Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Stockholders of Rollins, Inc.:

The management of Rollins, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Rollins, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial and principal accounting officer, we conducted an evaluation of the effectiveness of the design and operation of internal controls over financial reporting, as of December 31, 2022 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management’s assessment is that Rollins, Inc. maintained effective internal control over financial reporting as of December 31, 2022.

The independent registered public accounting firm, Grant Thornton LLP has audited the consolidated financial statements as of and for the year ended December 31, 2022, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 27.


/s/ Jerry E. Gahlhoff, Jr.		/s/ Kenneth D. Krause
Jerry E. Gahlhoff, Jr.		Kenneth D. Krause

President and Chief Executive Officer		Executive Vice President, Chief Financial Officer and Treasurer
Principal Executive Officer		Principal Financial Officer

Atlanta, Georgia
February 16, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Rollins, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Rollins, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated February 16, 2023 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Atlanta, Georgia

February 16, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Rollins, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated statements of financial position of Rollins, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 16, 2023 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accrued Insurance – general liability, workers’ compensation and auto liability

As described further in note 1 to the financial statements, the Company retains, up to certain policy-specified limits, risks related to claims under general liability, workers’ compensation and auto liability programs (“accrued insurance”). Historical claims experience is utilized to estimate the current year accrual and the underlying provision for future claims under the retained loss programs. This actuarially determined accrual and provision includes both reported and unreported claims and may be subsequently revised based on future developments relating to such claims. We identified accrued insurance as a critical audit matter.

The principal considerations for our determination that accrued insurance is a critical audit matter are that the accrued insurance liability has a higher risk of estimation uncertainty due to the utilization of loss development factors and assumptions in actuarial methods used in determining the required liability. The estimation uncertainty and complexity of the actuarial methods utilized involved especially subjective auditor judgment and an increased level of effort, including the involvement of an auditor-engaged actuarial specialist.

Our audit procedures related to accrued insurance included the following, among others:

	●	We obtained an understanding, evaluated the design and tested the operating effectiveness of key controls, including, but not limited to, controls that (1) determine that claims were reported and submitted accurately and timely, (2) determine the underlying data maintained by the Company and the third-party administrator used to develop the accrued insurance reserve was complete and accurate, and (3) determine the third-party actuarial report, including the assumptions, used in developing and recording the accrued insurance reserve was reviewed by the Company’s management.

	●	We tested the completeness and accuracy of the underlying data maintained by the Company and the third-party administrator, which was submitted to the Company’s actuary to develop the accrued insurance reserve.

	●	We utilized an auditor-engaged specialist in evaluating management’s methods and assumptions, including the reasonableness of the selected loss development factors, as well as performed a comparison of actual versus expected claims development to identify indicators of potential bias. The auditor-engaged specialist developed an independent estimate of the range of potential losses and compared to the accrued insurance reserve recorded by management.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2004

Atlanta, Georgia

February 16, 2023

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Rollins, Inc. and Subsidiaries

(in thousands except share information)


	December 31,		December 31,
	2022		2021
ASSETS
Cash and cash equivalents	$	95,346	$	105,301
Trade receivables, net of allowance for expected credit losses of $14,073 and $13,885, respectively		155,759		139,579
Financed receivables, short-term, net of allowance for expected credit losses of $1,768 and $1,463, respectively		33,618		26,152
Materials and supplies		29,745		28,926
Other current assets		34,151		52,422
Total current assets		348,619		352,380
Equipment and property, net of accumulated depreciation of $333,298 and $315,891, respectively		128,046		133,257
Goodwill		846,704		786,504
Customer contracts, net		298,559		301,914
Trademarks & tradenames, net		111,646		108,976
Other intangible assets, net		8,543		11,679
Operating lease right-of-use assets		277,355		244,784
Financed receivables, long-term, net of allowance for expected credit losses of $3,200 and $2,522, respectively		63,523		47,097
Other assets		39,033		34,949
Total assets	$	2,122,028	$	2,021,540
LIABILITIES
Accounts payable	$	42,796	$	44,568
Accrued insurance - current		39,534		36,414
Accrued compensation and related liabilities		99,251		97,862
Unearned revenues		158,092		145,122
Operating lease liabilities - current		84,543		75,240
Current portion of long-term debt		15,000		18,750
Other current liabilities		54,568		73,206
Total current liabilities		493,784		491,162
Accrued insurance, less current portion		38,350		31,545
Operating lease liabilities, less current portion		196,888		172,520
Long-term debt		39,898		136,250
Other long-term accrued liabilities		85,911		78,846
Total liabilities		854,831		910,323
Commitments and contingencies (see Note 13)
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, 492,447,997 and 491,911,087 shares issued and outstanding, respectively		492,448		491,911
Additional paid in capital		119,242		105,629
Accumulated other comprehensive loss		(31,562)		(16,411)
Retained earnings		687,069		530,088
Total stockholders’ equity		1,267,197		1,111,217
Total liabilities and stockholders’ equity	$	2,122,028	$	2,021,540

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

CONSOLIDATED STATEMENTS OF INCOME

Rollins, Inc. and Subsidiaries

(in thousands except per share information)



	Year Ended December 31,
	2022		2021		2020
REVENUES
Customer services	$	2,695,823	$	2,424,300	$	2,161,220
COSTS AND EXPENSES
Cost of services provided (exclusive of depreciation and amortization below)		1,308,399		1,162,617		1,048,592
Sales, general and administrative		802,710		727,489		657,209
Depreciation and amortization		91,326		86,558		79,331
Total operating expenses		2,202,435		1,976,664		1,785,132
OPERATING INCOME		493,388		447,636		376,088
Interest expense, net		2,638		830		5,082
Other (income) expense, net		(8,167)		(35,679)		8,290
CONSOLIDATED INCOME BEFORE INCOME TAXES		498,917		482,485		362,716
PROVISION FOR INCOME TAXES		130,318		125,920		95,960
NET INCOME	$	368,599	$	356,565	$	266,756
NET INCOME PER SHARE - BASIC AND DILUTED	$	0.75	$	0.72	$	0.54
Weighted average shares outstanding - basic		492,300		492,054		491,604
Weighted average shares outstanding - diluted		492,413		492,054		491,604
DIVIDENDS PAID PER SHARE	$	0.43	$	0.42	$	0.33

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Rollins, Inc. and Subsidiaries

(in thousands)




	2022		2021		2020
NET INCOME	$	368,599	$	356,565	$	266,756
Other comprehensive (loss) income, net of tax:
Pension and other postretirement benefit plans		—		—		(127)
Foreign currency translation adjustments		(14,215)		(5,895)		10,443
Unrealized loss on available for sale securities		(936)		—		—
Change in derivatives		—		381		(104)
Other comprehensive (loss) income, net of tax		(15,151)		(5,514)		10,212
Comprehensive income	$	353,448	$	351,051	$	276,968

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Rollins, Inc. and Subsidiaries

(in thousands)


									Accumulated
							Additional		Other
	Common Stock			Treasury			Paid- In-		Comprehensive		Retained
	Shares	Amount		Shares	Amount		Capital		Income (Loss)		Earnings		Total
Balance at December 31, 2019	491,146	$	491,146	—	$	—	$	89,413	$	(21,109)	$	273,659	$	833,109
Impact of adoption of ASC 326												2,486		2,486
Net income												266,756		266,756
Other comprehensive income
Pension liability adjustment, net of tax										(127)				(127)
Foreign currency translation adjustments										10,443				10,443
Interest rate swaps, net of tax										(104)				(104)
Cash dividends												(160,487)		(160,487)
Stock compensation	802		802					20,315				(267)		20,850
Employee stock buybacks	(336)		(336)					(7,971)				32		(8,275)
Balance at December 31, 2020	491,612	$	491,612	—	$	—	$	101,757	$	(10,897)	$	382,179	$	964,651
Net income												356,565		356,565
Other comprehensive income
Pension liability adjustment, net of tax										—				—
Foreign currency translation adjustments										(5,895)				(5,895)
Interest rate swaps, net of tax										381				381
Cash dividends												(208,656)		(208,656)
Stock compensation	593		593					14,272						14,865
Employee stock buybacks	(294)		(294)					(10,400)						(10,694)
Balance at December 31, 2021	491,911	$	491,911	—	$	—	$	105,629	$	(16,411)	$	530,088	$	1,111,217
Net income												368,599		368,599
Other comprehensive income
Pension liability adjustment, net of tax										—				—
Foreign currency translation adjustments										(14,215)				(14,215)
Unrealized losses on available for sale securities										(936)				(936)
Cash dividends												(211,618)		(211,618)
Stock compensation	765		765					20,450						21,215
Employee stock buybacks	(228)		(228)					(6,837)						(7,065)
Balance at December 31, 2022	492,448	$	492,448	—	$	—	$	119,242	$	(31,562)	$	687,069	$	1,267,197

