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

Below is a summary of the key operating results for the three months ended September 30, 2023:

• Third quarter revenues were $840.4 million, an increase of 15.2% over the third quarter 2022 with organic revenues* increasing 8.4%. We had strong growth across the portfolio with double digit growth in all service categories. The stronger dollar versus foreign currencies in countries where we operate reduced revenues by 10 basis points during the quarter.

• Quarterly operating income was $177.1 million, an increase of 21.8% over the third quarter of 2022. Quarterly operating margin was 21.1% of revenue, an increase of 120 basis points over the third quarter of 2022. Adjusted operating income* was $187.6 million, an increase of 29.0% over the prior year. Adjusted operating income margin* was 22.3%, an increase of 240 basis points over the prior year.

• Quarterly net income was $127.8 million, an increase of 17.3% over the prior year net income. Adjusted net income* was $135.6 million, an increase of 24.4% over the prior year.

• Quarterly EPS was $0.26 per diluted share, an 18.2% increase over the prior year EPS of $0.22. Adjusted EPS* was $0.28 per diluted share, an increase of 27.3% over the prior year.

• Adjusted EBITDA* was $208.5 million for the quarter, an increase of 22.7%. Adjusted EBITDA margin* was 24.8% of revenue, an increase of 150 basis points over the third quarter of 2022.

Demand is favorable to start the fourth quarter and we continue to maintain a very healthy balance sheet that positions us well to continue to invest in growth programs across our business. Although we continue to navigate a highly uncertain macro-environment, we believe we are positioned well to deliver strong 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 September 30, 2023, compared to quarter ended September 30, 2022

			Three Months Ended September 30,
															Variance
(in thousands, except per share data)			2023						2022						$			%
GAAP Metrics
Revenues			$	840,427					$	729,704					$	110,723		15.2		%
Gross profit (1)			$	451,894					$	381,546					$	70,348		18.4		%
Gross profit margin (1)			53.8		%				52.3		%				150 bps
Operating income			$	177,124					$	145,404					$	31,720		21.8		%
Operating income margin			21.1		%				19.9		%				120 bps
Net income			$	127,777					$	108,943					$	18,834		17.3		%
EPS			$	0.26					$	0.22					$	0.04		18.2		%
Non-GAAP Metrics
Adjusted operating income (2)			$	187,582					$	145,404					$	42,178		29.0		%
Adjusted operating margin (2)			22.3		%				19.9		%				240 bps
Adjusted net income (2)			$	135,558					$	108,943					$	26,615		24.4		%
Adjusted EPS (2)			$	0.28					$	0.22					$	0.06		27.3		%
Adjusted EBITDA (2)			$	208,531					$	169,945					$	38,586		22.7		%
Adjusted EBITDA margin (2)			24.8		%				23.3		%				150 bps

(1) Exclusive of depreciation and amortization

(2) Amounts are non-GAAP financial measures. See "Non-GAAP Financial Measures" of this Form 10-Q for a discussion of non-GAAP financial metrics including a reconciliation of the most closely correlated GAAP measure.

ROLLINS, INC. AND SUBSIDIARIES

Revenues

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

Revenues for the quarter ended September 30, 2023 were $840.4 million, an increase of $110.7 million, or 15.2%, from 2022 revenues of $729.7 million. Organic revenue* growth was 8.4% with acquisitions adding 6.8% in the quarter. The stronger dollar versus foreign currencies in countries where we operate reduced revenues by 10 basis points during the quarter. Comparing 2023 to 2022, residential pest control revenue increased 20%, commercial pest control revenue increased 12% and termite and ancillary services grew 11%. The Company’s foreign operations accounted for approximately 7% of total revenues for the quarters ended September 30, 2023 and 2022.

