine months ended September 30, 2022 and 2021, respectively. The fair values of the Company’s FX Forwards were recorded as a net asset of $0.8 million in Other Current Assets as of September 30, 2022 and an insignificant net obligation in Other Current Liabilities as of December 31, 2021, respectively.

As of September 30, 2022, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):

Non-Designated Derivative Summary

Number of

Sell

Buy

FX Forward Contracts

    

Instruments

    

Notional

    

Notional

Sell AUD/Buy USD Fwd Contract

16

2,300

$

1,615

Sell CAD/Buy USD Fwd Contract

16

16,000

12,313

Total

32

 

  

$

13,928

NOTE 11.CONTINGENCIES

In the normal course of business, the Company and its subsidiaries are involved in, and will continue to be involved in, various claims, arbitrations, contractual disputes, investigations, and regulatory and litigation matters relating to, and arising out of, our businesses and our operations. These matters may involve, but are not limited to, allegations that our

16

ROLLINS, INC. AND SUBSIDIARIES

services or vehicles caused damage or injury, claims that our services did not achieve the desired results, claims related to acquisitions and allegations by federal, state or local authorities, including taxing authorities, of violations of regulations or statutes. In addition, we are parties to employment-related cases and claims from time to time, which may include claims on a representative or class action basis alleging wage and hour law violations. We are also involved from time to time in certain environmental matters primarily arising in the normal course of business. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.

The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and auto liability. The estimated costs of existing and future claims under the retained loss program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts with an independent third party to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration in establishing the reserve, along with management’s knowledge of changes in business practice and existing claims compared to current balances. Management’s judgment is inherently subjective as a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events. The accruals and reserves we hold are based on estimates that involve a degree of judgment and are inherently variable and could be overestimated or insufficient. If actual claims exceed our estimates, our operating results could be materially affected, and our ability to take timely corrective actions to limit future costs may be limited.

Management does not believe that any pending claim, proceeding or litigation, regulatory action or investigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters could result in a charge that might be material to the results of an individual quarter or year.

NOTE 12.PENSION PLANS

In September 2019, the Company settled its fully-funded Rollins, Inc. pension plan, and during 2021, all remaining assets were reverted to the Company per ERISA regulations. The Company continues to sponsor its Waltham, Inc. defined benefit plan. This plan had assets of $2.2 million, a projected liability of $2.9 million and an unfunded status of $0.7 million as of September 30, 2022. The Company has not made any employer contributions to its Waltham defined benefit retirement plan in 2022.

NOTE 13.STOCKHOLDERS’ EQUITY

During the nine months ended September 30, 2022, the Company paid $147.6 million, or $0.30 per share, in cash dividends compared to $119.7 million, or $0.24 per share, during the same period in 2021.

During the nine months ended September 30, 2022 and during the same period in 2021, the Company did not repurchase shares on the open market.

The Company repurchases shares from employees for the payment of their taxes on restricted shares that have vested. The Company repurchased $0.0 million and $0.3 million for the quarters ended September 30, 2022 and 2021, and $7.0 million and $10.6 million for the nine-month periods ended September 30, 2022 and 2021, respectively.

As more fully discussed in Note 15 of the Company’s notes to the consolidated financial statements in its 2021 Annual Report on Form 10-K, time-lapse restricted awards and restricted stock units (“restricted shares”) have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plans. Beginning with the 2022 grant, restricted shares vest in 20 percent increments over five years from the date of the grant. Prior grants vest over six years from the date of grant. The Company issues new shares from its authorized but unissued share pool. As of September 30, 2022, approximately 5.9 million shares of the Company’s common stock were reserved for issuance.

17

ROLLINS, INC. AND SUBSIDIARIES

Time Lapse Restricted Shares

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)

    

2022

    

2021

    

2022

    

2021

Time lapse restricted stock:

 

  

 

  

  

 

  

Pre-tax compensation expense

$

4,957

$

3,920

$

15,914

$

11,762

Tax benefit

 

(1,298)

 

(1,025)

 

(3,894)

 

(2,950)

Restricted stock expense, net of tax

$

3,659

$

2,895

$

12,020

$

8,812

The following table summarizes information on unvested restricted stock outstanding as of September 30, 2022:

    

    

Weighted

Average

Number of

Grant-Date

(number of shares in thousands)

    

Shares

    

Fair Value

Unvested Restricted Stock at December 31, 2021

 

2,596

 

$

26.26

Forfeited

 

(68)

 

26.32

Vested

 

(666)

 

19.97

Granted

 

854

 

30.12

Unvested Restricted Stock at September 30, 2022

 

2,716

$

28.93

As of September 30, 2022, and December 31, 2021, the Company had $57.9 million and $65.2 million of total unrecognized compensation cost, respectively, related to time-lapse restricted shares that are expected to be recognized over a weighted average period of approximately 3.7 years and 4.5 years, respectively.