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

Rollins, Inc. and Subsidiaries

(in thousands)




	2022		2021		2020
OPERATING ACTIVITIES
Net income	$	368,599	$	356,565	$	266,756
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		91,326		86,558		79,331
Stock-based compensation expense		21,215		14,865		20,850
Provision for expected credit losses		19,441		15,285		17,536
Gain on sale of assets, net		(8,167)		(35,679)		1,598
Provision for deferred income taxes		1,595		3,421		849
Changes in operating assets and liabilities:
Trade accounts receivable and other accounts receivable		(34,003)		(22,439)		(12,045)
Financing receivables		(23,891)		(14,473)		(11,787)
Materials and supplies		(540)		2,644		(10,706)
Other current assets		5,836		(11,159)		6,847
Accounts payable and accrued expenses		304		1,421		50,061
Unearned revenue		10,400		11,934		7,276
Other long-term assets and liabilities		13,815		(7,138)		19,219
Net cash provided by operating activities		465,930		401,805		435,785
INVESTING ACTIVITIES
Acquisitions, net of cash acquired		(119,188)		(146,098)		(147,613)
Capital expenditures		(30,628)		(27,194)		(23,229)
Proceeds from sale of assets		14,597		74,438		7,700
Other investing activities, net		1,078		(111)		747
Net cash (used in) investing activities		(134,141)		(98,965)		(162,395)
FINANCING ACTIVITIES
Payment of contingent consideration		(17,334)		(22,809)		(24,011)
Borrowings under term loan		252,000		—		—
Borrowings under revolving commitment		43,000		206,500		135,000
Repayments of term loan		(245,000)		(88,000)		(54,000)
Repayments of revolving commitment		(150,000)		(166,500)		(169,500)
Payment of dividends		(211,618)		(208,656)		(160,487)
Cash paid for common stock purchased		(7,065)		(10,694)		(8,275)
Net cash (used in) financing activities		(336,017)		(290,159)		(281,273)
Effect of exchange rate changes on cash		(5,727)		(5,857)		12,084
Net (decrease) increase in cash and cash equivalents		(9,955)		6,824		4,201
Cash and cash equivalents at beginning of period		105,301		98,477		94,276
Cash and cash equivalents at end of period	$	95,346	$	105,301	$	98,477
Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,162	$	1,313	$	5,056
Cash paid for income taxes, net	$	119,573	$	119,762	$	81,184
Non-cash additions to operating lease right-of-use assets	$	122,149	$	116,594	$	89,016

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2022, 2021, and 2020, Rollins, Inc. and Subsidiaries

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description—Rollins, Inc. (“Rollins,” “we,” “us,” “our,” or the “Company”), is an international services company headquartered in Atlanta, Georgia that provides pest and termite control services to both residential and commercial customers through its wholly-owned subsidiaries and independent franchises in the United States, Canada, Australia, Europe, and Asia with international franchises in Canada, Central and South America, the Caribbean, Europe, the Middle East, Asia, Africa, and Australia. The Company operates as one reportable segment and the results of operations and its financial condition are not reliant upon any single customer.

Principles of Consolidation—The Company’s Consolidated Financial Statements include the accounts of Rollins, Inc. and the Company’s wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The Company does not consolidate the financial statements of any company in which it has an ownership interest of 50% or less. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity. The Company reclassified or revised certain prior period amounts, none of which were material, to conform to the current period presentation. All material intercompany accounts and transactions have been eliminated.

Subsequent Events—The Company evaluates its financial statements through the date the financial statements are issued.

Use of Estimates—The preparation of financial statements in conformity with 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, inventory (materials and supplies) valuation, employee benefit plans, income tax contingency accruals and valuation allowances, contingency accruals; 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 considered the impact of COVID-19 on the assumptions and estimates used in preparing the consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the year have been made. These adjustments are of a normal recurring nature but complicated by the uncertainty surrounding the global economic impact of COVID-19. The results of operations for the year ended December 31, 2022 are not necessarily indicative of results for future years. The severity, magnitude and duration, as well as the economic consequences of COVID-19, are uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods.

Basis of Presentation— Certain consolidated financial statement amounts relative to prior periods have been revised, the effects of which are immaterial, to correct the Company’s application of Accounting Standards Codification (“ASC”) 805, “Business Combinations,” with respect to certain acquisitions occurring between 2012 and 2019, which resulted in adjustments to the fair values of customer contracts and contingent consideration related to these acquisitions. The Company assessed the materiality of this correction to prior periods’ consolidated financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and “Presentation of Financial Statements,” codified in ASC 250. The Company concluded that the correction was not material to prior periods and therefore, amendments of previously filed reports are not required. In accordance with ASC 250, the Company corrected prior periods presented herein by revising the financial statement line item amounts previously disclosed in SEC filings. The impact of this revision does not affect the interim or annual assessment of goodwill, intangibles or indefinite-lived assets. The impact of this revision on the Company’s previously reported consolidated financial statements is as follows:



	At December 31, 2021
	As reported		Adjustment		As revised
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Goodwill	$	721,819	$	64,685	$	786,504
Customer contracts, net		325,929		(24,015)		301,914
Total assets		1,980,870		40,670		2,021,540
Other long-term accrued liabilities		67,345		11,501		78,846
Total liabilities		898,822		11,501		910,323
Retained earnings		500,919		29,169		530,088
Total stockholders' equity		1,082,048		29,169		1,111,217
Total liabilities and stockholders' equity		1,980,870		40,670		2,021,540

	For the year ended December 31, 2021						For the year ended December 31, 2020
	As reported		Adjustment		As revised		As reported		Adjustment		As revised
CONSOLIDATED STATEMENTS OF INCOME
COSTS AND EXPENSES
Sales, general and administrative	$	727,489	$	—	$	727,489	$	656,207	$	1,002	$	657,209
Depreciation and amortization		94,205		(7,647)		86,558		88,329		(8,998)		79,331
Total operating expenses		1,984,311		(7,647)		1,976,664		1,793,128		(7,996)		1,785,132
Operating income		439,989		7,647		447,636		368,092		7,996		376,088
Consolidated income before income taxes		474,838		7,647		482,485		354,720		7,996		362,716
Provision for income taxes		124,151		1,769		125,920		93,896		2,064		95,960
Net income		350,687		5,878		356,565		260,824		5,932		266,756
Net income per share - basic and diluted		0.71		0.01		0.72		0.53		0.01		0.54

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$	350,687	$	5,878	$	356,565	$	260,824	$	5,932	$	266,756
Comprehensive income		345,173		5,878		351,051		271,036		5,932		276,968

	Retained Earnings						Total
	As reported		Adjustment		As revised		As reported		Adjustment		As revised
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Balance at December 31, 2019	$	256,300	$	17,359	$	273,659	$	815,750	$	17,359	$	833,109
Net income		260,824		5,932		266,756		260,824		5,932		266,756
Balance at December 31, 2020		358,888		23,291		382,179		941,360		23,291		964,651
Net income		350,687		5,878		356,565		350,687		5,878		356,565
Balance at December 31, 2021		500,919		29,169		530,088		1,082,048		29,169		1,111,217

	For the year ended December 31, 2021						For the year ended December 31, 2020
	As reported		Adjustment		As revised		As reported		Adjustment		As revised
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income	$	350,687	$	5,878	$	356,565	$	260,824	$	5,932	$	266,756
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		94,205		(7,647)		86,558		88,329		(8,998)		79,331
Provision for deferred income taxes		1,652		1,769		3,421		(1,215)		2,064		849
Changes in operating assets and liabilities
Other long-term assets and liabilities		(7,138)		—		(7,138)		18,217		1,002		19,219
Net cash provided by operating activities		401,805		—		401,805		435,785		—		435,785

Revenue Recognition—The Company’s revenue recognition policy is to recognize revenue upon transfer of control of promised products and services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which are distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of Goods and Services and Performance Obligations

The Company contracts with its customers to provide the following goods and services, each of which is a distinct performance obligation:

Pest control services - Rollins provides pest control services to protect residential and commercial properties from common pests, including rodents and insects. Pest control generally consists of assessing a customer’s property for conditions that invite pests, tackling current infestations, and stopping the life cycle to prevent future invaders. Revenue from pest control services is recognized as services are rendered.