ROLLINS, INC. AND SUBSIDIARIES

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			820,750						714,049						638,204
Third Quarter			840,427						729,704						650,199
Fourth Quarter			—						661,390						600,343
Year to date			$	2,319,192					$	2,695,823					$	2,424,300

Gross Profit (exclusive of Depreciation and Amortization)

Gross profit for the quarter ended September 30, 2023 was $451.9 million, an increase of $70.3 million, or 18.4%, compared to $381.5 million for the quarter ended September 30, 2022. Gross margin improved 150 basis points to 53.8% in 2023 compared to 52.3% in 2022. The recent acquisition of Fox was accretive to gross margin by 30 basis points. Additionally, a stabilization of claims experience in the quarter drove 70 basis points of improvement in gross margin. Excluding Fox and the more favorable claims experience, we saw 50 basis points of improvement in underlying margins, as pricing more than offset inflationary pressures. We had good leverage on people costs and materials and supplies, which is partially offset by higher fleet costs associated primarily with a decline in vehicle gains related to leased vehicles.

Sales, General and Administrative

For the quarter ended September 30, 2023, sales, general and administrative ("SG&A") expenses increased $31.3 million, or 14.7%, compared to the quarter ended September 30, 2022. As a percentage of revenue, SG&A decreased to 29.1% from 29.3% 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. While we saw leverage in certain of our people costs and insurance claims costs, this was partially offset by an increase in customer-related costs incurred to drive demand.

Restructuring Costs

During the quarter ended September 30, 2023, we executed a restructuring program to modernize our workforce. This effort resulted in expense of approximately $5.2 million in the quarter. The large majority of the costs incurred are related to severance-related costs for employees who were terminated as part of this effort. The changes were primarily across corporate-related functions and will enable us to make more strategic improvements in our support functions.

Depreciation and Amortization

For the quarter ended September 30, 2023, depreciation and amortization increased $2.1 million, or 9.3%, compared to the quarter ended September 30, 2022. The increase was due to higher amortization of intangible assets from acquisitions, most notably Fox Pest Control, offset by lower depreciation of operating equipment and internal-use software.

Operating Income

For the quarter ended September 30, 2023, operating income increased $31.7 million, or 21.8%, compared to the prior year.

As a percentage of revenue, operating income was 21.1%, an increase of 120 basis points over the third quarter of 2022. Operating margin improved on the changes noted in gross profit and sales, general & administrative above, offset by restructuring, and higher depreciation and amortization associated primarily with our acquisition of Fox.

ROLLINS, INC. AND SUBSIDIARIES

Interest Expense, Net

During the quarter ended September 30, 2023, interest expense, net increased $4.7 million compared to the prior year, primarily due to the higher average debt balance, as well as the increase in weighted average interest rates in 2023 compared to 2022. The increase was driven primarily by the increased debt associated with the acquisition of Fox and the share repurchase completed in the third quarter.

We expect interest expense to continue to be elevated in the remainder of the year as we service the higher level of debt as a result of the Fox acquisition and share repurchase.

Other Income, Net

During the quarter ended September 30, 2023, other income decreased $1.5 million primarily due to lower gains on asset sales.

Income Taxes

The Company’s effective tax rate was 25.7% in the third quarter of 2023, and was in line with the same rate for the third quarter of 2022.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

			Nine Months Ended September 30,
															Variance
(in thousands, except per share data)			2023						2022						$			%
GAAP Metrics
Revenues			$	2,319,192					$	2,034,433					$	284,759		14.0		%
Gross profit (1)			$	1,219,626					$	1,054,117					$	165,509		15.7		%
Gross profit margin (1)			52.6		%				51.8		%				80 bps
Operating income			$	444,153					$	373,471					$	70,682		18.9		%
Operating income margin			19.2		%				18.4		%				80 bps
Net income			$	326,154					$	284,329					$	41,825		14.7		%
EPS			$	0.66					$	0.58					$	0.08		13.8		%
Non-GAAP Metrics
Adjusted operating income (2)			$	459,872					$	373,471					$	86,401		23.1		%
Adjusted operating margin (2)			19.8		%				18.4		%				140 bps
Adjusted net income (2)			$	337,849					$	284,329					$	53,520		18.8		%
Adjusted EPS (2)			$	0.69					$	0.58					$	0.11		19.0		%
Adjusted EBITDA (2)			$	531,281					$	446,934					$	84,347		18.9		%
Adjusted EBITDA margin (2)			22.9		%				22.0		%				90 bps

(1) Exclusive of depreciation and amortization

(2) Amounts are non-GAAP financial measures. See "Non-GAAP Financial Measures" of this Form 10-Q for a discussion of non-GAAP financial metrics including a reconciliation of the most closely correlated GAAP measure.