NOTE 14.EARNINGS PER SHARE

The Company reports both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to participating common stockholders by the weighted average number of participating common shares outstanding for the period. Diluted earnings per share is calculated by dividing the net income available to participating common shareholders by the diluted weighted average number of shares outstanding for the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive equity.

A reconciliation of weighted average shares outstanding is as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Weighted-average outstanding common shares

489,756

489,306

489,705

489,241

Add participating securities:

Weighted-average time-lapse restricted awards

2,560

2,763

2,580

2,817

Total weighted-average shares outstanding - basic

492,316

492,069

492,285

492,058

Dilutive effect of restricted stock units

114

113

Weighted-average shares outstanding - diluted

492,430

492,069

492,398

492,058

18

ROLLINS, INC. AND SUBSIDIARIES

NOTE 15.INCOME TAXES

The Company’s provision for income taxes is recorded on an interim basis based upon the Company’s estimate of the annual effective income tax rate for the full year applied to “ordinary” income or loss, adjusted each quarter for discrete items. The Company recorded a provision for income taxes of $37.2 million and $33.2 million for the three months ended September 30, 2022 and 2021, respectively, and $90.8 million and $95.5 million for the nine months ended September 30, 2022 and 2021, respectively.

The Company’s effective tax rate decreased to 25.7% in the third quarter of 2022 compared to 26.1% in 2021. During the nine months ended September 30, 2022, the Company’s effective tax rate decreased to 24.5% compared to 25.1% in 2021. The rate was lower due to a decrease in foreign taxes from 2021 to 2022.

As of September 30, 2022 and December 31, 2021, we had deferred income tax assets of $2.6 million and $2.9 million, respectively, included in other assets, and deferred income tax liabilities of $15.1 million and $13.3 million, respectively, included in other long-term accrued liabilities.

NOTE 16.SUBSEQUENT EVENTS

Quarterly Dividend

On October 25, 2022, the Company’s Board of Directors declared a regular quarterly cash dividend on its common stock of $0.13 per share payable on December 9, 2022 to stockholders of record at the close of business on November 10, 2022.

19

ROLLINS, INC. AND SUBSIDIARIES

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties and reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors,” of our 2021 Form 10-K and Part II, Item 1A, “Risk Factors” and “Caution Regarding Forward-Looking Statements” included in this report and those discussed in other documents we file from time to time with the SEC.

GENERAL OPERATING COMMENTS

Revenues for the quarter increased 12.2% percent to $729.7 million compared to $650.2 million for the prior year. Income before income taxes increased 14.0% to $144.8 million compared to $127.1 million the prior year. Net income increased 14.7% to $107.6 million, with earnings per diluted share of $0.22 compared to $93.9 million, or $0.19 per diluted share for the prior year.

During the nine months ended September 30, 2022, revenues increased 11.5% to $2.0 billion compared to $1.8 billion for the prior year. Income before income taxes decreased 2.5% to $371.2 million compared to $380.9 million the prior year. Net income decreased 1.7% to $280.4 million, with earnings per diluted share of $0.57 compared to $285.4 million, or $0.58 per diluted share for the prior year.

As more fully discussed in the results of operations, our residential, commercial, and termite and ancillary services experienced double digit revenue percentage growth for both the quarter and nine months ended September 30, 2022.

IMPACT OF COVID-19 AND OTHER ECONOMIC TRENDS

The global spread and unprecedented impact of the COVID-19 pandemic (“COVID-19”) has created uncertainty and economic disruption around the world. We will continue to monitor COVID-19 and may again take actions that may alter our operations, including those that may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees and customers. We do not know when, or if, it will become practical to eliminate all of these measures entirely as there is no guarantee that COVID-19 will be fully contained.

In addition, continued disruption in economic markets due to high inflation, increased fuel costs, business interruptions due to natural disasters, employee shortages and supply chain issues, all pose challenges which may adversely affect our future performance. The Company continues to carry out various strategies previously implemented to help mitigate the impact of these economic disruptors, including revamping its routing and scheduling process to decrease the number of miles per stop, advanced scheduling to compensate for employee and vehicle shortages, shipping delays, and maintaining higher purchasing levels to allow for sufficient inventory. However, the Company cannot reasonably estimate whether these strategies will help mitigate the impact of these economic disruptors in the future.

The Company’s condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements. The Company considered the impact of COVID-19 and other economic trends on the assumptions and estimates used in preparing the condensed consolidated financial statements. In the opinion of management, all material adjustments necessary for a fair presentation of the Company’s financial results for the quarter have been made. These adjustments are of a normal recurring nature but complicated by the continued uncertainty surrounding COVID-19 and other economic trends. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the entire year. The severity, magnitude and duration of certain economic trends, as well as the economic consequences of COVID-19, continue to be uncertain and are difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and other economic trends and may change materially in future periods.

