Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q. The following discussion contains forward-looking statements that involve risks and uncertainties and reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors,” of our 2022 Form 10-K and Part II, Item 1A, “Risk Factors” and “Caution Regarding Forward-Looking Statements” included in this report and those discussed in other documents we file from time to time with the SEC.

GENERAL OPERATING COMMENTS

The Company recognized 11.4% growth in revenues for the quarter with strong growth across all major service lines. Total revenues finished at $658.0 million compared to $590.7 million for the prior year. Organic revenue* growth was 9.2% and acquisitions added 2.2% in the quarter. The stronger U.S. Dollar versus the same quarter a year ago reduced current revenues by 60 basis points. The weaker Canadian Dollar, British Pound and Australian Dollar relative to the U.S. Dollar were the biggest headwind on currency.

Operating income increased 20.2%, to $112.2 million compared to $93.4 million in the same quarter a year ago. When stated as a percentage of sales, operating income was 17.1% vs. 15.8% the same quarter a year ago. The improvement versus. the prior year reflects improved price realization and improved control over sales, general and administrative ("SG&A") costs. Earnings before income taxes, depreciation and amortization ("EBITDA")* and related margin was $139.5 million and 21.2% compared to $117.8 million and 19.9% in the first quarter of 2022. Net income increased 19.6% to $88.2 million, with earnings per diluted share of $0.18 compared to $73.8 million, or $0.15 per diluted share for the prior year.

Operating cash flow was strong during the quarter and finished at $100.8 million up from $87.5 million in 2022. We paid $15.5 million for six acquisitions in 2023. The Company paid dividends to investors of $0.13 per diluted share in the first quarter of 2023 as compared to $0.10 per diluted share for the prior year, resulting in a 30% increase in dividends per share.

Demand remains favorable to start the second quarter and we expect acquisitions to have a larger impact on revenue growth in the second quarter versus the first quarter of this year due to the recently announced Fox Pest Control acquisition. Although we continue to navigate a highly uncertain macro-environment, we are positioned well to deliver strong operating results in 2023.

*Amounts are non-GAAP financial measures. See the schedules below for a discussion of non-GAAP financial metrics including a reconciliation of the most closely correlated GAAP measure.

IMPACT OF ECONOMIC TRENDS

The continued disruption in economic markets due to high inflation, increases in interest rates, business interruptions due to natural disasters, employee shortages and supply chain issues, all pose challenges which may adversely affect our future performance. The Company continues to carry out various strategies previously implemented to help mitigate the impact of these economic disruptors, including advanced scheduling to compensate for employee and vehicle shortages, and maintaining higher purchasing levels to allow for sufficient inventory.

However, the Company cannot reasonably estimate whether these strategies will help mitigate the impact of these economic disruptors in the future.

The Company’s condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements. The Company considered the impact of economic trends on the assumptions and estimates used in preparing the condensed consolidated financial statements. In the opinion of management, all material adjustments necessary for a fair presentation of the Company’s financial results for the year have been made. These adjustments are of a normal recurring nature but complicated by the continued uncertainty surrounding these macro economic trends. The severity, magnitude and duration of certain economic trends, continue to be uncertain and are difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to economic trends and may change materially in future periods.

ROLLINS, INC. AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

Quarter ended March 31, 2023 compared to quarter ended March 31, 2022

			Three Months Ended March 31,												Variance												As a % of Revenue
(in thousands)			2023						2022						$						%						2023						2022
Revenues			$	658,015					$	590,680					67,335						11.4						100.0						100.0
Cost of services provided (exclusive of depreciation and amortization below)			326,842						295,378						31,464						10.7						49.7						50.0
Gross Profit			331,173						295,302						35,871						12.1						50.3						50.0
Sales, general and administrative			196,431						178,785						17,646						9.9						29.9						30.3
Depreciation and amortization			22,502						23,127						(625)						(2.7)						3.4						3.9
Operating income			112,240						93,390						18,850						20.2						17.1						15.8
Interest expense, net			465						568						(103)						(18.1)						0.1						0.1
Other (income), net			(4,714)						(1,279)						(3,435)						268.6						(0.7)						(0.2)
Consolidated income before income taxes			116,489						94,101						22,388						23.8						17.7						15.9
Provision for income taxes			28,255						20,335						7,920						38.9						4.3						3.4
Net income			$	88,234					$	73,766					14,468						19.6						13.4						12.5

Revenues

The following presents a summary of revenues by product and service offering and revenues by geography:

ROLLINS, INC. AND SUBSIDIARIES

Revenues for the quarter ended March 31, 2023 were $658.0 million, an increase of $67.3 million, or 11.4%, from 2022 revenues of $590.7 million. Organic revenue* growth was 9.2% and acquisitions added 2.2% in the quarter. The weaker U.S. Dollar versus the same quarter a year ago reduced current revenues by 60 basis points. The currency headwind was primarily related to a stronger dollar versus the Canadian Dollar, the British Pound and the Australian Dollar. Comparing 2023 to 2022, residential pest control revenue increased 9%, commercial pest control revenue increased 12% and termite and ancillary services grew 14%. The Company’s foreign operations accounted for approximately 7% of total revenues for the quarters ended March 31, 2023 and 2022.