The Company’s revenue recognition policies are designed to recognize revenues upon satisfaction of the performance obligation at the time services are performed. For certain revenue types, because of the timing of billing and the receipt of cash versus the timing of performing services, we use estimates as described below. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. The Company defers recognition of advance payments and recognizes the revenue as the services are rendered. The Company classifies discounts related to the advance payments as a reduction in revenues.

Termite control services - Rollins provides a variety of termite protection services. Termite protection programs include liquid treatments, wet and dry foam applications, termite baiting and wood treatments. Revenue from initial termite treatment services is recognized as services are provided.

Maintenance/monitoring/inspection - In connection with the initial service offerings, Rollins provides recurring maintenance, monitoring or inspection services to help protect consumers’ property from any future sign of termite activities after the original treatment. This recurring service is a service-type warranty under ASC 606, “Revenue from Contracts with Customers,” as it is routinely sold and purchased separately from the initial treatment services and is typically purchased or renewed annually.

Termite baiting revenues are recognized based on the transfer of control of the individual units of accounting. At the inception of a new baiting services contract, upon quality control review of the installation, the Company recognizes revenue for the installation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring performance obligation. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue that depicts the Company’s performance in transferring control of the service. The allocation of the transaction price to the two deliverables is based on the relative stand-alone selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual contract period on a straight-line basis that depicts the Company’s performance in transferring control of the service.

Revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term that depicts the Company’s performance in transferring control of the service, and the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date, and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company accrues for noticed claims. The costs of providing termite services upon renewal are compared to the expected revenue to be received and a provision is made for any expected losses.

Miscellaneous services - In certain agreements with customers, Rollins may offer other miscellaneous services, including restroom cleaning (eliminating foul odors, grease and grime which could attract pests) and training (seminars covering good manufacturing practices and product stewardship). Revenue from miscellaneous services is recognized when services are provided.

Products - Depending on customer demand, Rollins may separately sell pest control and/or termite protection products, such as traps. Revenue from product sales is recognized upon transfer of control of the asset.

Equipment rental (or lease) - Depending on customer demand, Rollins may lease certain pest control and/or termite protection equipment. Revenues from equipment rentals are recognized over the period of the rental/lease. Revenues from equipment rentals represent less than 1.0% of the Company’s revenues for each reported period.

The Company’s international operations accounted for approximately 7%, 8%, and 7% of revenues for the years ended December 31, 2022, 2021, and 2020 respectively.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. We record unearned revenue when revenue is recognized subsequent to billing. Unearned revenue mainly relates to the Company’s termite baiting offering, conventional renewals, and year-in-advance pest control services for which we have been paid in advance and earn the revenue when we transfer control of the product or service. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. Refer to Note 3 - Revenue for further information, including changes in unearned revenue for the year.

The Company extends terms to certain customers on higher dollar termite and ancillary work, as well as to certain franchisees for initial funding on the sale of franchises. These financed receivables are segregated from our trade receivables. The allowance for expected credit losses reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. See Note 4 – Allowance for Credit Losses for further information.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.

Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. All revenues are reported net of sales taxes.

Allowance for Expected Credit Losses— The Company maintains an allowance for expected credit losses based on the expected collectability of accounts receivable. Management uses historical collection results as well as accounts receivable aging in order to determine the expected collectability of accounts receivable. Substantially all of the Company’s receivables are due from pest control and termite services in the United States and selected international locations. The Company’s allowance for expected credit losses is determined using a combination of factors. The Company’s established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Provisions for expected credit losses are recorded in selling, general and administrative expenses. Accounts are written off against the allowance for expected credit losses when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. Significant recoveries will generally reduce the required provision in the period of recovery. Therefore, the provision for expected credit losses can fluctuate significantly from period to period. We record specific provisions when we become aware of a customer’s inability to meet its financial obligations to us,

such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, our estimates of the realizability of receivables would be further adjusted, either upward or downward.

Advertising—Advertising costs are charged to sales, general and administrative expense during the year in which they are incurred.


Years ended December 31,	2022		2021		2020
(in thousands)
Advertising	$	102,959	$	91,879	$	86,314

Cash and Cash Equivalents— The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents.

The Company’s $95.3 million of total cash at December 31, 2022 is primarily cash held at various banking institutions. Approximately $68.6 million is held in cash accounts at international banking institutions and the remaining $26.7 million is primarily held in Federal Deposit Insurance Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times may exceed federally insured amounts. The Company has not incurred any losses in these accounts.


At December 31,	2022		2021
(in thousands)
Cash held in foreign bank accounts	$	68,580	$	78,102

Rollins maintains adequate liquidity and capital resources, without regard to its foreign deposits, that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future.

Marketable Securities— From time to time, the Company maintains investments held by several large, well-capitalized financial institutions. The Company’s investment policy does not allow investment in any securities rated less than “investment grade” by national rating services.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt securities are classified as available-for-sale because the Company does not have the intent to hold the securities to maturity. Available-for-sale securities are stated at their fair values, with the unrealized gains and losses reported in other comprehensive income.

The Company had no other marketable securities other than those held in the defined benefit pension plan and the non-qualified deferred compensation plan at December 31, 2022 and 2021. See Note 12 for further details.

Materials and Supplies— Materials and supplies are stated at the lower of cost or net realizable value. Cost is determined on the first-in, first-out method.

Other Current Assets – Other current assets include prepaids and the international bond investment. Refer to Note 9, Fair Value Measurement.

Income Taxes—The Company provides for income taxes based on FASB ASC topic 740 “Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. The Company provides an allowance for deferred tax assets when it determines that it is more likely than not that the deferred tax assets will not be utilized. The Company establishes additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold. The Company’s policy is to record interest and penalties related to income tax matters in income tax expense.

Equipment and Property— Equipment and property are stated at cost, net of accumulated depreciation, and are depreciated on a straight-line basis over the estimated useful lives of the related assets. Annual provisions for depreciation are computed using the following asset lives: buildings, 10 to 40 years; and furniture, fixtures and operating equipment, 2 to 10 years. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are expensed as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal

with the resulting gain or loss credited or charged to income. The annual provisions for depreciation, below, have been reflected in the consolidated statements of income in the line item entitled Depreciation and amortization.


Years ended December 31,	2022		2021		2020
(in thousands)
Depreciation	$	35,648	$	40,592	$	40,623

Certain internal-use software and systems development costs are capitalized. Accordingly, the specific identified costs incurred to develop and obtain software, which is intended for internal use, are not capitalized until the software is put into use. Management, with the relevant authority, authorizes and commits to funding a software project and it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred during a software development’s discovery phase and post-integration stage, are expensed as incurred. Application development activities that are eligible for capitalization include software design and configuration, development of interfaces, coding, testing and installation. Capitalized internal-use software and systems costs are subsequently amortized on a straight-line basis over a three to seven year period after project completion and when the related software or system is ready for intended use.

Impairment of Long-Lived Assets - In accordance with the FASB ASC Topic 360, “Property, Plant and Equipment,” the Company’s long-lived assets, such as property and equipment and intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. We periodically evaluate the appropriateness of remaining depreciable lives assigned to long-lived assets, including customer contracts and assets that may be subject to a management plan for disposition.

Goodwill and Other Intangible Assets— In accordance with the FASB ASC Topic 350, “Intangibles - Goodwill and other,” the Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. The Company does not amortize intangible assets with indefinite lives or goodwill. Goodwill and other intangible assets with indefinite useful lives are tested for impairment annually or more frequently if events or circumstances indicate the assets might be impaired. Such conditions may include an economic downturn or a change in the assessment of future operations. The Company performs impairment tests of goodwill at the Company level. Such impairment tests for goodwill include comparing the fair value of the appropriate reporting unit (the Company) with its carrying value. If the fair value of the reporting unit is below the carrying value, the Company recognizes a goodwill impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. The Company performs impairment tests for indefinite-lived intangible assets by comparing the fair value of each indefinite-lived intangible asset unit to its carrying value. The Company recognizes an impairment charge if the asset’s carrying value exceeds its estimated fair value. The Company completed its most recent annual impairment analysis as of September 30, 2022. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or intangible assets with indefinite lives was indicated.