20

ROLLINS, INC. AND SUBSIDIARIES

The extent to which COVID-19, inflation and other economic trends will continue to impact the Company’s business, financial condition and results of operations is highly uncertain. Therefore, we cannot reasonably estimate the full future impacts of these matters at this time.

RESULTS OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 2022 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2021

Three Months Ended September 30, 

Variance

As a % of Revenue

(in thousands)

    

2022

    

2021

    

$

    

%

    

2022

    

2021

REVENUES

Customer services

$

729,704

$

650,199

 

79,505

12.2

100.0

 

100.0

COSTS AND EXPENSES

 

Cost of services provided (exclusive of depreciation and amortization below)

 

348,158

 

305,474

 

42,684

14.0

47.7

 

47.0

Sales, general and administrative

 

213,581

 

194,261

 

19,320

9.9

29.3

 

29.9

Depreciation and amortization

 

24,282

 

23,617

 

665

2.8

3.3

 

3.6

Total operating expenses

 

586,021

 

523,352

 

62,669

12.0

80.3

 

80.5

OPERATING INCOME

 

143,683

 

126,847

 

16,836

13.3

19.7

 

19.5

Interest expense, net

846

 

222

624

NM

0.1

 

0.0

Other (income), net

(1,980)

(447)

(1,533)

NM

(0.3)

 

(0.1)

CONSOLIDATED INCOME BEFORE INCOME TAXES

144,817

127,072

17,745

14.0

19.8

19.5

PROVISION FOR INCOME TAXES

 

37,195

 

33,219

 

3,976

12.0

5.1

 

5.1

NET INCOME

$

107,622

$

93,853

 

13,769

14.7

14.7

 

14.4

Revenue

Revenues for the third quarter ended September 30, 2022 were $729.7 million, an increase of $79.5 million, or 12.2%, from third quarter 2021 revenues of $650.2 million. Revenue performance was strong in the third quarter despite a resurgence of COVID-19 that affected our business earlier in the quarter as well as the business interruption from Hurricane Ian that impacted the Southeast market in the latter part of the quarter. Comparing 2022 to 2021, residential pest control revenue increased 10%, commercial pest control revenue increased 11% and termite and ancillary services grew 19%. The Company’s revenue mix for the third quarter ended September 30, 2022 consisted primarily of 46% residential pest control, 33% commercial pest control and 19% termite and ancillary revenues (such as moisture control, insulation, deck and gutter work). The Company’s foreign operations accounted for approximately 7% of total revenues for the third quarters ended September 30, 2022 and 2021.

Revenues are impacted by the seasonal nature of the Company’s pest and termite control services. The increase in pest activity, as well as the metamorphosis of termites in the spring and summer (the occurrence of which is determined by the change in seasons), has historically resulted in an increase in the Company’s revenues as evidenced by the following chart:

    

Consolidated Net Revenues

(in thousands)

    

2022

    

2021

    

2020

First Quarter

$

590,680

$

535,554

$

487,901

Second Quarter

 

714,049

 

638,204

 

553,329

Third Quarter

 

729,704

 

650,199

 

583,698

Fourth Quarter

 

 

600,343

 

536,292

Year to date

$

2,034,433

$

2,424,300

$

2,161,220

21

ROLLINS, INC. AND SUBSIDIARIES

Cost of Services Provided

For the quarter ended September 30, 2022, cost of services provided increased $42.7 million, or 14.0%, compared to the quarter ended September 30, 2021. As a percentage of revenue cost of services increased to 47.7% from 47.0% in the prior year. Cost of services as a percent of revenue increased primarily due to an increase in the casualty reserve. The change in the casualty reserve was driven by a number of asserted auto claims that matured in the quarter.  These claims can change from time to time and we either reached resolution or received additional information about the nature of the claim that provided a better estimation of the total liability associated with the claim in the quarter. We also saw a general increase in spending associated with people, materials and supplies and fleet costs, due to an increase in business activity albeit at a slower pace than revenue growth.

Sales, General and Administrative

For the quarter ended September 30, 2022, sales, general and administrative (SG&A) expenses increased $19.3 million, or 9.9%, compared to the quarter ended September 30, 2021. As a percentage of revenue SG&A decreased to 29.3% from 29.9% in the prior year. Despite investing in additional people, advertising and other customer facing activities to drive growth, we saw an improvement in SG&A as a percentage of sales as we continue to manage our cost structure. Although claims activity had an impact on SG&A, it had a lesser impact on SG&A than cost of services.

Depreciation and Amortization

For the quarter ended September 30, 2022, depreciation and amortization increased $0.7 million, or 2.8%, compared to the quarter ended September 30, 2021. The increase was due to the additional amortization from acquisitions.

