Item 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 2021, AND DECEMBER 31, 2020

(in thousands except share data)

(unaudited)

​

​	​	​	​	​	​	​
​		September 30,			December 31,
​		2021			2020
ASSETS	​	​		​	​
Cash and cash equivalents	​	$	117,655	​	$	98,477
Trade receivables, net of allowance for expected credit losses of $13,473 and $16,854, respectively	​		152,866	​		126,337
Financed receivables, short-term, net of allowance for expected credit losses of $1,519 and $1,297, respectively	​		27,294	​		23,716
Materials and supplies	​		26,976	​		30,843
Other current assets	​		48,663	​		35,404
Total current assets	​		373,454	​		314,777
Equipment and property, net of accumulated depreciation of $315,921 and $294,226, respectively	​		131,549	​		178,052
Goodwill	​		665,645	​		653,176
Customer contracts, net	​		284,393	​		298,949
Trademarks & tradenames, net	​		108,231	​		109,044
Other intangible assets, net	​		9,914	​		10,777
Operating lease, right-of-use assets	​		251,374	​		212,342
Financed receivables, long-term, net of allowance for expected credit losses of $2,488 and $1,934, respectively	​		45,410	​		38,187
Benefit plan assets	​		1,118	​		1,198
Deferred income taxes	​		2,568	​		2,222
Other assets	​		31,157	​		27,176
Total assets	​	$	1,904,813	​	$	1,845,900
LIABILITIES	​			​
Accounts payable	​	$	38,509	​	$	64,596
Accrued insurance	​		34,790	​		31,675
Accrued compensation and related liabilities	​		96,285	​		91,011
Unearned revenues	​		151,645	​		131,253
Operating lease liabilities - current	​		76,684	​		73,248
Current portion of long-term debt	​		18,750	​		17,188
Other current liabilities	​		60,833	​		63,540
Total current liabilities	​		477,496	​		472,511
Accrued insurance, less current portion	​		32,582	​		36,067
Operating lease liabilities, less current portion	​		177,381	​		140,897
Long-term debt	​		49,250	​		185,812
Deferred income tax liabilities	​		13,288	​		10,612
Other long-term accrued liabilities	​		53,187	​	​	58,641
Total liabilities	​		803,184	​		904,540
Commitments and contingencies (see Note 6)	​			​
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, 492,048,685 and 491,612,059 shares issued and outstanding, respectively	​		492,049	​		491,612
Additional paid in capital	​		102,484	​		101,757
Accumulated other comprehensive loss	​		(17,465)	​		(10,897)
Retained earnings	​		524,561	​		358,888
Total stockholders’ equity	​		1,101,629	​		941,360
Total liabilities and stockholders’ equity	​	$	1,904,813	​	$	1,845,900

​

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands except per share data)

(unaudited)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		Three Months Ended					​	Nine Months Ended					​
​	​	September 30,					​	September 30,					​
​		2021			2020			2021			2020		​
REVENUES	​	​		​	​		​	​		​	​		​
Customer services	​	$	650,199	​	$	583,698	​	$	1,823,957	​	$	1,624,928	​
COSTS AND EXPENSES	​			​			​			​			​
Cost of services provided	​		305,474	​		275,474	​		864,888	​		782,248	​
Depreciation and amortization	​		23,617	​		22,404	​		70,519	​		65,926	​
Sales, general and administrative	​		194,261	​		168,006	​		539,951	​		497,121	​
Chairman's accelerated stock vesting expense	​		—	​		6,691	​		—	​		6,691	​
(Gain) loss on sale of assets, net	​		(447)	​		1,355	​		(33,598)	​		629	​
Interest expense, net	​		222	​		866	​		1,334	​		4,491	​
INCOME BEFORE INCOME TAXES	​		127,072	​		108,902	​		380,863	​		267,822	​
PROVISION FOR INCOME TAXES	​		33,219	​		29,323	​		95,513	​		69,617	​
NET INCOME	​	$	93,853	​	$	79,579	​	$	285,350	​	$	198,205	​
NET INCOME PER SHARE - BASIC AND DILUTED	​	$	0.19	​	$	0.16	​	$	0.58	​	$	0.40	​
DIVIDENDS PAID PER SHARE	​	$	0.08	​	$	0.05	​	$	0.24	​	$	0.19	​
Weighted average shares outstanding - basic and diluted	​		492,069	​		491,631	​		492,058	​		491,236	​

​

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

​

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands)

(unaudited)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ending					​	Nine Months Ended					​
​	​	September 30,					​	September 30,					​
​		2021			2020			2021			2020		​
NET INCOME	​	$	93,853	​	$	79,579	​	$	285,350	​	$	198,205	​
Other comprehensive income / (loss), net of tax:	​			​			​			​			​
Foreign currency translation adjustments	​		(7,207)	​		5,758	​		(6,924)	​		(1,732)	​
Change in derivatives	​		632	​		252	​		356	​		(312)	​
Other comprehensive income / (loss), net of tax	​		(6,575)	​		6,010	​		(6,568)	​		(2,044)	​
Comprehensive income	​	$	87,278	​	$	85,589	​	$	278,782	​	$	196,161	​