Other Assets – Other assets is mostly comprised of deferred compensation assets and the international bond investment. Refer to Note 12, Employee Benefit Plans and Note 9, Fair Value Measurement.

Accrued Insurance— The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and auto liability. Risks are managed through either high deductible insurance or, for Clark Pest Control only, a non-affiliated group captive insurance member arrangement. 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 group captive is subject to a third-party actuary retained by the captive manager, independent from the Company. For the high deductible insurance program, the Company contracts with an independent third-party actuary 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 Company continues to be proactive in safety and risk management to develop and maintain ongoing programs to reduce and prevent incidents and claims. Initiatives that have been implemented include required pre-employment screening and ongoing

motor vehicle record review for all drivers, post-offer physicals for new employees, pre-hire, random and post incident drug testing, driver training and post-injury nurse triage for work-related injuries. 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.

Accrual for Termite Contracts—The Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future costs include termiticide life expectancy and government regulation. The actual number of claims has decreased in recent years due to changes in the Company’s business practices. However, it is not possible to precisely predict future significant claims. An accrual for termite contracts is included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.

Other Current Liabilities – Other current liabilities are mostly comprised of the current portion of acquisition holdback and earnout liabilities (see Note 9), contingency accruals, deferred compensation liabilities (see Note 12) and taxes payable.

Other Long-term Accrued Liabilities – Other long-term accrued liabilities include long-term balances for deferred compensation, acquisition holdback and earnout liabilities, deferred tax liabilities, contingency accruals, and the long-term portion of unearned revenue.

Contingency Accruals—The Company is a party to legal proceedings with respect to matters in the ordinary course of business. In accordance with the FASB ASC Topic 450 “Contingencies,” management estimates and accrues for its liability and costs associated with the litigation. Estimates and accruals are determined in consultation with outside counsel. Because it is not possible to accurately predict the ultimate result of the litigation, judgments concerning accruals for liabilities and costs associated with litigation are inherently uncertain and actual liability may vary from amounts estimated or accrued. However, in the opinion of management, the outcome of the litigation will not have a material adverse impact on the Company’s financial condition or results of operations. Contingency accruals are included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.

Earnings Per Share—the FASB ASC Topic 260-10 “Earnings Per Share-Overall,” requires a basic earnings per share and diluted earnings per share presentation. Further, all outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and an entity is required to include participating securities in its calculation of basic earnings per share.

The Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and therefore are considered participating securities. See Note 14 for further information on restricted stock granted to employees.

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 stockholders 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 along with the earnings per share attributable to restricted shares of common stock (participating securities) and restricted stock units is as follows (in thousands except per share data).


Year Ended December 31,	2022		2021		2020
Net income available to stockholders	$	368,599	$	356,565	$	266,756
Less dividends paid:
Common stock		(210,509)		(207,482)		(159,524)
Time-lapse restricted awards		(1,109)		(1,174)		(963)
Undistributed earnings for the period	$	156,981	$	147,909	$	106,269
Allocation of undistributed earnings:
Common stock		156,123		147,069		99,676
Time-lapse restricted awards		823		840		661
Restricted stock units		36		—		—
Weighted-average shares outstanding:
Weighted-average outstanding common shares		489,719		489,259		488,364
Add participating securities:
Weighted-average time-lapse restricted awards		2,581		2,795		3,240
Total weighted-average shares outstanding - basic		492,300		492,054		491,604
Dilutive effect of restricted stock units		113		—		—
Total weighted-average shares outstanding - diluted		492,413		492,054		491,604

Basic earnings per share:
Common stock:
Distributed earnings	$	0.43	$	0.42	$	0.33
Undistributed earnings		0.32		0.30		0.21
	$	0.75	$	0.72	$	0.54
Time-lapse restricted awards:
Distributed earnings	$	0.43	$	0.42	$	0.30
Undistributed earnings		0.32		0.30		0.20
	$	0.75	$	0.72	$	0.50
Diluted earnings per share:
Common stock:
Distributed earnings	$	0.43	$	0.42	$	0.33
Undistributed earnings		0.32		0.30		0.21
	$	0.75	$	0.72	$	0.54
Time-lapse restricted awards:
Distributed earnings	$	0.43	$	0.42	$	0.30
Undistributed earnings		0.32		0.30		0.20
	$	0.75	$	0.72	$	0.50
Restricted stock units:
Distributed earnings	$	—	$	—	$	—
Undistributed earnings		0.32		—		—
	$	0.32	$	—	$	—

Translation of Foreign Currencies—Assets and liabilities reported in functional currencies other than U.S. dollars are translated into U.S. dollars at the year-end rate of exchange. Revenues and expenses are translated at the weighted average exchange rates for the year. The resulting translation adjustments are charged or credited to other comprehensive income. Gains or losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables, denominated in foreign currency are included in the earnings of the current period.

Stock-Based Compensation— The Company accounts for its stock-based compensation in accordance with the FASB ASC Topic 718 “Compensation – Stock Compensation.” 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 Plan.

Restricted shares provide for the issuance of a share of the Company’s common stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. The 2022 grant of restricted shares vest 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. During these years, restricted awards grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the restricted shares are issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed. The fair value of these awards is recognized as compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period.

Comprehensive Income (Loss)—Other Comprehensive Income (Loss) results from foreign currency translations, minimum pension liability adjustments, cash flow hedge of interest rate risks and unrealized gains and losses on available for sale securities.

Franchising Program – The Company has franchise programs through Orkin, Critter Control and its Australian subsidiaries. We had a total of 137, 135 and 128 domestic franchise agreements as of December 31, 2022, 2021 and 2020, respectively. International franchise agreements totaled 89, 103 and 101 as of December 31, 2022, 2021 and 2020, respectively. Transactions with our franchises involve sales of territories and customer contracts to establish new franchises and the payment of initial franchise fees and royalties by franchisees. The territories, customer contracts and initial franchise fees are typically paid for by a combination of cash and notes.

Combined domestic and international revenues from Orkin, Critter Control and Australia franchises were $15.5 million, $15.5 million and $15.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. Total franchising revenues were less than 1.0% of the Company’s annual revenues for each of the three years respectively.

Right to access intellectual property (Franchise) - The right to access Orkin’s, Critter Control’s and our Australia franchisors’ intellectual property is an essential part of our franchise agreements. These agreements provide the franchisee a license to use the brand name and trademark when advertising and selling services to end customers in their normal course of business. Orkin and Critter Control franchise agreements contain a clause allowing the respective franchisor to purchase certain assets of the franchisee at the conclusion of their franchise agreement or upon termination. This is only an option for the franchisor to re-purchase the assets selected by the franchisor and is not a performance obligation or a form of consideration.

Recent Accounting Guidance

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.

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.

ACQUISITIONS

The Company made 31 and 39 acquisitions during the years ended December 31, 2022, and 2021, respectively. Total cash purchase price for the Company’s acquisitions in 2022 and 2021 were $116.0 million and $146.1 million, respectively. For the 31 acquisitions completed in 2022, the preliminary values of major classes of assets acquired and liabilities assumed recorded at the dates of acquisition are included in the reconciliation of the total consideration as follows (in thousands):


	2022		2021
Accounts receivable, net	$	3,736	$	3,072
Materials and supplies		529		891
Equipment and property		6,741		8,184
Goodwill		64,997		69,555
Customer contracts		49,871		80,239
Trademarks & tradenames		5,615		1,200
Other intangible assets		1,538		3,668
Current liabilities		(4,853)		(6,483)
Other assets and liabilities, net		(1,948)		288
Total consideration		126,226		160,614
Less: Acquisition holdback liabilities		(10,178)		(14,516)
Total cash purchase price	$	116,048	$	146,098

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 year ended December 31, 2022, $65.0 million of goodwill was added related to the 31 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.