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

			Consolidated Net Revenues
(in thousands)			2023						2022						2021
First Quarter			$	658,015					$	590,680					$	535,554
Second Quarter			—						714,049						638,204
Third Quarter			—						729,704						650,199
Fourth Quarter			—						661,390						600,343
Year to date			$	658,015					$	2,695,823					$	2,424,300

Gross Profit (exclusive of Depreciation and Amortization)

Gross profit for the quarter ended March 31, 2023 was $331.2 million, an increase of $35.9 million, or 12.1%, compared to $295.3 million for the quarter ended March 31, 2022. Gross margin was 50.3% in 2023 compared to 50.0% in 2022. Gross profit remains strong, and we saw good performance on gross profit as pricing more than offset inflationary pressures. We pulled our price increase forward by a month this year. We were also more consistent in raising pricing across all our brands this year.

There are categories of costs that comprise the majority of cost of services provided: people, materials and supplies, fleet, and insurance and claims. We saw favorable results as a percentage of sales in people related costs as well as fleet costs, materials and supplies costs were neutral to margins and insurance and claims continues to be a headwind to margins.

ROLLINS, INC. AND SUBSIDIARIES

Sales, General and Administrative

For the quarter ended March 31, 2023, SG&A expenses increased $17.6 million, or 9.9%, compared to the quarter ended March 31, 2022. As a percentage of revenue, SG&A decreased to 29.9% from 30.3% in the prior year.

There are three categories of costs that comprise the majority of SG&A: people costs, customer acquisition related costs, and insurance and claims. In the quarter, we saw favorable results as a percentage of sales in people, customer acquisition costs were relatively neutral to margins while insurance and claims were a headwind to margins.

As we start the second quarter, which marks the start of the busier seasons for our business, we expect to see an uptick in SG&A primarily related to customer acquisition costs as we work to acquire new customers and grow our business.

Depreciation and Amortization

For the quarter ended March 31, 2023, depreciation and amortization decreased $0.6 million, or 2.7%, compared to the quarter ended March 31, 2022. A decrease in the depreciation of retirements exceeding additions was partially offset by the additional amortization of customer contracts from acquisitions.

Operating Income

For the quarter ended March 31, 2023, operating income increased $18.9 million or 20.2% compared to the prior year. The increase in revenue was partially offset primarily by an increase in expense associated with insurance and claims.

As a percentage of revenue, operating income increased to 17.1% from 15.8% in the prior year. The improvement in operating income as a percentage of sales is driven by the pricing actions discussed above which helped provide improved leverage across a number of categories of the income statement, as discussed in gross profit and SG&A areas above. These improvements were partially offset by higher insurance and claims costs.

While we remain focused on driving improvements in operating income and related margins, we could see a lower level of incremental margins in the second quarter relative to the first quarter associated with higher customer acquisition costs as described above.

Interest Expense, Net

During the quarter ended March 31, 2023, interest expense, net decreased $0.1 million compared to the prior year, primarily due to the lower average debt balance which was partially offset by increase in weighted average interest rates in 2023 compared to 2022.

Other Income, Net

During the quarter ended March 31, 2023, other income increased $3.4 million primarily due to gains on asset sales.

Income Taxes

The Company’s effective tax rate increased to 24.3% in the first quarter of 2023 compared to 21.6% in 2022. The 2023 rate was less favorable due to higher foreign income taxes and state income taxes as compared to the prior year.

Non-GAAP Financial Measures

Reconciliation of GAAP and non-GAAP Financial Measures

The Company has used the non-GAAP financial measures of organic revenues and EBITDA in this Form 10-Q. Organic revenue is calculated as revenue less acquisition revenue. Acquisition revenue is based on the trailing 12-month revenue of our acquired entities. These measures should not be considered in isolation or as a substitute for revenues, net income, earnings per share or other performance measures prepared in accordance with GAAP.

Management uses EBITDA as a measure of operating performance because this measure allows the Company to compare performance consistently over various periods. Management also uses organic revenues to compare revenues over various periods excluding the impact of acquisitions.

ROLLINS, INC. AND SUBSIDIARIES

A non-GAAP financial measure is a numerical measure of financial performance, financial position, or cash flows that either 1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows, or 2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

Set forth below is a reconciliation of non-GAAP financial measures with their most comparable GAAP measures.