ROLLINS, INC. AND SUBSIDIARIES

Revenues

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

Revenues for the nine months ended September 30, 2023 were $2.3 billion, an increase of $284.8 million, or 14.0%, from 2022 revenues of $2.0 billion. Organic revenue* growth was 8.4% and acquisitions added 5.6% in the nine months ended September 30, 2023. The stronger U.S. Dollar reduced year-to-date revenues by 30 basis points versus the same period a year ago. The currency headwind was primarily related to a stronger U.S. Dollar versus both the Canadian and Australian Dollar. Comparing 2023 to 2022, residential pest control revenue increased 16%, commercial pest control revenue increased 12% and termite and ancillary services grew 13%. The Company’s foreign operations accounted for approximately 7% of total revenues for the nine months ended September 30, 2023 and 2022.

Gross Profit (exclusive of Depreciation and Amortization)

Gross profit for the nine months ended September 30, 2023 was $1.2 billion, an increase of $165.5 million, or 15.7%, compared to $1.1 billion for the nine months ended September 30, 2022. Gross margin improved 80 basis points to 52.6% in 2023 compared to 51.8% in 2022. The recent acquisition of Fox was accretive to margins. Despite improvements in Q3, a less favorable claims experience decreased margins in the first nine months of the year. Excluding these items, we saw 60

ROLLINS, INC. AND SUBSIDIARIES

basis points of improvement in underlying margins, as pricing initiatives more than offset inflationary pressures across people-related costs, materials and supplies, and fleet-related costs, our most significant areas of cost of services.

Sales, General and Administrative

For the nine months ended September 30, 2023, SG&A expenses increased $84.3 million, or 13.8%, compared to the nine months ended September 30, 2022. As a percentage of revenue, SG&A expenses decreased slightly to 30.0% from 30.1% in the prior year.

Despite investing in additional people, advertising and other customer facing activities to drive growth, we saw an improvement in SG&A as a percentage of sales as we continue to manage our cost structure. Despite improvements in Q3, insurance and legacy claims related primarily to auto accidents continue to be a headwind to SG&A and SG&A as a percentage of sales.

Restructuring Costs

During the nine months ended September 30, 2023, we executed a restructuring program in the third quarter to modernize our workforce. This effort resulted in expense of approximately $5.2 million in the nine months ended September 30, 2023. The large majority of the costs incurred are related to severance-related costs for employees who were terminated as part of this effort. This adjustment allows us to make strategic improvements in our support functions.

Depreciation and Amortization

For the nine months ended September 30, 2023, depreciation and amortization increased $5.3 million, or 7.8%, compared to the nine months ended September 30, 2022. The increase was due to higher amortization of intangible assets from acquisitions, most notably Fox, offset by lower depreciation of operating equipment and internal-use software.

Operating Income

For the nine months ended September 30, 2023, operating income increased $70.7 million, or 18.9%, compared to the nine months ended September 30, 2022. As a percentage of revenue, operating income increased to 19.2% from 18.4% in the prior year. The improvement in operating income as a percentage of sales is driven by the changes in gross profit and SG&A noted above, offset by higher restructuring costs.

Interest Expense, Net

For the nine months ended September 30, 2023, interest expense, net increased $8.5 million, compared to the nine months ended September 30, 2022, due to the increase in the average debt balance associated primarily with the acquisition of Fox, and the share repurchase completed in the third quarter.

We expect interest expense to continue to be elevated in the remainder of the year as we service the higher level of debt as a result of the Fox acquisition and share repurchase.