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




	2022		2021		2020
(in thousands)
United States	$	2,498,363	$	2,240,226	$	2,006,368
Other countries		197,460		184,074		154,852
Total Revenues	$	2,695,823	$	2,424,300	$	2,161,220

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




(in thousands)	2022		2021		2020
Residential revenue	$	1,212,491	$	1,103,687	$	977,470
Commercial revenue		914,839		829,396		752,349
Termite completions, bait monitoring, & renewals		536,854		465,053		406,782
Franchise revenues		15,665		15,777		14,367
Other revenues		15,974		10,387		10,252
Total Revenues	$	2,695,823	$	2,424,300	$	2,161,220

Deferred revenue recognized for the year ended December 31, 2022 and 2021 was $205.3 million and $187.3 million, respectively. Changes in unearned revenue were as follows:


	Year Ended December 31,
	2022		2021
(in thousands)
Beginning balance	$	168,607	$	149,224
Deferral of unearned revenue		224,647		206,730
Recognition of unearned revenue		(205,260)		(187,347)
Ending balance	$	187,994	$	168,607

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes both unearned revenue and revenue that will be billed and recognized in future periods. The Company has no material contracted not recognized revenue as of December 31, 2022 or December 31, 2021.

At December 31, 2022 and December 31, 2021, the Company had long-term unearned revenue of $29.9 million and $23.5 million, respectively. 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.

ALLOWANCE FOR EXPECTED 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 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 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 creditworthiness with low risk before entering into a contract. Depending upon the individual’s credit score, the Company may accept with 100% financing or 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.

Total financing receivables, net were $97.1 million and $73.2 million at December 31, 2022 and December 31, 2021, respectively. Financing receivables are generally charged-off when deemed uncollectable or when 180 days have elapsed since the date of the last full contractual payment. The Company’s charge-off policy has been consistently applied during the periods reported. Management considers the charge-off policy when evaluating the appropriateness of the allowance for expected credit losses. Gross charge-offs as a percentage of average financing receivables were 5.6% and 4.3% for the twelve months ended December 31, 2022 and December 31, 2021, respectively. Due to the low percentage of charge-off receivables and the high creditworthiness of the potential obligors, the Rollins, Inc. financing receivables portfolio has a low credit risk.

The Company offers 90 days same-as-cash financing to some customers based on their creditworthiness. Interest is not recognized until the 91st day at which time it is calculated retrospectively back to the first day if the contract has not been paid in full. In certain circumstances, such as when delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 180 days past due. As of December 31, 2022, there were no accounts greater than 180 days past due.

Included in financing receivables are notes receivable from franchise owners. The majority of these notes are low risk as the repurchase of these franchises is guaranteed by the Company’s wholly-owned subsidiary, Orkin Systems, LLC, and the repurchase price of the franchise is currently estimated and has historically been well above the receivable due from the franchise owner. Also included in notes receivables are franchise notes from other brands which are not guaranteed and do not have the same historical valuation.

The carrying amount of notes receivable approximates fair value as the interest rates approximate market rates for these types of contracts. Long-term installment receivables, net were $63.5 million and $47.1 million at December 31, 2022 and 2021, respectively.

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 years ended December 31, 2022, 2021 and 2020.


	Allowance for Credit Losses
	Trade		Financed		Total
(in thousands)	Receivables		Receivables		Receivables
Balance at December 31, 2019	$	16,699	$	2,959	$	19,658
Adoption of ASC 326		(3,330)		-		(3,330)
Provision for expected credit losses		14,699		2,837		17,536
Write-offs charged against the allowance		(18,228)		(2,565)		(20,793)
Recoveries collected		7,014		—		7,014
Balance at December 31, 2020	$	16,854	$	3,231	$	20,085
Provision for expected credit losses		11,732		3,553		15,285
Write-offs charged against the allowance		(19,882)		(2,799)		(22,681)
Recoveries collected		5,181		—		5,181
Balance at December 31, 2021	$	13,885	$	3,985	$	17,870
Provision for expected credit losses		13,701		5,740		19,441
Write-offs charged against the allowance		(18,861)		(4,757)		(23,618)
Recoveries collected		5,348		—		5,348
Balance at December 31, 2022	$	14,073		4,968	$	19,041

The following is a summary of the past due financing receivables:


At December 31,	2022		2021
(in thousands)
30-59 days past due	$	4,269	$	1,911
60-89 days past due		1,913		1,058
90 days or more past due		3,781		2,886
Total	$	9,963	$	5,855

The following is a summary of percentage of gross financing receivables:


At December 31,	2022		2021
Current	90.2	%	91.7	%
30-59 days past due	4.2	%	2.7	%
60-89 days past due	1.9	%	1.5	%
90 days or more past due	3.7	%	4.1	%
Total	100.0	%	100.0	%

EQUIPMENT AND PROPERTY, NET

Equipment and property are presented at cost less accumulated depreciation and are detailed as follows:


December 31,	2022		2021
(in thousands)
Buildings	$	51,223	$	54,935
Operating equipment		132,411		126,732
Furniture and fixtures		20,389		19,261
Computer equipment and systems		233,108		223,648
		437,131		424,576
Less: accumulated depreciation		(333,298)		(315,891)
		103,833		108,685
Land		24,213		24,572
Equipment and property, net	$	128,046	$	133,257

Included in computer equipment and systems at December 31, 2022 and 2021, are costs for internal use software of $147.1 million and $143.5 million, respectively. The related accumulated depreciation was $117.3 million and $105.3 million at December 31, 2022 and 2021, respectively.

Included in equipment and property, net at December 31, 2022 and 2021, are fixed assets held in foreign countries of $9.5 million, and $8.4 million, respectively.

Total depreciation expense was approximately $35.6 million in 2022, $40.6 million in 2021 and $40.6 million in 2020.

LEASES

The Company leases certain buildings, vehicles, and equipment in order to reduce the risk associated with ownership. The Company elected the practical expedient approach permitted under ASC Topic 842, “Leases” not to include short-term leases with a duration of 12 months or less on the balance sheet. As of December 31, 2022 and 2021, all leases were classified as operating leases. Building leases generally carry terms of 5 to 10 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 year ended December 31, 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 in Other (income) expense, net on the income statement. These leases are classified as operating leases with terms of 7 to 15 years.

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.


		Years Ended
(in thousands, except Other Information)		December 31,
Lease Classification	Financial Statement Classification	2022			2021
Short-term lease cost	Cost of services provided, Sales, general, and administrative expenses	$	129		$	235
Operating lease cost	Cost of services provided, Sales, general, and administrative expenses		97,764			93,215
Total lease expense		$	97,893		$	93,450

Other Information:
Weighted-average remaining lease term - operating leases			5.1 Yrs			5.5 Yrs
Weighted-average discount rate - operating leases			3.67	%		3.63	%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases		$	96,700		$	92,032

Lease Commitments

Future minimum lease payments, including assumed exercise of renewal options at December 31, 2022 were as follows:


(in thousands)
2023		93,779
2024		70,739
2025		52,123
2026		32,551
2027		16,124
Thereafter		49,943
Total Future Minimum Lease Payments		315,259
Less: Amount representing interest		(33,828)
Total future minimum lease payments, net of interest	$	281,431

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 $163.2 million for building leases and $152.1 million for vehicle leases. As of December 31, 2022, the Company had additional future obligations of $9.5 million for leases that had not yet commenced.

GOODWILL

Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $846.7 million as of December 31, 2022 and $786.5 million as of December 31, 2021. Goodwill increased for the year ended December 31, 2022 primarily due to acquisitions. The carrying amount of goodwill in foreign countries was $97.4 million as of December 31, 2022 and $82.1 million as of December 31, 2021.

The changes in the carrying amount of goodwill for the twelve months ended December 31, 2022 and 2021 were as follows:


Goodwill:
Balance at December 31, 2020	$	717,861
Additions		69,264
Adjustments due to currency translation		(621)
Balance at December 31, 2021		786,504
Additions		64,997
Measurement adjustments		(9)
Adjustments due to currency translation		(4,788)
Balance at December 31, 2022	$	846,704

The carrying amount of goodwill as of December 31, 2021 and 2020 reflects the adjustment of $64,685 to correct prior periods. See Note 1, Basis of Presentation, for further information on the prior period adjustments recorded.