			Three Months Ended March 31,												Variance									As a % of Revenue
			2023						2022						$						%			2023						2022
Reconciliation of Revenues to Organic Revenues
Revenues			$	658,015					$	590,680					67,335						11.4			100.0						100.0
Revenue growth from acquisitions			(13,155)						—						(13,155)						—			(2.0)
Organic revenues			$	644,860					590,680						54,180						9.2			98.0
Reconciliation of Net Income to EBITDA
Net income			$	88,234					$	73,766					14,468						19.6			13.4						12.5
Depreciation and amortization			22,502						23,127						(625)						(2.7)			3.4						3.9
Interest expense, net			465						568						(103)						(18.1)			0.1						0.1
Provision for income taxes			28,255						20,335						7,920						38.9			4.3						3.4
EBITDA			$	139,456					117,796						21,660						18.4			21.2						19.9

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Flow

The Company’s $112.5 million of total cash at March 31, 2023 is held at various banking institutions. Approximately $74.9 million is held in cash accounts at international bank institutions and the remaining $37.6 million is primarily held in Federal Deposit Insurance Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times exceed federally insured amounts.

The Company’s international business is expanding, and we intend to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies. The Company 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.

On February 24, 2023, the Company entered into a revolving credit agreement with, among others, JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), as administrative agent (in such capacity, the “Administrative Agent”), which refinanced its previous credit facility.

The Credit Agreement provides for a $1.0 billion revolving Credit Facility, which may be denominated in U.S. Dollars and other currencies, including Euros, Australian Dollars, Canadian Dollars, New Zealand Dollars, Pounds Sterling and Japanese Yen, subject to a $400 million foreign currency sublimit. Rollins has the ability to expand its borrowing availability under the Credit Agreement in the form of increased revolving commitments or one or more tranches of term loans by up to an additional $750 million, subject to the agreement of the participating lenders and certain other customary conditions. The maturity date of the loans under the Credit Agreement is February 24, 2028. Refer to Note 9. Debt, of the Notes to Condensed Consolidated Financial Statements for further details.

As of March 31, 2023, the Company had outstanding borrowings of $62.4 million under the Credit Facility. The aggregate effective interest rate on the debt outstanding as of March 31, 2023 was 6.1%. As of December 31, 2022, the Revolving

ROLLINS, INC. AND SUBSIDIARIES

Commitment had outstanding borrowings of $54.9 million under the previous Term Loan with an effective interest rate of 5.1%.

The Company maintains $194.2 million in letters of credit as of March 31, 2023. 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 $71.3 million as of December 31, 2022. This balance is unusually high as of quarter end due to overlapping policies while the Company transitions to new letters of credit associated with the new Credit Facility. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims.

The Company believes its current cash and cash equivalents balances, future cash flows expected to be generated from operating activities, and available borrowings under its Credit Facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future.

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

			Three months ended March 31,												Variance
(in thousands)			2023						2022						$			%
Net cash provided by operating activities			$	100,773					$	87,532					13,241			15.1
Net cash used in investing activities			(13,590)						(19,928)						6,338			(31.8)
Net cash (used in) provided by financing activities			(71,082)						82,093						(153,175)			(186.6)
Effect of exchange rate on cash			1,056						3,340						(2,284)			(2.4)
Net increase in cash and cash equivalents			$	17,157					$	153,037					(135,880)			(88.8)

Cash Provided by Operating Activities

Cash from operating activities is the principal source of cash generation for our businesses. The most significant source of cash in our cash flow from operations is customer-related activities, the largest of which is collecting cash resulting from services sold. The most significant operating use of cash is to pay our suppliers, employees, and tax authorities. The Company’s operating activities generated net cash of $100.8 million and $87.5 million for the three months ended March 31, 2023 and 2022, respectively. The $13.2 million increase was driven primarily by strong operating results and the timing of cash receipts and cash payments to vendors, employees, and tax and regulatory authorities.

Cash Used in Investing Activities

The Company’s investing activities used $13.6 million and $19.9 million for the three months ended March 31, 2023 and 2022, respectively. Cash paid for acquisitions totaled $15.5 million for the three months ended March 31, 2023 as compared to $13.2 million for the three months ended March 31, 2022. The Company invested $7.6 million in capital expenditures during the quarter, offset by $8.9 million in cash proceeds from the sale of assets, compared with $8.0 million of capital expenditures and $1.3 million in cash proceeds from asset sales in 2022. The Company’s investing activities were funded through existing cash balances and operating cash flows.