Other Income, Net

During the nine months ended September 30, 2023, other income increased $1.1 million compared to the nine months ended September 30, 2022, due to gains on asset sales.

Income Taxes

During the nine months ended September 30, 2023, the Company’s effective tax rate increased to 25.8% compared to 24.5% in 2022 due to higher foreign income taxes.

ROLLINS, INC. AND SUBSIDIARIES

Non-GAAP Financial Measures

Reconciliation of GAAP and non-GAAP Financial Measures

The Company has used the non-GAAP financial measures of organic revenues, adjusted operating income, adjusted operating margin, adjusted net income, and adjusted earnings per share (“EPS”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, and free cash flow in this Form 10-Q. Organic revenue is calculated as revenue less acquisition revenue. Acquisition revenue is calculated as the trailing 12-month revenue of our acquired entities. Adjusted operating income and adjusted operating margin are calculated by adding back to the GAAP measures those expenses resulting from the amortization of certain intangible assets and adjustments to the fair value of contingent consideration resulting from the acquisition of Fox Pest Control and restructuring costs related to restructuring and workforce reduction plans. Adjusted EBITDA and adjusted EBITDA margin are calculated by adding back to the GAAP measures those expenses resulting from the adjustments to the fair value of contingent consideration resulting from the acquisition of Fox Pest Control and restructuring costs related to restructuring and workforce reduction plans. Adjusted net income and adjusted EPS are calculated by adding back those acquisition-related expenses and restructuring costs to the GAAP measures and by further subtracting the tax impact of those expenses. Free cash flow is calculated by subtracting capital expenditures from cash provided by operating activities. 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 adjusted operating income, adjusted operating margin, adjusted net income, adjusted EPS, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, and free cash flow as measures 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. Management uses free cash flow to demonstrate the Company’s ability to maintain its asset base and generate future cash flows from operations. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

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.

ROLLINS, INC. AND SUBSIDIARIES

Set forth below is a reconciliation of the non-GAAP financial measures contained in this report with their most comparable GAAP measures (in thousands, except per share data and margins).

			Three Months Ended September 30,												Variance												Nine Months Ended September 30,												Variance
			2023						2022 (5)						$						%						2023						2022 (5)						$						%
Reconciliation of Revenues to Organic Revenues
Revenues			$	840,427					$	729,704					110,723						15.2						$	2,319,192					$	2,034,433					284,759						14.0
Revenues from acquisitions			(49,971)						—						(49,971)						—						(114,273)						—						(114,273)						—
Organic revenues			$	790,456					$	729,704					60,752						8.4						$	2,204,919					$	2,034,433					170,486						8.4
Reconciliation of Operating Income to Adjusted Operating Income and Adjusted Operating Income Margin
Operating income			$	177,124					$	145,404																	$	444,153					$	373,471
Fox acquisition-related expenses (1)			5,262						—																		10,523						—
Restructuring costs (2)			5,196						—																		5,196						—
Adjusted operating income			$	187,582					$	145,404					42,178						29.0						$	459,872					$	373,471					86,401						23.1
Revenues			$	840,427					$	729,704																	$	2,319,192					$	2,034,433
Operating income margin			21.1		%				19.9		%																19.2		%				18.4		%
Adjusted operating margin			22.3		%				19.9		%																19.8		%				18.4		%
Reconciliation of Net Income to Adjusted Net Income and Adjusted EPS
Net income			$	127,777					$	108,943																	$	326,154					$	284,329
Fox acquisition-related expenses (1)			5,262						—																		10,523						—
Restructuring costs (2)			5,196						—																		5,196						—
Tax impact of adjustments (3)			(2,677)						—																		(4,024)						—
Adjusted net income			$	135,558					$	108,943					26,615						24.4						$	337,849					$	284,329					53,520						18.8
EPS - basic and diluted			$	0.26					$	0.22																	$	0.66					$	0.58
Fox acquisition-related expenses (1)			0.01						—																		0.02						—
Restructuring costs (2)			0.01						—																		0.01						—
Tax impact of adjustments (3)			(0.01)						—																		(0.01)						—
Adjusted EPS - basic and diluted (4)			$	0.28					$	0.22					0.06						27.3						$	0.69					$	0.58					0.11						19.0
Weighted average shares outstanding - basic			490,775						492,316																		491,980						492,285
Weighted average shares outstanding - diluted			490,965						492,430																		492,158						492,398
Reconciliation of Net Income to EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin
Net income			$	127,777					$	108,943																	$	326,154					$	284,329
Depreciation and amortization			24,668						22,561																		73,609						68,293
Interest expense, net			5,547						846																		10,797						2,294
Provision for income taxes			44,293						37,595																		113,428						92,018
EBITDA			$	202,285					$	169,945					32,340						19.0						$	523,988					$	446,934					77,054						17.2
Fox acquisition-related expenses (1)			1,050						—																		2,097						—
Restructuring costs (2)			5,196						—																		5,196						—
Adjusted EBITDA			$	208,531					$	169,945					38,586						22.7						$	531,281					$	446,934					84,347						18.9
Revenues			$	840,427					$	729,704																	$	2,319,192					$	2,034,433
EBITDA margin			24.1		%				23.3		%																22.6		%				22.0		%
Adjusted EBITDA margin			24.8		%				23.3		%																22.9		%				22.0		%
Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow
Net cash provided by operating activities			$	127,355					$	127,285																	$	375,541					$	342,537
Capital expenditures			(6,868)						(7,886)																		(21,279)						(22,921)
Free cash flow			$	120,487					$	119,399					1,088						0.9						$	354,262					$	319,616					34,646						10.8