CUSTOMER CONTRACTS, TRADENAMES AND TRADEMARKS, AND OTHER INTANGIBLE ASSETS

Customer contracts are amortized on a straight-line basis as this best approximates the ratio that current revenues bear to the total of current and anticipated revenues based on the estimated lives of the assets. In accordance with the FASB ASC Topic 350 “Intangibles - Goodwill and other”, the expected lives of customer contracts were analyzed, and it was determined that customer contracts should be amortized over a life of 7 to 20 years dependent upon customer type.

The carrying amount and accumulated amortization for customer contracts were as follows:


December 31,	2022		2021
(in thousands)
Customer contracts	$	502,689	$	479,294
Less: accumulated amortization		(204,130)		(177,380)
Customer contracts, net	$	298,559	$	301,914

The carrying amount of customer contracts as of December 31, 2021 reflects the impact of adjustments to correct prior periods. See Note 1, Basis of Presentation, for further information on the prior period adjustments recorded. The net carrying amount of customer contracts in foreign countries was $46.1 million as of December 31, 2022 and $42.1 million as of December 31, 2021.

Trademarks and tradenames are amortized on a straight-line basis over the period of their useful lives. The Company has determined these assets have useful lives between 7 and 20 years with non-amortizable, indefinite-lived tradenames of $104.3 million and $102.7 million as of December 31, 2022 and 2021, respectively.

The carrying amount and accumulated amortization for trademarks and tradenames were as follows:


December 31,	2022		2021
(in thousands)
Trademarks and tradenames	$	121,655	$	115,468
Less: accumulated amortization		(10,009)		(6,492)
Trademarks and tradenames, net	$	111,646	$	108,976

The net carrying amount of trademarks and tradenames in foreign countries was $4.2 million as of December 31, 2022 and $2.9 million as of December 31, 2021.

Other intangible assets include non-compete agreements and patents. Non-compete agreements are amortized on a straight-line basis over periods ranging from 3 to 20 years and patents are amortized on a straight-line basis over 15 years.

The carrying amount and accumulated amortization for other intangible assets were as follows:


December 31,	2022		2021
(in thousands)
Other intangible assets	$	25,357	$	24,448
Less: accumulated amortization		(16,814)		(12,769)
Other intangible assets, net	$	8,543	$	11,679

The net carrying amount of other intangible assets in foreign countries was $0.7 million as of December 31, 2022 and 2021.

Included in the table above are non-amortizable, indefinite-lived Internet domain names of $2.2 million at December 31, 2022 and 2021, respectively.

Total amortization expense was approximately $55.7 million in 2022, $46.0 million in 2021 and $38.7 million in 2020.

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


(in thousands)
2023	$	59,281
2024		55,950
2025		47,140
2026		43,622
2027		39,958

FAIR VALUE MEASUREMENT

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, financed and notes receivable, accounts payable, other short-term liabilities, and debt. The carrying amounts of these financial instruments approximate their respective fair values. The Company also has derivative instruments as discussed in Note 11 and financial instruments related to its defined benefit pension plan and deferred compensation plan detailed in Note 12.

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 December 31, 2022 and 2021, the Company had investments in international bonds of $10.7 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 December 31, 2022, $0.5 million was included in other current assets and $10.2 million was included in other assets. The bonds are recorded at fair market value with unrealized losses of $1.0 million included in other comprehensive income during the year ended December 31, 2022.

At December 31, 2022 and 2021, respectively, the Company had $13.5 million and $25.2 million of acquisition holdback and earnout liabilities with the former owners of acquired companies. Acquisition earnouts are generally earned by achieving certain levels of revenue growth while maintaining certain profit margins. The earnout liabilities are discounted to reflect the expected probability of payout, and both earnout and holdback liabilities are 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.


(in thousands)
Acquisition holdback and earnout liabilities at December 31, 2020	$	35,744
New acquisitions		14,516
Payouts		(22,809)
Interest on outstanding contingencies		855
Charge offset, forfeit and other		(3,150)
Acquisition holdback and earnout liabilities at December 31, 2021		25,156
New acquisitions		10,178
Payouts		(17,334)
Interest on outstanding contingencies		398
Charge offset, forfeit and other		(4,902)
Acquisition holdback and earnout liabilities at December 31, 2022	$	13,496

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 “2019 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 December 31, 2022, the Company had outstanding borrowings of $54.9 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 December 31, 2022 was 5.123%. 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 with an effective interest rate of 0.85%.

The Company maintains approximately $71.3 million in letters of credit as of December 31, 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 at December 31, 2022.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

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.

Cash Flow Hedges of Interest Rate Risk

The Company uses interest rate swap arrangements to manage or hedge its interest rate risk. Notwithstanding the terms of the swaps, the Company is ultimately obligated for all amounts due and payable under the Credit Facility. The Company does not use interest rate swaps for speculative or trading purposes.

On June 19, 2019, the Company entered into a floating-to-fixed interest rate swap for an aggregate notional amount of $100.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility. The Company designated the swap as a cash flow hedge. The swap required the Company to pay a fixed rate of 1.94% per annum on the notional amount. The cash flows from the swap began June 30, 2019 and ended on December 31, 2021. Realized gains and losses in connection with each required interest payment were reclassified from Accumulated other comprehensive income (“AOCI”) to interest expense during the period of the cash flows. During 2021 and 2020, $0.4 million and $0.7 million was reclassified into interest expense.

Hedges of Foreign Exchange Risk

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 are recorded in other income/expense and were equal to net income of $1.1 million for the twelve months December 31, 2022, and net losses of $0.4 million for each of the twelve months ended December 31, 2021 and 2020. The fair values of the Company’s FX Forwards were recorded as a net asset of $0.3 million in Other Current Assets as of December 31, 2022 and a net obligation of $0.05 million in Other Current Liabilities as of December 31, 2021.

As of December 31, 2022, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):


	Number of	Sell		Buy
FX Forward Contracts	Instruments	Notional		Notional
Sell AUD/Buy USD Fwd Contract	20		2,700	$	1,888
Sell CAD/Buy USD Fwd Contract	20		20,000		15,264
Total	40			$	17,152

The financial statement impact related to these derivative instruments was insignificant for the years ended December 31, 2022, 2021, and 2019, respectively.

EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

The Company has sponsored noncontributory tax-qualified defined benefit pension plans covering employees meeting certain age and service requirements, the most significant of which was the Rollins, Inc. Plan, which was terminated in 2018. The Company funds its plans with at least the minimum amount required by ERISA.

Waltham Services, LLC Hourly Employee Pension Plan (the “Waltham Plan”)

The Company sponsors the Waltham Plan, which covers less than 80 participants as of December 31, 2022. The Waltham Plan was amended, effective September 1, 2018, to freeze future benefit accruals for all participants. The Company accounts for all defined benefit plans in accordance with the FASB ASC Topic 715 “Compensation Retirement Benefits,” and engages an outside actuary to calculate obligations and costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis, including the estimated future return on plan assets, the discount rate, and other factors, and makes adjustments to these liabilities as necessary. As of December 31, 2022, the fair value of Waltham Plan assets were $1.2 million, with a projected liability of $1.9 million and an unfunded status of $0.7 million. At December 31, 2022 the plan’s assets were comprised of listed common stocks and U.S government and corporate securities and are classified as Level 1 and Level 2 in the fair value hierarchy.

Defined Contribution 401(k) Savings Plan

The Company sponsors a defined contribution 401(k) Savings Plan (“the Plan”) that is available to a majority of the Company’s full-time employees the first day of the calendar quarter following completion of three months of service. The Plan is available to non-full-time employees the first day of the calendar quarter following one year of service upon completion of 1,000 hours in that year. The Plan provides for a matching contribution of one dollar ($1.00) for each one dollar ($1.00) of a participant’s contributions to the Plan that do not exceed 3 percent of his or her eligible compensation (which includes commissions, overtime, and bonuses) and fifty cents ($0.50) for each one dollar ($1.00) of a participant’s contributions to the Plan over the initial 3 percent that do not exceed 6 percent of his or her eligible compensation (which includes commissions, overtime and bonuses). The charge to expense for the Company match was approximately $29.9 million, $25.7 million and $27.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. At December 31, 2022, 2021, and 2020 approximately, 30.6%, 28.7%, and 34.9%, respectively, of the plan assets consisted of Rollins, Inc. common stock. Total administrative fees paid by the Company for the Plan were less than $0.1 million for each of the years ended December 31, 2022, 2021 and 2020.