Operating Income

For the quarter ended September 30, 2022, operating income increased $16.8 million, or 13.3%, compared to the quarter ended September 30, 2021. As a percentage of revenue operating income increased to 19.7% from 19.5% in the prior year.  Operating income increased due to an increase in revenue driven by double digit growth in all lines of service, despite a resurgence of COVID-19 that affected our productivity earlier in the quarter as well as the business interruption from Hurricane Ian that impacted the Southeast market in the latter part of the quarter. The improvement in revenue was partially offset by an increase in expenses associated with the casualty reserve as well as an increase in spending associated with people, advertising and customer facing activities.

Other Income, Net

During the quarter ended September 30, 2022, other income increased $1.5 million compared to the quarter ended September 30, 2021 due to gains on asset sales.

Interest Expense, Net

For the quarter ended September 30, 2022, interest expense, net increased $0.6 million, compared to the quarter ended September 30, 2021 due to the increase in the average debt balance and the increase in weighted average interest rates.

Income Taxes

The Company’s effective tax rate decreased to 25.7% in the third quarter of 2022 compared to 26.1% in 2021. The rate was lower due to a decrease in foreign taxes from 2021 to 2022.

22

ROLLINS, INC. AND SUBSIDIARIES

NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2021

Nine Months Ended September 30, 

Variance

As a % of Revenue

(in thousands)

    

2022

    

2021

    

$

    

%

    

2022

    

2021

REVENUES

Customer services

$

2,034,433

$

1,823,957

 

210,476

11.5

100.0

 

100.0

COSTS AND EXPENSES

 

Cost of services provided (exclusive of depreciation and amortization below)

 

980,316

 

864,888

 

115,428

13.3

48.2

 

47.4

Sales, general and administrative

 

612,353

 

539,951

 

72,402

13.4

30.1

 

29.6

Depreciation and amortization

 

73,454

 

70,519

 

2,935

4.2

3.6

 

3.9

Total operating expenses

 

1,666,123

 

1,475,358

 

190,765

12.9

81.9

 

80.9

OPERATING INCOME

 

368,310

 

348,599

 

19,711

5.7

18.1

 

19.1

Interest expense, net

2,294

 

1,334

960

72.0

0.1

 

0.1

Other (income), net

(5,170)

(33,598)

28,428

84.6

(0.3)

 

(1.8)

CONSOLIDATED INCOME BEFORE INCOME TAXES

371,186

380,863

(9,677)

(2.5)

18.2

20.9

PROVISION FOR INCOME TAXES

 

90,820

 

95,513

 

(4,693)

(4.9)

4.5

 

5.2

NET INCOME

$

280,366

$

285,350

 

(4,984)

(1.7)

13.8

 

15.6

Revenue

Revenues for the nine months ended September 30, 2022 were $2.0 billion, an increase of $210.5 million, or 11.5%, from 2021 revenues of $1.8 billion. Comparing 2022 to 2021, residential pest control revenue increased 10%, commercial pest control revenue increased 11% and termite and ancillary services grew 16%. The Company’s revenue mix for the nine months ended September 30, 2022 consisted primarily of 45% residential pest control, 34% commercial pest control and 20% termite and ancillary revenues. The Company’s foreign operations accounted for approximately 7% and 8% of total revenues for the nine months ended September 30, 2022 and 2021, respectively.

Cost of Services Provided

For the nine months ended September 30, 2022, cost of services provided increased $115.4 million, or 13.3%, compared to the nine months ended September 30, 2021. As a percentage of revenue cost of services increased to 48.2% from 47.4% in the prior year. Cost of Services increased due to an increase in the casualty reserve in the third quarter coupled with an increase in people costs, materials and supplies and fleet costs due to an increase in business activity.

Sales, General and Administrative

For the nine months ended September 30, 2022, sales, general and administrative (SG&A) expenses increased $72.4 million, or 13.4%, compared to the nine months ended September 30, 2021. As a percentage of revenue SG&A increased to 30.1% from 29.6% in the prior year. SG&A increased due primarily to an increase in people costs, advertising costs and fleet costs due to an increase in business activity.

Depreciation and Amortization

For the nine months ended September 30, 2022, depreciation and amortization increased $2.9 million, or 4.2%, compared to the nine months ended September 30, 2021. The increase was primarily due to the additional amortization from several acquisitions.

23

ROLLINS, INC. AND SUBSIDIARIES

Operating Income

For the nine months ended September 30, 2022, operating income increased $19.7 million, or 5.7%, compared to the prior year. As a percentage of revenue operating income decreased to 18.1% from 19.1% in the prior year.  The increase in revenue was partially offset by an increase in expense associated with the casualty reserve in the third quarter coupled with an increase in spending associated with people, advertising, and fleet costs on the increased business activity.  