​

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

​

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands)

(unaudited)

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	Accumulated Other		​	​	​	​	​	​
​	​	Common Stock				​	Paid-in-		​	Comprehensive		​	Retained		​	​	​
​		Shares		Amount			Capital			Income / (Loss)			Earnings			Total
Balance at June 30, 2021	​	492,079	​	$	492,079	​	$	98,842	​	$	(10,890)	​	$	470,653	​	$	1,050,684
Net Income	​	​	​	​	​	​	​	​	​	​	​	​	​	93,853	​	​	93,853
Other comprehensive income / (loss), net of tax:		​		​	​		​			​			​			​
Foreign currency translation adjustments		​		​	​		​			​	(7,207)		​			​	(7,207)
Change in derivatives		​		​	​		​			​	632		​			​	632
Cash dividends		​		​	​		​			​			​	(39,945)		​	(39,945)
Stock compensation		(22)		​	(22)		​	3,942		​	​		​			​	3,920
Employee stock buybacks		(8)		​	(8)		​	(300)		​	​		​			​	(308)
Balance at September 30, 2021		492,049	​	$	492,049	​	$	102,484	​	$	(17,465)	​	$	524,561	​	$	1,101,629

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	Accumulated Other		​	​	​	​	​	​
​	​	Common Stock				​	Paid-in-		​	Comprehensive		​	Retained		​	​	​
​		Shares		Amount			Capital			Income / (Loss)			Earnings			Total
Balance at June 30, 2020	​	491,643	​	$	491,643	​	$	88,640	​	$	(29,163)	​	$	311,710	​	$	862,830
Net Income	​	​	​	​	​	​	​	​	​	​	​	​	​	79,579	​	​	79,579
Other comprehensive income / (loss), net of tax:		​		​	​		​			​			​			​
Foreign currency translation adjustments		​		​	​		​			​	5,758		​			​	5,758
Change in derivatives		​		​	​		​			​	252		​			​	252
Cash dividends		​		​	​		​			​			​	(26,214)		​	(26,214)
Stock compensation		(18)		​	(18)		​	10,521		​	​		​	8		​	10,511
Employee stock buybacks		(1)		​	(1)		​	—		​	​		​	1		​	—
Balance at September 30, 2020		491,624	​	$	491,624	​	$	99,161	​	$	(23,153)	​	$	365,084	​	$	932,716

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	Accumulated Other		​	​	​	​	​	​
​	​	Common Stock				​	Paid-in-		​	Comprehensive		​	Retained		​	​	​
​		Shares		Amount			Capital			Income / (Loss)			Earnings			Total
Balance at December 31, 2020	​	491,612	​	$	491,612	​	$	101,757	​	$	(10,897)	​	$	358,888	​	$	941,360
Net Income	​	​	​	​	​	​	​	​	​	​	​	​	​	285,350	​	​	285,350
Other comprehensive income / (loss), net of tax:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Foreign currency translation adjustments		​		​	​		​		​		(6,924)		​		​		(6,924)
Change in derivatives		​		​	​		​		​		356		​		​		356
Cash dividends		​	​	​	​		​		​				​	(119,677)		​	(119,677)
Stock compensation		728		​	728		​	11,034	​		​		​		​		11,762
Employee stock buybacks		(291)		​	(291)		​	(10,307)	​		​		​		​		(10,598)
Balance at September 30, 2021		492,049	​	$	492,049	​	$	102,484	​	$	(17,465)	​	$	524,561	​	$	1,101,629

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	Accumulated Other		​	​	​	​	​	​
​	​	Common Stock				​	Paid-in-		​	Comprehensive		​	Retained		​	​	​
​		Shares		Amount			Capital			Income / (Loss)			Earnings			Total
Balance at December 31, 2019	​	491,146	​	$	491,146	​	$	89,413	​	$	(21,109)	​	$	256,300	​	$	815,750
Impact of adoption of ASC 842	​	​	​	​	​	​	​	​	​	​	​	​	​	2,484	​	​	2,484
Net Income	​	​	​	​	​	​	​	​	​	​	​	​	​	198,205	​	​	198,205
Other comprehensive income / (loss), net of tax:		​		​	​		​		​				​		​
Foreign currency translation adjustments		​	​	​	​		​		​		(1,732)		​	​		​	(1,732)
Change in derivatives		​	​	​	​		​		​		(312)		​	​		​	(312)
Cash dividends		​		​	​		​		​				​	(91,745)	​		(91,745)
Stock compensation		809		​	809		​	17,612	​		​		​	(270)	​		18,151
Employee stock buybacks		(331)		​	(331)		​	(7,864)	​		​		​	110	​		(8,085)
Balance at September 30, 2020		491,624	​	$	491,624	​	$	99,161	​	$	(23,153)	​	$	365,084	​	$	932,716