Nonqualified Deferred Compensation Plan

The Deferred Compensation Plan provides that participants may defer up to 50% of their base salary and up to 85% of their annual bonus with respect to any given plan year, subject to a $2 thousand per plan year minimum. The Company may make discretionary contributions to participant accounts but has not done so since 2011.

Accounts will be credited with hypothetical earnings, and/or debited with hypothetical losses, based on the performance of certain “Measurement Funds.” Account values are calculated as if the funds from deferrals and Company credits had been converted into shares or other ownership units of selected Measurement Funds by purchasing (or selling, where relevant) such shares or units at the current purchase price of the relevant Measurement Fund at the time of the participant’s selection. Deferred Compensation Plan benefits are unsecured general obligations of the Company to the participants, and these obligations rank in parity with the Company’s other unsecured and unsubordinated indebtedness. The Company has established a “rabbi trust,” which it uses to voluntarily set aside amounts to indirectly fund any obligations under the Deferred Compensation Plan. To the extent that the Company’s obligations under the Deferred Compensation Plan exceed assets available under the trust, the Company would be required to seek additional funding sources to fund its liability under the Deferred Compensation Plan.

Generally, the Deferred Compensation Plan provides for distributions of any deferred amounts upon the earliest to occur of a participant’s death, disability, retirement or other termination of employment (a “Termination Event”). However, for any deferrals of salary and bonus (but not Company contributions), participants would be entitled to designate a distribution date which is prior to a Termination Event. Generally, the Deferred Compensation Plan allows a participant to elect to receive distributions under the Deferred Compensation Plan in installments or lump-sum payments.

At December 31, 2022, the Deferred Compensation Plan had 75 life insurance policies with a net face value of $45.8 million compared to 75 policies with a face value of $53.1 million at December 31, 2021. The cash surrender value of these life insurance policies was $23.2 million and $27.2 million at December 31, 2022 and 2021, respectively. These policies are valued using the NAV practical expedient.

The following table presents our non-qualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2022 and 2021.


(in thousands)	Level 1		Level 2		Level 3		NAV		Total
December 31, 2022	$	25	$	—	$	—	$	23,246	$	23,271
December 31, 2021	$	25	$	—	$	—	$	27,211	$	27,236

Cash and cash equivalents, which are used to pay benefits and deferred compensation plan administrative expenses, are held in money market funds.

Total expense related to deferred compensation was $1.1 million, $0.3 million, and $0.3 million in 2022, 2021, and 2020, respectively. The Company had $23.3 million and $27.2 million in deferred compensation assets as of December 31, 2022 and 2021, respectively, included within other assets on the Company’s consolidated statements of financial position and $19.0 million and $23.6 million in deferred compensation liability as of December 31, 2022 and 2021, respectively, located within other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position. The amounts of assets were marked to fair value.

COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company and its subsidiaries are involved in, and will continue to be involved in, various claims, arbitrations, contractual disputes, investigations, and regulatory and litigation matters relating to, and arising out of, our businesses and our operations. These matters may involve, but are not limited to, allegations that our services or vehicles caused damage or injury, claims that our services did not achieve the desired results, and claims related to acquisitions and allegations by federal, state or local 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 in accordance with ASC 450.

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.

STOCK-BASED COMPENSATION

Stock Compensation Plans

Time-Lapse Restricted Shares and Restricted Stock Units

Time-lapse restricted awards and restricted stock units (“restricted shares”) have been issued to officers and other employees under the Company’s Employee Stock Incentive Plan. The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their closing stock price at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures.

Restricted shares provide for the issuance of a share of the Company’s common stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. The 2022 grant of restricted shares vest in 20 percent increments over five years from the date of grant. Prior grants vest over six years from the date of grant. In some cases, the Company may issue restricted shares that vest in greater increments over a shorter period of time. During these years, grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the one-time grant of restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed.

The Company issued time lapse restricted shares of 0.9 million, 0.8 million, and 0.9 million for the years ended December 31, 2022, 2021, and 2020, respectively.

The Company issues new shares from its authorized but unissued share pool. At December 31, 2022, approximately 5.9 million shares of the Company’s common stock were reserved for issuance. In accordance with the FASB ASC Topic 718, “Compensation – Stock Compensation,” the Company recognizes the fair value of the award on a straight-line basis over the service periods of each award. The Company estimates restricted share employee forfeiture rates based on its historical experience.

The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense ($ in thousands):




(in thousands)	2022		2021		2020
Restricted shares:
Pre-tax compensation expense	$	20,816	$	14,865	$	20,850
Tax benefit		(4,660)		(3,208)		(3,752)
Restricted share expense, net of tax	$	16,156	$	11,657	$	17,098

As of December 31, 2022 and 2021, $52.3 million and $49.8 million, respectively, of total unrecognized compensation cost related to time-lapse restricted shares are expected to be recognized over a weighted average period of approximately 3.5 years and 4.0 years at December 31, 2022 and 2021, respectively.

The following table summarizes information on unvested restricted shares outstanding as of December 31, 2022, 2021 and 2020.


		Weighted
		Average
	Number of	Grant-Date
(number of shares in thousands)	Shares	Fair Value
Unvested as of December 31, 2019	3,465	$	17.23
Forfeited	(59)		17.11
Vested	(1,397)		15.29
Granted	861		24.53
Unvested as of December 31, 2020	2,870	$	20.36
Forfeited	(191)		25.34
Vested	(861)		16.67
Granted	778		37.04
Unvested as of December 31, 2021	2,596	$	26.16
Forfeited	(90)		26.37
Vested	(675)		19.99
Granted	854		30.12
Unvested as of December 31, 2022	2,685	$	28.97

Employee Stock Purchase Plan

On April 26, 2022, shareholders approved the Rollins, Inc. 2022 Employee Stock Purchase Plan (“ESPP”) which provides eligible employees with the option to purchase shares of Company common stock, at a discount, through payroll deductions. Initially, a maximum of 1,000,000 shares of the Company’s common stock are authorized for issuance under the ESPP. Under the ESPP, shares of common stock may be purchased by eligible participants during defined purchase periods at 90% of the lesser of the closing price of the Company’s common stock on the first day or last day of each purchase period. The first purchase period for the ESPP began on July 1, 2022 and ended on December 30, 2022. The Company recorded compensation expense of $0.4 million associated with the purchase period which is included in cost of services provided and sales, general and administrative expenses for the year ended December 31, 2022.

ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss consists of the following (in thousands):


			Foreign
	Pension Liability		Currency		Interest		Available for
	Adjustment		Translation		Rate Swaps		Sale Securities		Total
Balance at December 31, 2019	$	(195)	$	(20,637)	$	(277)	$	—	$	(21,109)
Change during 2020:
Before-tax amount		(173)		10,443		(141)		—		10,129
Tax benefit		46		—		37		—		83
Other comprehensive (loss) income		(127)		10,443		(104)		—		10,212
Balance at December 31, 2020		(322)		(10,194)		(381)		—		(10,897)
Change during 2021:										—
Before-tax amount		—		(5,895)		516		—		(5,379)
Tax expense		—		—		(135)		—		(135)
Other comprehensive (loss) income		—		(5,895)		381		—		(5,514)
Balance at December 31, 2021		(322)		(16,089)		—		—		(16,411)
Change during 2022:										—
Before-tax amount		—		(14,215)		—		(936)		(15,151)
Other comprehensive loss		—		(14,215)		—		(936)		(15,151)
Balance at December 31, 2022	$	(322)	$	(30,304)	$	—	$	(936)	$	(31,562)

INCOME TAXES

The Company’s income tax provision consisted of the following:


For the years ended December 31,	2022		2021		2020
(in thousands)
Current:
Federal	$	92,793	$	87,888	$	67,861
State		26,786		24,131		18,381
Foreign		9,144		10,480		8,869
Total current tax		128,723		122,499		95,111
Deferred:
Federal		(333)		1,735		(12)
State		2,011		1,795		312
Foreign		(83)		(109)		549
Total deferred tax		1,595		3,421		849
Total income tax provision	$	130,318	$	125,920	$	95,960

The primary factors causing income tax expense to be different than the federal statutory rate for 2022, 2021 and 2020 are as follows:


For the years ended December 31,	2022		2021		2020
(in thousands)
Income tax at statutory rate	$	104,773	$	101,485	$	76,555
State income tax expense (net of federal benefit)		20,560		19,135		14,393
Foreign tax expense		1,907		2,837		2,341
Foreign tax credit		(292)		(273)		(240)
Executive compensation		2,281		2,786		5,557
Restricted stock adjustments		(1,422)		(3,468)		(3,927)
Other		2,511		3,418		1,281
Total income tax provision	$	130,318	$	125,920	$	95,960

Other includes the release of deferred tax liabilities, tax credits, valuation allowance, disallowed deductions, and other immaterial adjustments.