(1) Consists of expenses resulting from the amortization of certain intangible assets and adjustments to the fair value of contingent consideration resulting from the acquisition of Fox Pest Control during the quarter. While we exclude such expenses in this non-GAAP measure, the revenue from the acquired company is reflected in this non-GAAP measure and the acquired assets contribute to revenue generation.

ROLLINS, INC. AND SUBSIDIARIES

(2) Restructuring costs consist of costs primarily related to severance and benefits paid to employees pursuant to restructuring and workforce reduction plans.

(3) The tax effect of the adjustments is calculated using the applicable statutory tax rates for the respective periods.

(4) In some cases, the sum of the individual EPS amounts may not equal total non-GAAP EPS calculations due to rounding.

(5) Certain condensed consolidated financial statement amounts relative to the prior period have been revised as detailed in our annual report on Form 10-K for the year ended December 31, 2022. The impact of this revision on the Company's previously reporting condensed consolidated financial statements for the three and nine months ended September 30, 2022, includes a decrease to depreciation and amortization expense of $1.7 million and $5.2 million, respectively, and an increase in the provision for income tax expense of $0.4 million and $1.2 million, respectively. This revision affects these specific line items and subtotals within the consolidated statements of income and cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Flow

The Company’s $142.2 million of total cash at September 30, 2023 is held at various banking institutions. Approximately $71.6 million is held in cash accounts at international bank institutions and the remaining $70.6 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 September 30, 2023, the Company had outstanding borrowings of $599.0 million under the Credit Facility. The aggregate effective interest rate on the debt outstanding as of September 30, 2023 was 6.4%. As of December 31, 2022, the Company had outstanding borrowings of $54.9 million under the previous Term Loan and there were no outstanding borrowings under the previous Revolving Commitment. The aggregate effective interest rate on the debt outstanding as of December 31, 2022 was 5.1%.

The Company maintains $71.7 million in letters of credit as of September 30, 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. 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.