​

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands)

(unaudited)

​

​	​	​	​	​	​	​	​
​	​	Nine Months Ended					​
​	​	September 30,					​
​		2021			2020		​
OPERATING ACTIVITIES	​	​		​	​		​
Net income	​	$	285,350	​	$	198,205	​
Adjustments to reconcile net income to net cash provided by operating activities:	​		​	​	​	​	​
Depreciation and amortization	​		70,519	​		65,926	​
Provision for deferred income taxes	​		2,221	​		3,701	​
Provision for expected credit losses	​		8,522	​		12,820	​
(Gain) loss on sale of assets, net	​	​	(33,598)	​	​	629	​
Stock-based compensation expense	​		11,762	​		18,151	​
Other, net	​	​	(83)	​	​	1,423	​
Changes in operating assets and liabilities	​		(45,782)	​		39,752	​
Net cash provided by operating activities	​		298,911	​		340,607	​
INVESTING ACTIVITIES	​			​			​
Cash used for acquisitions of companies, net of cash acquired	​		(39,692)	​		(79,880)	​
Purchases of equipment and property	​		(20,031)	​		(17,690)	​
Proceeds from sales of assets	​		70,967	​		2,131	​
Proceeds from sales of franchises	​	​	134	​	​	430	​
Other, net	​	​	(274)	​	​	478	​
Net cash provided by/(used in) investing activities	​		11,104	​		(94,531)	​
FINANCING ACTIVITIES	​		​	​			​
Payment of contingent consideration	​		(19,413)	​		(24,168)	​
Borrowings under revolving commitment	​		82,500	​		68,000	​
Repayments of term loan	​		(83,000)	​		(20,000)	​
Repayments of revolving commitment	​		(134,500)	​		(169,500)	​
Payment of dividends	​		(119,677)	​		(91,745)	​
Cash paid for common stock purchased	​		(10,598)	​		(8,085)	​
Net cash used in financing activities	​		(284,688)	​		(245,498)	​
Effect of exchange rate changes on cash	​		(6,149)	​		586	​
Net increase in cash and cash equivalents	​		19,178	​		1,164	​
Cash and cash equivalents at beginning of period	​		98,477	​		94,276	​
Cash and cash equivalents at end of period	​	$	117,655	​	$	95,440	​
Supplemental disclosure of cash flow information:	​			​			​
Non-cash additions to operating lease right-of-use assets	​	$	101,720	​	$	67,877	​

​

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

​

ROLLINS, INC. AND SUBSIDIARIES

**NOTE 1.**BASIS OF PREPARATION AND OTHER

Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. There has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Rollins, Inc. (including its subsidiaries unless the context otherwise requires, “Rollins,” “we,” “us,” “our,” or the “Company”) for the year ended December 31, 2020. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2020 Annual Report on Form 10-K.

The preparation of interim financial statements requires management to make estimates and assumptions for the amounts reported in the condensed consolidated financial statements. Specifically, the Company makes estimates in its interim condensed consolidated financial statements for the termite accrual, allowance for expected credit losses, environmental, regulatory and litigation claims, the insurance accrual, which includes auto liability, general liability, worker’s compensation and medical claims, inventory adjustments, discounts and volume incentives earned, among others.

The Company has one reportable segment, its pest and termite control business. The Company’s results of operations and its financial condition are not reliant upon any single customer, a few customers, or the Company’s foreign operations.

Three-for-Two Stock Split

All prior year share and per share data presented have been adjusted to account for the three-for-two stock split effective December 10, 2020.

**NOTE 2.**RECENT ACCOUNTING PRONOUNCEMENTS

In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting, caused by reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of the standard to have a material impact on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The standard eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments and (3) exceptions in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (1) franchise taxes that are partially based on income, (2) transactions with a government that result in a step-up in the tax basis of goodwill, (3) separate financial statements of legal entities that are not subject to tax, and (4) enacted changes in tax laws in interim periods. The Company adopted ASU 2019-12 effective January 1, 2021, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

**NOTE 3.**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 on the following table.

ROLLINS, INC. AND SUBSIDIARIES

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended					​	Nine Months Ended					​
​	​	September 30,					​	September 30,					​
​		2021			2020			2021			2020		​
(in thousands)	​	​	​	​	​	​	​	​	​	​	​	​	​
United States	​	$	602,336	​	$	540,763	​	$	1,686,371	​	$	1,510,685	​
Other countries	​		47,863	​		42,935	​		137,586	​		114,243	​
Total Revenues	​	$	650,199	​	$	583,698	​	$	1,823,957	​	$	1,624,928	​

​

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

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended					​	Nine Months Ended					​
​	​	September 30,					​	September 30,					​
(in thousands)		2021			2020			2021			2020		​
Residential revenue	​	$	307,747	​	$	275,581	​	$	835,871	​	$	738,159	​
Commercial revenue	​		218,648	​		199,561	​		618,183	​		562,777	​
Termite completions, bait monitoring, & renewals	​		117,423	​		102,144	​		350,791	​		306,188	​
Franchise revenues	​	​	4,128	​	​	3,852	​	​	11,698	​	​	10,791	​
Other revenues	​		2,253	​		2,560	​		7,414	​		7,013	​
Total Revenues	​	$	650,199	​	$	583,698	​	$	1,823,957	​	$	1,624,928	​

​

See Note 8. Unearned Revenue, for disclosures related to our unearned revenue balances.