The provision for income taxes resulted in effective tax rates of 26.1%, 26.1% and 26.5% on income before income taxes for the years ended December 31, 2022, 2021 and 2020, respectively. The effective rates differ from the annual federal statutory rate primarily because of state and foreign income taxes and certain other disallowed deductions.

During 2022, 2021 and 2020, the Company paid income taxes of $119.6 million, $119.8 million and $81.2 million, respectively, net of refunds.

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2022 and 2021 are as follows:


December 31,	2022		2021
(in thousands)
Deferred tax assets:
Insurance and contingencies	$	21,695	$	18,258
Unearned revenues		12,930		12,051
Compensation and benefits		14,528		13,546
State and foreign operating loss carryforwards		—		1,234
Bad debt reserve		4,301		3,873
Foreign tax credit		3,562		4,775
Termite accrual		813		642
Net pension liability		169		195
Other		1,648		3,371
Valuation allowance		—		(192)
Total deferred tax assets		59,646		57,753
Deferred tax liabilities:
Depreciation and amortization		(22,663)		(24,261)
Intangibles and other		(59,346)		(55,300)
Total deferred tax liabilities	$	(82,009)	$	(79,561)
Net deferred taxes
Deferred tax assets	$	1,792	$	2,948
Deferred tax liabilities	$	(24,154)	$	(24,757)

Deferred tax assets are included in Other assets and deferred tax liabilities are included in Other long-term accrued liabilities on the balance sheet.

Analysis of the valuation allowance:


December 31,	2022		2021
(in thousands)
Valuation allowance at beginning of year	$	192	$	144
(Decrease) increase in valuation allowance		(192)		48
Valuation allowance at end of year	$	—	$	192

As of December 31, 2022, the Company has net operating loss carryforwards for foreign and state income tax purposes of approximately $22.9 million, which are expected to be fully utilized when filing the 2022 income tax returns. If not used, these carryforwards will expire between 2022 and 2032. Because management believes that the loss carryforwards will be fully utilized, the valuation allowance decreased by $0.2 million due to the dissolution of the foreign subsidiary carrying the losses. The Company has a foreign tax credit carryforward of $3.6 million which if not fully utilized will expire in 2028.

Earnings from continuing operations before income tax included foreign income of $32.9 million in 2022, $32.5 million in 2021 and $25.3 million in 2020. 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 acquisition of unrelated companies. The Company has historically asserted that the undistributed earnings of our foreign subsidiaries are permanently reinvested. However, in the fourth quarter of 2022, the Company has partially changed this assertion and expects to repatriate unremitted foreign earnings from our foreign subsidiaries. The Company asserts that we continue to be permanently reinvested with respect to our investments in our foreign subsidiaries.

The total amount of unrecognized tax benefits at December 31, 2022 that, if recognized, would affect the effective tax rate is $1.4 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


December 31,	2022		2021
(in thousands)
Unrecognized tax benefits at beginning of year	$	1,018	$	844
Additions for tax positions of prior years		376		174
Unrecognized tax benefits at end of year	$	1,394	$	1,018

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company’s material foreign jurisdictions include Canada, the United Kingdom and Australia. In addition, the Company has subsidiaries in various state and international jurisdictions that are currently under audit for years ranging from 2016 through 2020. With few immaterial exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations for years prior to 2016.

It is reasonably possible that the amount of unrecognized tax benefits will decrease in the next 12 months.

The Company’s policy is to record interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were $0.2 million, $0.2 million and $0.7 million as of December 31, 2022, 2021 and 2020, respectively.

RELATED PARTY TRANSACTIONS

Transactions with RPC, Inc.

The Company provides certain administrative services to RPC, Inc. (“RPC”) (a company of which Mr. Gary W. Rollins was Chairman and currently serves as a Director). The service agreements between RPC and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months’ notice. The services covered by these agreements include administration of

certain employee benefit programs and other administrative services. Charges to RPC (or to corporations which are subsidiaries of RPC) for such services and rent totaled approximately $0.1 million for each of the years ended December 31, 2022, 2021, and 2020.

Transactions with LOR, Inc.

Purchase of Gulfstream III Aircraft

During the year ended December 31, 2021, the Company purchased a Gulfstream III aircraft (“Gulfstream”) from LOR Inc. (“LOR”), a company controlled by Gary W. Rollins and certain members of his family) to be used as the Company’s primary airplane. The Company purchased the Gulfstream for $0.5 million and paid the applicable taxes of forty thousand dollars. The purchase of the Gulfstream was approved by the Company’s Nominating and Corporate Governance Committee and the Committee was presented with an independent appraisal of the aircraft supporting the purchase. The Gulfstream was subsequently sold to a non-related third party in October 2022.

Pilot Sharing Agreement

The Company entered into a Pilot Sharing Agreement with LOR whereby the Company’s employee pilots may be used by LOR from time to time to operate the LOR aircraft and LOR will reimburse the Company for 50% of the costs of the pilots, including salary, benefits and training. In addition, LOR and the Company are each responsible for their own fuel costs. The Pilot Sharing Agreement was approved by the Company’s Nominating and Corporate Governance Committee. Charges to LOR under the Pilot Sharing Agreement total $0.6 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively.

Administrative Services Agreement

The Company also provides certain administrative services to LOR and rents office, hanger and storage space to LOR. Charges to LOR (or corporations which are subsidiaries of LOR) for rent and administrative services totaled $0.8 million, $0.6 million and $1.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Lear Lease Agreement

In 2014, P.I.A. LLC, a company then owned by our late Chairman of the Board of Directors, R. Randall Rollins, purchased a Lear Model 35A jet and entered into a lease arrangement with the Company for company use of the aircraft for business purposes. P.I.A. LLC is now owned by a trust for the benefit of the late Mr. Rollins’ family. The lease is terminable by either party on 30 days’ notice. The Company pays $100 per month in rent for the leased aircraft, and pays all variable costs and expenses associated with the leased aircraft, such as the costs for fuel, maintenance, storage and pilots. The Company has the priority right to use of the aircraft on business days, and Rollins family members and guests have the right to use the aircraft for personal use through the terms of an Aircraft Time Sharing Agreement with the Company. The amounts paid by the Company for the Rollins family and guests to use the aircraft for personal use will be disclosed in the Summary Compensation Table and the Director Compensation Table to be included in the Company’s 2022 Proxy Statement. During the years ended December 31, 2022, 2021 and 2020, the Company paid approximately $0.3 million, $0.3 million, and $0.6 million in rent and operating costs under the Aircraft Time Sharing Agreement, respectively. The foregoing related party transactions were previously approved by the Company’s Nominating and Governance Committee of the Board of Directors.

Related Party Franchise Agreement

On December 1, 2019, Orkin, a subsidiary of the Company entered into a franchise agreement with Wilson Pest Management, Inc. The franchise is owned 100% by John Wilson IV. During the years ended December 31, 2022, 2021 and 2020, the Company received a total of approximately $0.2 million, $0.1 million and $0.1 million, respectively. During the year ended December 31, 2019 the Company received $0.8 million which included payment for the franchise and an initial franchise fee of seventy-five thousand dollars in connection with the transaction. The franchise agreement provides for a monthly royalty fee of 9.0% of the franchisee’s reported revenue. John Wilson IV is the son of John F. Wilson, Vice Chairman of the Company. The Company approved the agreement in accordance with its Related Party Transactions policy.

SUBSEQUENT EVENTS

Quarterly Dividend

On January 23, 2023, the Company’s Board of Directors declared a regular quarterly cash dividend on its common stock of $0.13 payable March 10, 2023 to stockholders of record at the close of business February 10, 2023. The Company expects to continue to pay cash dividends to the common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.

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