ROLLINS, INC. AND SUBSIDIARIES

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

			Nine Months Ended September 30,												Variance
(in thousands)			2023						2022						$						%
Net cash provided by operating activities			$	375,541					$	342,537					33,004						9.6
Net cash used in investing activities			(362,334)						(123,378)						(238,956)						N/M
Net cash provided by (used in) financing activities			33,743						(196,285)						230,028						N/M
Effect of exchange rate on cash			(49)						(6,299)						6,250						N/M
Net increase in cash and cash equivalents			$	46,901					$	16,575					30,326						183.0

N/M - calculation not meaningful

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 $375.5 million and $342.5 million for the nine months ended September 30, 2023 and 2022, respectively. The $33.0 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 $362.3 million and $123.4 million for the nine months ended September 30, 2023 and 2022, respectively. Cash paid for acquisitions totaled $349.3 million for the nine months ended September 30, 2023, as compared to $110.4 million for the nine months ended September 30, 2022, driven primarily by the acquisition of Fox Pest Control. The Company invested $21.3 million in capital expenditures during the year, offset by $10.2 million in cash proceeds from the sale of assets, compared with $22.9 million of capital expenditures and $9.8 million in cash proceeds from asset sales in 2022. The Company’s investing activities were funded through existing cash balances, operating cash flows, and borrowings under the Credit Facility.

Cash Provided by or Used in Financing Activities

Cash provided by financing activities was $33.7 million during the nine months ended September 30, 2023, while cash of $196.3 million was used by financing activities in the prior year. A total of $191.8 million was paid in cash dividends ($0.39 per share) during the nine months ended September 30, 2023, compared to $147.6 million in cash dividends paid ($0.30 per share) during the nine months ended September 30, 2022. The Company made net borrowings under its credit agreements of $544.0 million during the nine months ended September 30, 2023, compared to net repayments of $30.0 million during 2022. In addition, the Company completed the repurchase of 8,724,100 of the shares of common stock from LOR, Inc ("LOR") for $300.0 million in conjunction with the transaction described below.

On September 6, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with LOR, and Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC, as representatives of the several underwriters named in Schedule I thereto (the “Underwriters”), relating to the sale by LOR of 38,724,100 shares of the Company’s common stock, par value $1.00 per share, at a public offering price of $34.39 per share (the “Offering”). In connection with the Offering, LOR granted the Underwriters an option to purchase up to an additional 5,785,714 shares of common stock (the “Optional Shares”). The Offering, including the sale of the Optional Shares, closed on September 11, 2023. The Company did not sell any shares in the Offering and did not receive any proceeds from the Offering.

In June 2023, concurrently with the execution of the Registration Rights Agreement, LOR paid $1.5 million to the Company and upon closing the Offering, LOR paid $3.5 million to the Company pursuant to the Registration Rights Agreement between the Company and LOR dated as of June 5, 2023. Pursuant to the Registration Rights Agreement, the Company will pay all costs, fees and expenses incident to the Company’s performance or compliance with the Registration Rights Agreement with respect to a total of five (5) requested offerings, and thereafter, LOR will be responsible for all such expenses in connection with any subsequent offering. These cash receipts are included in other financing activities.

ROLLINS, INC. AND SUBSIDIARIES

In 2012, the Company’s Board of Directors authorized the purchase of up to 5 million shares of the Company’s common stock. After adjustments for stock splits, the total authorized shares under the share repurchase plan are 16.9 million shares. The Company did not repurchase shares of its common stock on the open market during the first nine months of 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 program. The Company repurchased $12.3 million and $7.0 million of common stock for the nine months ended September 30, 2023 and 2022, respectively, from employees for the payment of taxes on vesting restricted shares.

In addition, the Form S-3 on file with the SEC registers $1.5 billion of the Company’s common stock, preferred stock, debt securities, depositary shares, warrants, rights, purchase contracts and units for future issuance. The Company may offer and sell some or all of such securities from to time or to or through underwriters, brokers or dealers, directly to one or more other purchasers, through a block trade, through agents on a best-efforts basis, through a combination of any of the above methods of sale or through other types of transactions described in the Form S-3. The Company has not sold any securities as of the date of this Form 10-Q.

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

Except as described below, there have been no significant changes in our identified critical accounting estimates as disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" of our 2022 Form 10-K. During the second quarter of 2023, we concluded to add business combination accounting as one of our critical accounting estimates.