**NOTE 4.**ALLOWANCE FOR CREDIT LOSSES

Effective January 1, 2020, the Company adopted ASC 326, the new accounting standard related to credit losses. The Company is exposed to credit losses primarily related to accounts receivables and financed receivables derived from customer services revenue. To reduce credit risk for residential pest control accounts receivable, we promote enrollment in our auto-pay programs. In general, we may suspend future services for customers with past due balances. The Company’s credit risk is generally low with a large number of entities comprising Rollins’ customer base and dispersion across many different geographical regions.

The Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risks. The Company’s established credit evaluation and monitoring procedures seek to minimize the amount of business we conduct with higher risk customers. The credit quality of a potential obligor is evaluated at the loan origination based on an assessment of the individual’s Beacon/credit bureau score. Rollins requires a potential obligor to have good credit worthiness with low risk before entering into a contract. Depending upon the individual’s credit score, the Company may accept with 100% financing 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.

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

ROLLINS, INC. AND SUBSIDIARIES

are deemed uncollectible. Below is a roll forward of the Company’s allowance for credit losses for the three and nine months ended September 30, 2021 and 2020.

​

​	​	​	​	​	​	​	​	​	​
​	​	(in thousands)
​	​	Allowance for Credit Losses
​		Trade			Financed			Total
​	​	Receivables		​	Receivables		​	Receivables
Balance at June 30, 2021	​	$	13,863	​	$	4,341	​	$	18,204
Provision for expected credit losses	​		3,526	​		323	​		3,849
Write-offs charged against the allowance	​		(5,163)	​		(657)	​		(5,820)
Recoveries collected	​		1,247	​		—	​		1,247
Balance at September 30, 2021	​	$	13,473	​	$	4,007	​	$	17,480

​

​	​	​	​	​	​	​	​	​	​
​	​	Allowance for Credit Losses
​	​	Trade		​	Financed		​	Total
​		Receivables			Receivables			Receivables
Balance at December 31, 2020	​	$	16,854	​	$	3,231	​	$	20,085
Provision for expected credit losses	​		5,760	​		2,762	​		8,522
Write-offs charged against the allowance	​		(12,912)	​		(1,986)	​		(14,898)
Recoveries collected	​		3,771	​		—	​		3,771
Balance at September 30, 2021	​	$	13,473	​	$	4,007	​	$	17,480

​

​	​	​	​	​	​	​	​	​	​
​	​	Allowance for Credit Losses
​	​	Trade		​	Financed		​	Total
​		Receivables			Receivables			Receivables
Balance at June 30, 2020	​	$	16,452	​	$	3,014	​	$	19,466
Provision for expected credit losses	​		2,363	​		689	​		3,052
Write-offs charged against the allowance	​		(3,502)	​		(567)	​		(4,069)
Recoveries collected	​		660	​		—	​		660
Balance at September 30, 2020	​	$	15,973	​	$	3,136	​	$	19,109

​

​	​	​	​	​	​	​	​	​	​
​	​	Allowance for Credit Losses
​	​	Trade		​	Financed		​	Total
​		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	​		10,843	​		1,977	​		12,820
Write-offs charged against the allowance	​		(11,735)	​		(1,800)	​		(13,535)
Recoveries collected	​		3,496	​		—	​		3,496
Balance at September 30, 2020	​	$	15,973	​	$	3,136	​	$	19,109

​

​

​

​

**NOTE 5.**EARNINGS PER SHARE

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

ROLLINS, INC. AND SUBSIDIARIES

Basic and diluted earnings per share attributable to common and restricted shares of common stock for the period were as follows:

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended					​	Nine Months Ended
​	​	September 30,					​	September 30,
​		2021			2020			2021			2020
Basic and diluted earnings per share	​	​	​	​	​	​	​	​	​	​	​	​
Common stock	​	$	0.19	​	$	0.16	​	$	0.58	​	$	0.40
Restricted shares of common stock	​	$	0.19	​	$	0.16	​	$	0.58	​	$	0.40

​

​

​

**NOTE 6.**CONTINGENCIES

In the normal course of business, from time to time, the Company and certain subsidiaries are parties to lawsuits, claims, arbitrations, regulatory actions or investigations. In addition, from time to time in the ordinary course of business, the Company also defends employment-related cases as well as claims arising out of environmental matters.