Other Income, Net

During the nine months ended September 30, 2022, other income decreased $28.4 million compared to the nine months ended September 30, 2021 due to the Company recognizing a $31.5 million gain in the prior year related to multiple sale-leaseback transactions where the Company sold and leased back properties that it acquired in 2019 with the Clark Pest Control acquisition.

Interest Expense, Net

During the nine months ended September 30, 2022, interest expense, net increased $1.0 million compared to the nine months ended September 30, 2021 primarily due to the increase in the average debt balance and the increase in weighted average interest rates for the nine months ended September 30, 2022.

Income Taxes

During the nine months ended September 30, 2022, the Company’s effective tax rate decreased to 24.5% compared to 25.1% in 2021. The rate was lower due to a decrease in foreign taxes from 2021 to 2022.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Flow

The Company’s $121.9 million of total cash at September 30, 2022 is primarily money market funds and cash held at various banking institutions. Approximately $65.4 million is held in cash accounts at international bank institutions and the remaining $56.5 million is primarily held in Federal Deposit Insurance Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times exceed federally insured amounts.

The Company’s international business is expanding, and we intend to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies. Repatriation of cash from the Company’s international subsidiaries is not a part of the Company’s current business plan.

As of September 30, 2022, the Company had outstanding borrowings of $124.9 million under the Term Loan and there were no outstanding borrowings under the Revolving Commitment. The aggregate effective interest rate on the debt outstanding as of September 30, 2022 was 3.866%. The effective interest rate is comprised of the BSBY plus a margin of 75.0 basis points as determined by the Company’s leverage ratio calculation. As of December 31, 2021, the Revolving Commitment had outstanding borrowings of $107.0 million and the Term Loan had outstanding borrowings of $48.0 million.

The Company maintains approximately $71.3 million in letters of credit as of September 30, 2022. These letters of credit are required by the Company’s insurance companies, due to the Company’s high deductible insurance program, to secure various workers’ compensation and casualty insurance contracts coverage and were increased from $37.2 million as of December 31, 2021. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims.

24

ROLLINS, INC. AND SUBSIDIARIES

Rollins maintains adequate liquidity and capital resources, without regard to its foreign deposits, that are directed to finance domestic operations and obligations and to fund expansion of its domestic business. In order to comply with applicable debt covenants, the Company is required to maintain at all times a leverage ratio of not greater than 3.00:1.00. The leverage ratio is calculated as of the last day of the fiscal quarter most recently ended. The Company remained in compliance with applicable debt covenants at September 30, 2022 and expects to maintain compliance throughout 2022.

The Company believes its current cash and cash equivalents balances, future cash flows expected to be generated from operating activities, and available borrowings under its $175 million revolving credit facility and $300 million term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future.

The following table sets forth a summary of our cash flows from operating, investing and financing activities for the nine-month periods presented:

    

Nine Months Ended September 30, 

Variance

(in thousands)

    

2022

    

2021

    

$

%

Net cash provided by operating activities

$

342,537

$

298,911

43,626

14.6

Net cash (used in) provided by investing activities

 

(123,378)

 

11,104

(134,482)

NM

Net cash used in financing activities

 

(196,285)

 

(284,688)

88,403

31.1

Effect of exchange rate on cash

 

(6,299)

 

(6,149)

(150)

(2.4)

Net increase in cash and cash equivalents

$

16,575

$

19,178

(2,603)

(13.6)

Cash Provided by Operating Activities

Cash from operating activities is the principal source of cash generation for our businesses. The most significant source of cash in our cash flow from operations is customer-related activities, the largest of which is collecting cash resulting from services sold. The most significant operating use of cash is to pay our suppliers, employees, and tax authorities. The Company’s operating activities generated net cash of $342.5 million and $298.9 million for the nine months ended September 30, 2022 and 2021, respectively. The $43.6 million increase was driven primarily by strong operating results and the timing of cash receipts and cash payments to vendors, employees, and tax and regulatory authorities.

25

ROLLINS, INC. AND SUBSIDIARIES

Cash Used in or Provided by Investing Activities

The Company’s investing activities used $123.4 million for the nine months ended September 30, 2022 and provided $11.1 million for the nine months ended September 30, 2021. The Company invested approximately $22.9 million in capital expenditures during 2022 compared to $20.0 million during 2021. Capital expenditures for the period consisted primarily of equipment replacements and technology-related projects.  Cash paid for acquisitions totaled $110.4 million for the nine months ended September 30, 2022 as compared to $39.7 million for the nine months ended September 30, 2021. The expenditures for the Company’s acquisitions were funded through existing cash balances and operating cash flows. The nine months ended September 30, 2021 included approximately $67 million in cash proceeds from the sale of assets related to the Clark Pest property sale-leaseback transactions.