Cash Provided by or Used in Financing Activities

Cash used by financing activities was $71.1 million during the three months ended March 31, 2023, while cash of $82.1 million was provided by financing activities in the prior year. A total of $64.1 million was paid in cash dividends ($0.13 per share) during the quarter compared to $49.2 million in cash dividends paid ($0.10 per share) during the three months ended March 31, 2022. The Company made net borrowings under its credit agreements of $10.0 million during the three months ended March 31, 2023, compared to net borrowings of $140.8 million during 2022.

In 2012, the Company’s Board of Directors authorized the purchase of up to 5 million shares of the Company’s common stock. After adjustments for stock splits, the total authorized shares under the share repurchase plan are 16.9 million shares. The Company did not repurchase shares of its common stock on the open market during the first three months of 2023 nor during the same period in 2022. However, in 2023 the Company purchased shares on behalf of employees for the Employee Stock Purchase Plan. In total, 11.4 million additional shares may be purchased under the share repurchase

ROLLINS, INC. AND SUBSIDIARIES

program. The Company repurchased $9.8 million and $6.4 million of common stock for the three months ended March 31, 2023 and 2022, respectively, from employees for the payment of taxes on vesting restricted shares.

CONTINGENCIES

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

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

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

CRITICAL ACCOUNTING ESTIMATES

There have been no changes to the Company’s critical accounting estimates since the filing of its Form 10-K for the year ended December 31, 2022.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

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

• the Company’s belief that its accounting estimates and assumptions may materially change over time in future periods in response to economic trends;

• the outcomes of any pending claim, proceeding, litigation, regulatory action or investigation filed against us, either alone or in the aggregate, which could have a material adverse effect on our business, or liquidity, financial condition and results of operations;

• the Company’s evaluation of pending and threatened claims and establishment of loss contingency reserves based upon outcomes it currently believes to be probable and reasonably estimable;

ROLLINS, INC. AND SUBSIDIARIES

• the Company's belief that it does not expect the resolution of the alleged violations and information requests from governmental authorities in California for its Orkin and Clark Pest Control operations to have a material adverse effect on its consolidated financial position, results of operations or cash flows;

• the Company’s belief that it will continue to be involved in various claims, arbitrations, contractual disputes, investigations, and regulatory and litigation matters relating to, and arising out of, its businesses and its operations. the Company’s reasonable certainty that it will exercise the renewal options on its operating leases;

• risks related to the Company’s belief that its current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings under its $1.0 billion revolving credit facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future;

• the Company’s ability to remain in compliance with applicable debt covenants under the Credit Facility throughout 2023;

• the Company’s belief that the adoption of ASU 2022-03 is not expected to have a material impact on the Company’s consolidated financial statements;

• risks related to, the Company’s plans to continue to grow its business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies, the Company's expectation to repatriate unremitted foreign earnings from its foreign subsidiaries, and the Company's expectations to continue to be permanently reinvested with respect to its investments in its foreign subsidiaries;

• the Company’s expectation that total unrecognized compensation cost related to restricted shares and PSUs will be recognized over a weighted average period of approximately 3.4 years;

• the Company’s expectation that the acquisition-related goodwill recognized during the quarter will be deductible for tax purposes;

• the Company’s conclusion that there are no impairments of its goodwill or other intangible assets;

• the Company’s belief that the factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized;

• the Company’s belief that it has adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims;

• the Company’s belief that foreign exchange rate risk will not have a material effect on the Company’s results of operations going forward;

• the Company's belief that demand remains favorable to start the second quarter and its expectations that acquisitions will have a larger impact on revenue growth in the second quarter versus the first quarter;

• the Company's belief that it is positioned well to deliver strong operating results in 2023;

• the Company's expectations to see an uptick in SG&A primarily related to customer acquisition costs as the Company works to acquire new customers and grow its business;

• the Company's expectations to see a lower level of incremental margins in the second quarter relative to the first quarter associated with higher customer acquisition costs; and

• the Company’s belief that continued disruptions in economic markets due to high inflation, increases in interest rates, business interruptions due to natural disasters, employee shortages and supply chain issues, all pose current and future challenges which may adversely affect the Company’s future performance, and that the Company cannot reasonably estimate whether its current strategies will help mitigate the impact of these economic disruptors in the future.

ROLLINS, INC. AND SUBSIDIARIES

Forward-looking statements are based on information available at the time those statements are made and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Such risks and uncertainties are beyond our ability to control, and in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. The reader should consider the factors discussed under Item 1A., “Risk Factors,” of Part I of the Company’s Annual Report on Form 10 K, filed with the U.S. Securities and Exchange Commission, for the year ended December 31, 2022 (the “2022 Annual Report”) that could cause the Company’s actual results and financial condition to differ materially from estimated results and financial condition. The Company does not undertake to update its forward-looking statements.