As previously disclosed, the SEC is conducting an investigation which we believe is primarily focused on how the Company established accruals and reserves at period-ends for periods beginning January 1, 2015 and the impact of those accruals and reserves on reported earnings per share. The Company’s Audit Committee retained independent counsel to conduct an internal investigation into matters related to the SEC investigation and that investigation is being supplemented as previously reported. To date the internal investigation findings include certain inadequately supported journal entries and certain other errors, all primarily related to the Company’s reserve and accrual accounting, which the Company has determined were individually and in the aggregate immaterial to the impacted quarterly and annual financial statements. As previously disclosed in the Company’s 2020 Form 10-K, based on the results of the internal investigation, it was determined that there was a significant deficiency in the Company’s internal controls relating to the documentation and review of accounting entries for certain reserves and accruals, which was remediated as of December 31, 2020 and as discussed below. The supplemental investigation regarding the assertions described in the Current Report on Form 8-K furnished to the SEC on July 28, 2021 is ongoing. The Company continues to believe that its financial statements filed with the SEC on Forms 10-K and 10-Q for the relevant periods fairly present in all material respects its financial condition, results of operations and cash flows as of their respective balance sheet dates and for the periods then ended.

The Company is continuing to cooperate fully with the SEC investigation and has initiated discussions with the SEC staff regarding a potential resolution of the investigation. In accordance with the accounting guidance in ASC 450, “Contingencies,” and based on the findings described above and other information, the Company recorded an accrual related to this matter in the third quarter of 2021, which is reflected in other current liabilities in our condensed consolidated statements of financial position. We cannot predict the outcome of the SEC investigation and it is possible that the ultimate amount of any potential liability could be different from the amount accrued.

As previously disclosed in the Company’s 2020 Form 10-K, in connection with the SEC investigation, the Company reevaluated and strengthened its internal controls over financial reporting, including improving processes and procedures and supporting documentation, including those related to management’s judgments and estimates.

There can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries or pursue action against the Company and its senior officers that could result in potentially significant sanctions and penalties, or that could require the Company to take additional remedial steps. Further, the Company may be subject to litigation from third parties related to the matters under review by the SEC.

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.

​

ROLLINS, INC. AND SUBSIDIARIES

**NOTE 7.**FAIR VALUE OF FINANCIAL INSTRUMENTS

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 further discussed in Note 15. Derivative Instruments and Hedging Activities.

During the nine months ended September 30, 2021, the Company invested $10.6 million of unrestricted cash in international bonds, a level 2 asset under the fair value hierarchy. The investment is recorded in other current assets. The fair market values of the bonds approximate their amortized costs.

As of September 30, 2021 and December 31, 2020, the Company had $21.5 million and $35.7 million of acquisition holdback and earnout liabilities with the former owners of acquired companies. The earnout liabilities were discounted to reflect the expected probability of payout, and both earnout and holdback liabilities were discounted to their net present value on the Company’s books and are considered level 3 liabilities. The table below presents a summary of the changes in fair value for these liabilities.

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended					​	Nine Months Ended
​	​	September 30,					​	September 30,
(in thousands)		2021			2020			2021			2020
Beginning balance	​	$	27,057	​	$	47,085	​	$	35,744	​	$	49,131
New acquisitions and revaluations	​		1,341	​		3,160	​		5,314	​		8,703
Payouts	​		(6,540)	​		(16,306)	​		(19,413)	​		(24,168)
Interest on outstanding contingencies	​		178	​		386	​		715	​		1,534
Charge offset, forfeit and other	​		(514)	​		(554)	​		(838)	​		(1,429)
Ending balance	​	$	21,522	​	$	33,771	​	$	21,522	​	$	33,771

​

​

**NOTE 8.**UNEARNED REVENUE

The Company records unearned revenue when we have either received payment or contractually have the right to bill for services in advance of the services or performance obligations being performed. Deferred revenue recognized in the three months ended September 30, 2021 and 2020 were $47.3 million and $43.4 million, respectively. Deferred revenue recognized for the nine months ended September 30, 2021 and 2020 were $139.6 million and $129.4 million respectively. Changes in unearned revenue were as follows:

​

​	​	​	​	​	​	​	​	​	​	​	​	​
​		Three Months Ended September 30,					​	Nine Months Ended September 30,
​		2021			2020		​	2021			2020
(in thousands)	​	​	​	​	​	​	​	​	​	​	​	​
Beginning balance	​	$	172,951	​	$	156,499	​	$	149,224	​	$	136,507
Deferral of unearned revenue	​		49,060	​		44,582	​		165,094	​		150,510
Recognition of unearned revenue	​		(47,316)	​		(43,441)	​		(139,623)	​		(129,377)
Ending balance	​	$	174,695	​	$	157,640	​	$	174,695	​	$	157,640

​

As of September 30, 2021 and December 31, 2020, the Company had long-term unearned revenue of $23.1 million and $18.0 million, respectively, recorded in other long-term accrued liabilities. Unearned short-term revenue is recognized over the next 12-month period. The majority of unearned long-term revenue is recognized over a period of five years or less with immaterial amounts recognized through 2032.