Cash Provided by or Used in Financing Activities

Cash used by financing activities was $196.3 million during the nine months ended September 30, 2022 compared to cash used of $284.7 million in the prior year. The Company made net debt repayments of $30.0 million during the nine months ended September 30, 2022, compared to net repayments of $135.0 million during 2021. A total of $147.6 million was paid in cash dividends ($0.30 per share) during the nine months ended September 30, 2022 compared to $119.7 million in cash dividends paid ($0.24 per share) during the nine months ended September 30, 2021.

In 2012, the Company’s Board of Directors authorized the purchase of up to 5 million shares of the Company’s common stock. After adjustments for stock splits, the total authorized shares under the share repurchase plan are 16.9 million shares. The Company did not repurchase shares of its common stock on the open market during the first nine months of 2022 nor during the same period in 2021. In total, 11.4 million additional shares may be purchased under the share repurchase program. The Company repurchased $7.0 million and $10.6 million of common stock for the nine months ended September 30, 2022 and 2021, respectively, from employees for the payment of taxes on vesting restricted shares.

CONTINGENCIES

In the normal course of business, the Company and its subsidiaries are involved in, and will continue to be involved in, various claims, arbitrations, contractual disputes, investigations, litigation, and tax and other regulatory matters relating to, and arising out of, our businesses and our operations. These matters may involve, but are not limited to, allegations that our services or vehicles caused damage or injury, claims that our services did not achieve the desired results, claims related to acquisitions and allegations by federal, state or local authorities, including taxing authorities, of violations of regulations or statutes. In addition, we are parties to employment-related cases and claims from time to time, which may include claims on a representative or class action basis alleging wage and hour law violations. We are also involved from time to time in certain environmental and tax matters primarily arising in the normal course of business. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.

The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and auto liability. The estimated costs of existing and future claims under the retained loss program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts with an independent third party to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration in establishing the reserve, along with management’s knowledge of changes in business practice and existing claims compared to current balances. Management’s judgment is inherently subjective as a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events. The accruals and reserves we hold are based on estimates that involve a degree of judgment and are inherently variable and could be overestimated or insufficient. If actual claims exceed our estimates, our operating results could be materially affected, and our ability to take timely corrective actions to limit future costs may be limited.

26

ROLLINS, INC. AND SUBSIDIARIES

Management does not believe that any pending claim, proceeding or litigation, regulatory action or investigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters could result in a charge that might be material to the results of an individual quarter or year.

CRITICAL ACCOUNTING ESTIMATES

There have been no changes to the Company’s critical accounting estimates since the filing of its Form 10-K for the year ended December 31, 2021.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties concerning the business and financial results of Rollins, Inc.  We have based these forward-looking statements largely on our current opinions, expectations, beliefs, plans, objectives, assumptions and projections about future events and financial trends affecting the operating results and financial condition of our business. Such forward looking-statements include, but are not limited to, statements regarding:

the Company’s belief that its accounting estimates and assumptions, financial condition and results of operations may change materially in future periods in response to the COVID-19 pandemic;
the outcomes of any pending claim, proceeding, litigation, regulatory action or investigation filed against us, either alone or in the aggregate, which could have a material adverse effect on our business, or liquidity, financial condition and results of operations;
the Company’s evaluation of pending and threatened claims and establishment of loss contingency reserves based upon outcomes it currently believes to be probable and reasonably estimable;
the Company’s reasonable certainty that it will exercise the renewal options on its operating leases;
risks related to 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 under its $175.0 million revolving credit facility and $300.0 million term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future;
the Company’s ability to remain in compliance with applicable debt covenants under the Credit Facility throughout 2022;
the Company’s belief that the adoption of ASU 2022-02 and ASU 2022-03 is not expected to have a material impact on the Company’s consolidated financial statements;
the Company’s ability to continue the purchase of Company common stock when appropriate;
risks related to the Company’s ability to continue to grow its 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 from the company’s foreign subsidiaries is not a part of the Company’s current business plan;
the Company’s expectation that total unrecognized compensation cost related to time-lapse restricted shares will be recognized over a weighted average period of approximately 3.7 years;

27

ROLLINS, INC. AND SUBSIDIARIES

the Company’s expectation that the acquisition-related goodwill recognized during the quarter will be deductible for tax purposes;
the Company’s conclusion that there are no impairments of its goodwill or other intangible assets;
the Company’s belief that the factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized;
the Company’s belief that it has adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims;
the Company’s belief that foreign exchange rate risk will not have a material effect on the Company’s results of operations going forward;
the Company’s belief that recent disruptions in economic markets due to high inflation, increased fuel costs, and supply chain issues, all pose current and future challenges which may adversely affect the Company’s future performance;
that the Company cannot reasonably estimate whether its current strategies will help mitigate the impact of high inflation, increased fuel costs, employee and vehicle shortages, shipping delays and supply chain issues in the future;
the Company’s belief that it maintains adequate liquidity 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; and
the Company’s belief that it will continue to be involved in various claims, arbitrations, contractual disputes, investigations, and regulatory and litigation matters relating to, and arising out of, its businesses and its operations.