Business Combinations

We account for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition date fair value. In valuing certain acquired assets and liabilities, fair value estimates use Level 3 inputs, including future expected cash flows and discount rates. Goodwill is measured as the excess of consideration transferred over the fair values of the

ROLLINS, INC. AND SUBSIDIARIES

assets acquired and the liabilities assumed. While we use our best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments arising from new facts and circumstances are recorded to the consolidated statements of operations. The results of operations of acquisitions are reflected in our consolidated financial statements from the date of acquisition.

Accounting for business combinations requires our management to make significant estimates and assumptions about intangible assets, assets and obligations assumed, contingent consideration, and other contingencies. Critical inputs and assumptions in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer contracts; the acquired Company’s trademarks & tradenames, and competitive position, as well as assumptions about the period of time the acquired trademarks & tradenames will continue to be used in the combined Company’s product portfolio; and discount rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions.

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: our healthy organic growth trajectory and our sense of optimism to start the fourth quarter; our progress on gross margin across our family of brands; our expectation that advertising spend, especially on a dollar basis, will be higher during our peak season to drive customer acquisition during such period; our expectation that interest expense will continue to be elevated in the remainder of the year as we service the higher level of debt as a result of the Fox acquisition; our belief that the Fox acquisition will expand the Rollins family of brands and drive long term value given Fox’s attractive financial profile and complementary end market exposure; our belief that recognized goodwill from the Fox acquisition and from acquisitions generally is expected to be deductible for tax purposes; our plans to exercise the renewal options on our vehicle leases; our belief that its accounting estimates and assumptions may materially change over time in future periods in response to economic trends; our belief that no pending claim, proceeding or litigation, regulatory action or investigation, either alone or in the aggregate, will have a material adverse effect on our financial position, results of operations or liquidity; our evaluation of pending and threatened claims and establishment of loss contingency reserves based upon outcomes it currently believes to be probable and reasonably estimable; our evaluations of a number of streamlining initiatives that are aimed at improving the effectiveness of our corporate office and supporting functions; our belief that we do 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 our results of operations, financial condition, or cash flows; our 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; our belief that our current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings under our Credit Facility will be sufficient to finance our 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; our international business expansion efforts and our intent 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, our expectations to repatriate unremitted foreign earnings from its foreign subsidiaries, and our plans to continue to be permanently reinvested with respect to its investments in our foreign subsidiaries; our belief that no changes in our internal control over financial reporting during the third quarter are reasonably likely to materially affect our internal control over financial reporting; our expectation that total unrecognized compensation cost related to restricted shares and PSUs will be recognized over a weighted average period of approximately 3.0 years; our conclusion that there are no impairments of its goodwill or other intangible assets; our belief that the factors contributing to the amount of goodwill are based on strategic and synergistic benefits that are expected to be realized; our belief that we have adequate liquid assets, funding sources and insurance accruals to accommodate potential future insurance claims; our belief that demand remains favorable to start the fourth quarter and that we continue to maintain a very healthy balance sheet that positions us well to continue to invest in growth programs across our business; our belief that we are positioned well to deliver strong operating results in 2023; and our 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 our future

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performance, and that we cannot reasonably estimate whether our current strategies will help mitigate the impact of these economic disruptors in the future.

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, including, but not limited to, risks regarding: our ability to maintain our competitive position in the pest control industry in the future; our inability to identify, complete or successfully integrate acquisitions or guarantee that any acquisitions will achieve the anticipated financial benefits; our ability to expand into international markets; our ability to maintain and enhance our brands and develop a positive client reputation; labor shortages and/or our ability to attract and retain skilled workers; climate change and unfavorable weather conditions; the effects of a pandemic, including the COVID-19 pandemic; adverse economic conditions; cybersecurity incidents; noncompliance with, changes to, or increased enforcement of federal, state and local laws and regulations pertaining to environmental, public health and safety matters, including those related to the pest control industry; and our capital and ownership structure. 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 above, in Item 1A "Risk Factors" of Part II of this Form 10-Q, and under Item 1.A. “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.