​

**NOTE 9.**LEASES

The Company leases certain buildings, vehicles, and equipment in order to reduce the risk associated with ownership and to maximize working capital utilization. The Company elected the practical expedient approach permitted under ASC 842

ROLLINS, INC. AND SUBSIDIARIES

not to include short-term leases with a duration of 12 months or less on the balance sheet. As of September 30, 2021, and December 31, 2020, all leases were classified as operating leases. Building leases generally carry terms of 5 to 15 years with annual rent escalations at fixed amounts per the lease. Vehicle leases generally carry a fixed term of one year with renewal options to extend the lease on a monthly basis resulting in lease terms up to 7 years depending on the class of vehicle. The exercise of renewal options is at the Company’s sole discretion. It is reasonably certain that the Company will exercise the renewal options on its vehicle leases. The measurement of right-of-use assets and liabilities for vehicle leases includes the fixed payments associated with such renewal periods. We separate lease and non-lease components of contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants.

During the nine months ended September 30, 2021, the Company completed multiple sale-leaseback transactions where it sold 17 of its properties related to the Clark Pest Control acquisition for gross proceeds of $67.0 million and a pre-tax gain of $31.5 million. 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.

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	Three Months Ended September 30,					​	Nine Months Ended September 30,					​
(in thousands, except Other Information)	​	​	​	​					​	​					​
Lease Classification		Financial Statement Classification		2021			2020			2021			2020		​
Short-term lease cost		Cost of services provided, Sales, general, and administrative expenses	​	$	51	​	$	20	​	$	176	​	$	153	​
Operating lease cost		Cost of services provided, Sales, general, and administrative expenses	​		23,472	​		21,514	​		69,497	​		63,538	​
Total lease expense	​	​	​	$	23,523	​	$	21,534	​	$	69,673	​	$	63,691	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other Information:			​			​			​			​			​
Weighted-average remaining lease term - operating leases	​	​	​	​	​	​	​	​	​		5.54 years	​		3.70 years	​
Weighted-average discount rate - operating leases	​	​	​	​	​	​	​	​	​		3.69	%		3.94	%
Cash paid for amounts included in the measurement of lease liabilities:	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Operating cash flows for operating leases	​	​	​	​	​	​	​	​	​	$	68,614	​	$	62,928	​

​

ROLLINS, INC. AND SUBSIDIARIES

Lease Commitments

Future minimum lease payments, including assumed exercise of renewal options as of September 30, 2021 were as follows:

​

​	​	​	​
(in thousands)	​	​
2021 (excluding the nine months ended September 30, 2021)	​	$	22,994
2022	​	​	79,411
2023		​	59,682
2024		​	35,874
2025		​	20,329
2026		​	13,495
Thereafter		​	52,667
Total Future Minimum Lease Payments		​	284,452
Less: Amount representing interest		​	30,387
Total future minimum lease payments, net of interest	​	$	254,065

​

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 $161.3 million for building leases and $123.2 million for vehicle leases. As of September 30, 2021, the Company had additional future obligations of $4.3 million for leases that had not yet commenced.

​

**NOTE 10.**GOODWILL AND INTANGIBLE ASSETS

The cumulative carrying amount of goodwill was $665.6 million and $653.2 million as of September 30, 2021 and December 31, 2020, respectively. Goodwill generally changes due to acquisitions, the finalization of allocation of purchase prices of previous acquisitions and foreign currency translations. During the nine months ended September 30, 2021, goodwill increased $15.5 million due to acquisitions and decreased $3.1 million due to foreign currency translation. The carrying amount of goodwill in foreign countries was $78.6 million as of September 30, 2021 and $81.4 million as of December 31, 2020.

The Company completed its most recent annual impairment analysis as of September 30, 2021. Based upon the results of this analysis, the Company concluded that no impairment of its goodwill or other intangible assets was indicated.

The carrying amount of customer contracts was $284.4 million and $298.9 million as of September 30, 2021, and December 31, 2020, respectively. The carrying amount of trademarks and tradenames was $108.2 million and $109.0 million as of September 30, 2021 and December 31, 2020, respectively. The carrying amount of other intangible assets was $9.9 million and $10.8 million as of September 30, 2021 and December 31, 2020, respectively. The carrying amount of customer contracts in foreign countries was $40.2 million and $45.7 million as of September 30, 2021 and December 31, 2020, respectively. The carrying amount of trademarks and tradenames in foreign countries was $2.9 million and $3.3 million as of September 30, 2021 and December 31, 2020, respectively. The carrying amount of other intangible assets in foreign countries was $0.7 million and $1.0 million as of September 30, 2021 and December 31, 2020, respectively.

Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives.

ROLLINS, INC. AND SUBSIDIARIES

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

​

​	​	​	​	​	​
​		​	​		Useful Life
​	​	Carrying Value		​	in Years
Amortizable intangible assets:	​	​	​	​	​
Customer contracts	​	$	284,393		3-20
Trademarks and tradenames	​		6,493		7-20
Non-compete agreements	​		4,316		3-20
Patents	​		1,441		3-15
Other assets	​		512		10
Total amortizable intangible assets	​		297,155
Indefinite-lived intangible assets:	​
Trademarks and tradenames	​		101,738
Internet domains	​		2,227
Other assets	​		1,418
Total indefinite-lived intangible assets	​		105,383
Total customer contracts and other intangible assets	​	$	402,538

​

​

**NOTE 11.**DEBT

In April 2019, the Company entered into a Revolving Credit Agreement with Truist Bank N.A. (formerly SunTrust Bank N.A.) and Bank of America, N.A. (the “Credit Agreement”) for an unsecured revolving commitment of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $25.0 million swingline subfacility (the “Revolving Commitment”), and an unsecured variable rate $250.0 million term loan (the “Term Loan”). Both the Revolving Commitment and the Term Loan (“Credit Facility”) have five-year terms commencing on April 29, 2019. In addition, the Credit Agreement has provisions to extend the term of the Revolving Commitment beyond April 29, 2024, as well as the right at any time and from time to time to prepay any borrowing under the Credit Agreement, in whole or in part, without premium or penalty. As of September 30, 2021, the Company had outstanding borrowings of $53 million under the Term Loan and $15 million under the Revolving Commitment. The aggregate effective interest rate on the debt outstanding as of September 30, 2021 was 0.835%. The effective interest rate is comprised of the 1-month LIBOR plus a margin of 75.0 basis points as determined by the Company’s leverage ratio calculation. As of December 31, 2020, the Revolving Commitment had outstanding borrowings of $67.0 million and the Term Loan had outstanding borrowings of $136.0 million. The Credit Agreement includes a debt covenant that requires the Company’s leverage ratio to be no greater than 3.00:1.00. The Leverage Ratio is calculated as of the last day of the fiscal quarter most recently ended. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance throughout 2021.

​

**NOTE 12.**STOCKHOLDERS’ EQUITY

During the nine months ended September 30, 2021, the Company paid $119.7 million, or $0.24 per share, in cash dividends compared to $91.7 million, or $0.19 per share, during the same period in 2020.

During the third quarter ended September 30, 2021 and during the same period in 2020, the Company did not repurchase shares on the open market.

The Company repurchases shares from employees for the payment of their taxes on restricted shares that have vested. The Company repurchased $0.3 million for the quarter ended September 30, 2021, and $10.6 million and $8.1 million during the nine-month period ended September 30, 2021 and 2020 respectively. The Company did not repurchase shares for the payment of taxes on vested shares during the quarter ended September 30, 2020.

ROLLINS, INC. AND SUBSIDIARIES

As more fully discussed in Note 17 of the Company’s notes to the consolidated financial statements in its 2020 Annual Report on Form 10-K, time-lapse restricted awards and restricted stock units (“restricted shares”) have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plans. The Company issues new shares from its authorized but unissued share pool. As of September 30, 2021, approximately 6.6 million shares of the Company’s common stock were reserved for issuance.

Time Lapse Restricted Shares

The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense:

​

​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	Three Months Ended					​	Nine Months Ended					​
​	​	September 30,					​	September 30,					​
(in thousands)		2021			2020			2021			2020		​
Time lapse restricted stock:		​			​		​	​			​		​
Pre-tax compensation expense	​	$	3,920	​	$	10,511	​	$	11,762	​	$	18,151	​
Tax benefit	​		(1,025)	​		(1,180)	​		(2,950)	​		(3,117)	​
Restricted stock expense, net of tax	​	$	2,895	​	$	9,331	​	$	8,812	​	$	15,034	​

​

According to the Employee Stock Incentive Plan, restricted shares automatically vest upon the death of an employee holding the unvested shares. The pre-tax compensation expense was higher for the quarter and nine months ended September 30, 2020 due to the accelerated vesting of unvested restricted shares held by the Company’s Chairman of the Board, R. Randall Rollins, who passed away in August, 2020.

​

The following table summarizes information on unvested restricted stock outstanding as of September 30, 2021:

​

​	​	​	​	​	​
​		​		Weighted
​	​	​	​	Average
​	​	Number of	​	Grant-Date
(number of shares in thousands)		Shares		Fair Value
Unvested Restricted Stock at December 31, 2020		2,870		$	20.36
Forfeited		(56)		​	24.80
Vested		(851)		​	16.62
Granted		778		​	37.04
Unvested Restricted Stock at September 30, 2021		2,741	​	$	26.16

​

As of September 30, 2021 and December 31, 2020, the Company had $56.4 million and $40.5 million of total unrecognized compensation cost, respectively, related to time-lapse restricted shares that are expected to be recognized over a weighted average period of approximately 4.1 years and 3.8 years, respectively.