Forward-looking statements are based on information available at the time those statements are made and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Such risks and uncertainties are beyond our ability to control, and in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. The reader should consider the factors discussed under Item 1A., “Risk Factors,” of Part I of the Company’s Annual Report on Form 10 K, filed with the U.S. Securities and Exchange Commission, for the year ended December 31, 2021 (the “2021 Annual Report”) that could cause the Company’s actual results and financial condition to differ materially from estimated results and financial condition. The Company does not undertake to update its forward-looking statements.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures about Market Risk,” in Part II, Item 7.A of our 2021 Form 10-K. There were no material changes to our market risk exposure during the three and nine months ended September 30, 2022.

ITEM 4.CONTROLS AND PROCEDURES

The Disclosure Committee, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as

28

ROLLINS, INC. AND SUBSIDIARIES

of September 30, 2022 (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation Date to ensure that the information required to be included in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Controls Over Financial Reporting

Management’s quarterly evaluation identified no changes in our internal control over financial reporting during the third quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

In the normal course of business, the Company and its subsidiaries are involved in, and will continue to be involved in, various claims, arbitrations, contractual disputes, investigations, litigation, and tax and other regulatory matters relating to, and arising out of, our businesses and our operations. These matters may involve, but are not limited to, allegations that our services or vehicles caused damage or injury, claims that our services did not achieve the desired results, claims related to acquisitions and allegations by federal, state or local authorities, including taxing authorities, of violations of regulations or statutes. In addition, we are parties to employment-related cases and claims from time to time, which may include claims on a representative or class action basis alleging wage and hour law violations. We are also involved from time to time in certain environmental and tax matters primarily arising in the normal course of business. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.

The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and auto liability. The estimated costs of existing and future claims under the retained loss program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts with an independent third party to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration in establishing the reserve, along with management’s knowledge of changes in business practice and existing claims compared to current balances. Management’s judgment is inherently subjective as a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events. The accruals and reserves we hold are based on estimates that involve a degree of judgment and are inherently variable and could be overestimated or insufficient. If actual claims exceed our estimates, our operating results could be materially affected, and our ability to take timely corrective actions to limit future costs may be limited.

Management does not believe that any pending claim, proceeding or litigation, regulatory action or investigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters could result in a charge that might be material to the results of an individual quarter or year.

ITEM 1A.RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2021.

29

ROLLINS, INC. AND SUBSIDIARIES

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Rollins, Inc did not purchase any equity securities reportable under Item 703 of Regulation S-K during the period from July 1, 2022 to September 30, 2022.

Total number of 

Weighted-

shares purchased as 

Maximum number of 

Total number of

average 

part of publicly 

shares that may yet be 

 shares 

price paid 

announced 

purchased under the 

Period

    

purchased

    

per share

    

repurchases (1)

    

repurchase plan (1)

July 1 to 31, 2022

$

11,415,625

August 1 to 31, 2022

11,415,625

September 1 to 30, 2022

11,415,625

Total

$

11,415,625

(1)The Company has a share repurchase plan, adopted in 2012, to repurchase up to 16.9 million shares of the Company’s common stock. The plan has no expiration date.

30

ROLLINS, INC. AND SUBSIDIARIES

ITEM 6.EXHIBITS

Exhibit No.

Exhibit Description

Incorporated By Reference

Filed Herewith

Form

Date

Number

2.1

Stock Purchase Agreement by and among Rollins, Inc., Clark Pest Control of Stockton, Inc., the Stockholders of Clark Pest Control of Stockton, Inc. the Principals and the Stockholders Representative

10-Q

April 26, 2019

10.1

2.2

Asset Purchase Agreement among King Distribution, Inc., a Delaware corporation, Geotech Supply Co., LLC, a California limited liability company, and Clarksons California Properties, California limited partnership

10-Q

April 26, 2019

10.2

2.3

Real Estate Purchase Agreement by and between RCI – King, Inc., and Clarksons California Properties, a California limited partnership

10-Q

April 26, 2019

10.3

3.1

Restated Certificate of Incorporation of Rollins, Inc., dated July 28, 1981

10-Q

August 1, 2005

(3)(i)(A)

3.2

Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated August 20, 1987

10-K

March 11, 2005

(3)(i)(B)

3.3

Certificate of Change of Location of Registered Office and of Registered Agent, dated March 22, 1994

10-Q

August 1, 2005

(3)(i)(C)

3.4

Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated April 26, 2011

10-K

February 25, 2015

(3)(i)(E)

3.5

Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated April 28, 2015

10-Q

July 29, 2015

(3)(i)(F)

3.6

Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated April 23, 2019

10-Q

April 26, 2019

(3)(i)(G)

3.7

Certificate of Amendment of Certificate of Incorporation of Rollins, Inc., dated April 27, 2021

10-Q

July 30, 2021

(3)(i)(H)

3.8

Amended and Restated By-laws of Rollins, Inc., dated May 20, 2021

8-K

May 24, 2021

3.1

4.1

Form of Common Stock Certificate of Rollins, Inc.