​

**NOTE 13.**PENSION PLANS

In September 2019, the Company settled its fully-funded Rollins, Inc. pension plan. As of September 30, 2021, $1.1 million of Rollins, Inc. pension assets remained in the trust with a planned reversion of the remaining pension assets to the Company per ERISA regulations before year end. The Company anticipates tax of approximately 45% of the pension plan assets to be paid upon reversion, which includes the 20% excise tax. In addition, the Company has a remaining Waltham, Inc. defined benefit plan. This plan had assets of $2.3 million, a projected liability of $3.0 million and an unfunded status of $0.7 million as of September 30, 2021. The Company has made $0.1 million in employer contributions to its remaining defined benefit retirement plan in 2021.

​

ROLLINS, INC. AND SUBSIDIARIES

**NOTE 14.**BUSINESS COMBINATIONS

The Company made 26 acquisitions during the nine-month period ended September 30, 2021, and 31 acquisitions for the year ended December 31, 2020. For the 26 acquisitions completed through September 30, 2021, the preliminary values of major classes of assets acquired and liabilities assumed recorded at the dates of acquisition, as adjusted during the valuation period, are included in the reconciliation of the total consideration as follows (in thousands):

​

​	​	​	​	​
​		September 30, 2021		​
Accounts receivable, net	​	$	1,013	​
Materials and supplies	​		231	​
Equipment and property	​		2,352	​
Goodwill	​		15,520	​
Customer contracts	​		25,450	​
Trademarks & tradenames	​		200	​
Other intangible assets	​		143	​
Current liabilities	​		(362)	​
Other assets and liabilities, net	​		234	​
Total consideration paid	​	$	44,781	​
Less: Contingent consideration liability	​		(5,089)	​
Total cash purchase price	​	$	39,692	​

​

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 period ended September 30, 2021, $15.5 million of goodwill was added related to the 26 acquisitions noted above. The recognized goodwill is expected to be deductible for tax purposes.

​

**NOTE 15.**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 such instruments 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 requires us to pay a fixed rate of 1.94% per annum on the notional amount. The notional amounts as of September 30, 2021 and December 31, 2020 were $10.0 million and $40.0 million, respectively. The cash flows from the swap began June 30, 2019 and end on December 31, 2021. As of December 31, 2020, $0.4 million had been recorded as a loss in Accumulated Other Comprehensive Income (“AOCI”). For the nine months ended September 30, 2021, a gain of $0.4 million was recorded in AOCI, compared to a loss of $0.3 million for the nine months ended September 30, 2020. Realized gains and losses in connection with each required interest payment are reclassified from AOCI to interest expense during the period of the cash flows. During the quarter and nine months ended September 30, 2021, the Company reclassified into interest expense $0.1 million and $0.4 million, respectively. The fair value of the Company’s interest rate swaps was recorded as $0.0 million in Other Current Liabilities

ROLLINS, INC. AND SUBSIDIARIES

as of September 30, 2021. The fair value of the Company’s interest rate swaps was recorded as $0.2 million in Long-Term Liabilities as of December 31, 2020. On a quarterly basis, management evaluates our swap agreement to determine its effectiveness or ineffectiveness and records the change in fair value as an adjustment to AOCI. Management intends that the swap remains effective.

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 AUD-USD exchange rates. FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX Forwards are typically settled in US dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards were recorded in other income/expense and were equal to net losses of $0.1 million for the quarters ended September 30, 2021 and 2020, and net losses of $0.6 million and $0.4 million for the nine months ended September 30, 2021 and 2020, respectively. The fair values of the Company’s FX Forwards were recorded as net obligations of $0.0 million and $0.4 million in Other Current Liabilities as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):

​

Non-Designated Derivative Summary

​

​	​	​	​	​	​	​	​	​
​	​	Number of	​	Sell		​	Buy
FX Forward Contracts		Instruments		Notional			Notional
Sell AUD/Buy USD Fwd Contract	​	9	​	$	900	​	$	661
Sell CAD/Buy USD Fwd Contract	​	9	​	​	9,500	​	​	7,492
Total	​	18	​			​	$	8,153

​

The financial statement impact related to these derivative instruments was insignificant for the nine months ended September 30, 2021 and year ended December 31, 2020.

​

**NOTE 16.**SUBSEQUENT EVENTS

On October 26, 2021, the Company’s Board of Directors declared a regular quarterly cash dividend on its common stock of $0.10 per share plus a special year-end dividend of $0.08 per share with both payable on December 10, 2021 to stockholders of record at the close of business on November 10, 2021.

​

​

ROLLINS, INC. AND SUBSIDIARIES