10-K

March 26, 1999

(4)

4.2

Description of Registrant’s Securities

10-K

February 28, 2020

4(b)

10.1+

Membership Interest Purchase Agreement by and among Rollins, Inc., Northwest Exterminating Co., Inc. NW Holdings, LLC and the stockholders of Northwest Exterminating Co., Inc. dated as of July 24, 2017

10-Q

October 27, 2017

10.1

10.2*

Rollins, Inc. Amended and Restated Deferred Compensation Plan

S-8

November 18, 2005

4.1

10.3*

Form of Plan Agreement pursuant to the Rollins, Inc. Amended and Restated Deferred Compensation Plan

S-8

November 18, 2005

4.2

10.4*

Written description of Rollins, Inc. Performance-Based Incentive Cash Compensation Plan for Executive Officer

8-K

February 1, 2021

10(a)

10.5*

2018 Stock Incentive Plan

DEF 14A

March 21, 2018

Appendix A

10.6*

Form of Restricted Stock Grant Agreement

8-K

April 28, 2008

10(d)

10.7*

Form of Time-Lapse Restricted Stock Agreement

10-Q

April 27, 2012

10.1

10.8*

Summary of Compensation Arrangements with Executive Officers

10-K

February 25, 2011

(10)(q)

10.9*

Summary of Compensation Arrangements with Non-Employee Directors

10-K

February 25, 2015

10(i)

10.10

Revolving Credit Agreement dated as of April 30, 2019 between Rollins, Inc. and SunTrust Bank and Bank of America, N.A.

10-K

February 28, 2020

10.1

10.11

Amended Credit Agreement dated as of January 27, 2022 between Rollins, Inc. and Truist Bank in its capacity as Administrative Agent and as a Lender and Bank of America, N.A. as a Lender

10-K

February 25, 2022

10.12

10.12

Annex A to the Credit Agreement dated as of January 27, 2022 between Rollins, Inc. and Truist Bank in its capacity as

10-K

February 25, 2022

10.13

ROLLINS, INC. AND SUBSIDIARIES

Exhibit No.

Exhibit Description

Incorporated By Reference

Filed Herewith

Form

Date

Number

Administrative Agent and as a Lender and Bank of America, N.A. as a Lender

10.13

Annex B to the Credit Agreement dated as of January 27, 2022 between Rollins, Inc. and Truist Bank in its capacity as Administrative Agent and as a Lender and Bank of America, N.A. as a Lender

10-K

February 25, 2022

10.14

10.14*

Form of Rollins, Inc. 2022 Executive Bonus Plan

10-K

February 25, 2022

10.15

10.15*

Rollins, Inc. 2022 Executive Bonus Plan - Jerry Gahlhoff

10-K

February 25, 2022

10.16

10.16*

Confidential Settlement and General Release Agreement dated as of April 5, 2022 between the Company and Paul E. Northen

10-Q

April 28, 2022

10.17

10.17*

Form of Time-Lapse Restricted Stock Agreement for Non-Section 16 Reporting Person

X

10.18*

Form of Time-Lapse Restricted Stock Agreement For Section 16 Reporting Persons

X

10.19*

Offer Letter dated July 25, 2022, between Kenneth D. Krause and the Company

X

31.1

Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2

Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.1**

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

101.INS

Inline XBRL Instance Document

X

101.SCH

Inline XBRL Schema Document

X

101.CAL

Inline XBRL Calculation Linkbase Document

X

101.LAB

Inline XBRL Labels Linkbase Document

X

101.PRE

Inline XBRL Presentation Linkbase Document

X

101.DEF

Inline XBRL Definition Linkbase Document

X

104

Cover Page Interactive Data File (embedded with the Inline XBRL document)

X

+

Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K, Item 601(b)(10)

*

Indicates management contract or compensatory plans or arrangements.

**

Furnished with this report

ROLLINS, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ROLLINS, INC.

(Registrant)

Date: October 27, 2022

By:

/s/ Gary W. Rollins

Gary W. Rollins

Chairman and Chief Executive Officer

(Principal Executive Officer)

 

Date: October 27, 2022

By:

/s/ Traci Hornfeck

Traci Hornfeck

Chief Accounting Officer

(Principal Accounting Officer)