UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2021

Commission File Number 1-4422

ROLLINS, INC.

(Exact name of registrant as specified in its charter)

Delaware	51-0068479
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(Address of principal executive offices)

30324

(Zip Code)

(404) 888-2000

(Registrant’s telephone number, including area code)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		ROL		NYSE

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

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

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

Large Accelerated Filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o
		Emerging growth company	o

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

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

Yes

Rollins, Inc. had 492,079,290 shares of its $1 par value Common Stock outstanding as of July 16, 2021.

ROLLINS, INC. AND SUBSIDIARIES

PART 1 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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

(in thousands except share data)

(unaudited)

	June 30,			December 31,
	2021			2020
ASSETS
Cash and cash equivalents	$	128,528		$	98,477
Trade receivables, net of allowance for expected credit losses of $13,863 and $16,854 respectively		142,868			126,337
Financed receivables, short-term, net of allowance for expected credit losses of $1,635 and $1,297 respectively		25,431			23,716
Materials and supplies		29,952			30,843
Other current assets		49,546			35,404
Total current assets		376,325			314,777
Equipment and property, net of accumulated depreciation of $307,352 and $294,226, respectively		134,911			178,052
Goodwill		664,118			653,176
Customer contracts, net		291,976			298,949
Trademarks & tradenames, net		108,517			109,044
Other intangible assets, net		10,158			10,777
Operating lease, right-of-use assets		258,073			212,342
Financed receivables, long-term, net of allowance for expected credit losses of $2,706 and $1,934 respectively		43,837			38,187
Benefit plan assets		1,118			1,198
Deferred income taxes		2,653			2,222
Other assets		30,007			27,176
Total assets	$	1,921,693		$	1,845,900
LIABILITIES
Accounts payable	$	74,815		$	64,596
Accrued insurance		31,015			31,675
Accrued compensation and related liabilities		91,912			91,011
Unearned revenues		151,379			131,253
Operating lease liabilities - current		77,604			73,248
Current portion of long-term debt		18,750			17,188
Other current liabilities		73,269			63,540
Total current liabilities		518,744			472,511
Accrued insurance, less current portion		36,369			36,067
Operating lease liabilities, less current portion		182,804			140,897
Long-term debt		69,250			185,812
Deferred income tax liabilities		9,330			10,612
Long-term accrued liabilities		54,512			58,641
Total liabilities		871,009			904,540
Commitments and contingencies
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, 492,079,290 and 491,612,059 shares issued and outstanding, respectively		492,079			491,612
Paid in capital		98,842			101,757
Accumulated other comprehensive loss		(10,890	)		(10,897	)
Retained earnings		470,653			358,888
Total stockholders’ equity		1,050,684			941,360
Total liabilities and stockholders’ equity	$	1,921,693		$	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 SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(in thousands except per share data)

(unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
REVENUES
Customer services	$	638,204		$	553,329		$	1,173,758		$	1,041,230
COSTS AND EXPENSES
Cost of services provided		297,862			255,622			559,414			506,774
Depreciation and amortization		23,306			21,925			46,902			43,522
Sales, general and administrative		183,482			171,253			345,690			329,115
Gain on sale of assets, net		(891	)		(451	)		(33,151	)		(726	)
Interest expense, net		506			1,460			1,112			3,625
INCOME BEFORE INCOME TAXES		133,939			103,520			253,791			158,920
PROVISION FOR INCOME TAXES		35,085			28,162			62,294			40,294
NET INCOME	$	98,854		$	75,358		$	191,497		$	118,626
NET INCOME PER SHARE - BASIC AND DILUTED	$	0.20		$	0.15		$	0.39		$	0.24
DIVIDENDS PAID PER SHARE	$	0.08		$	0.05		$	0.16		$	0.13
Weighted average shares outstanding - basic and diluted		491,999			491,645			491,950			491,585

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(in thousands)

(unaudited)



	Three Months Ending					Six Months Ending
	June 30,					June 30,
	2021			2020		2021			2020
NET INCOME	$	98,854		$	75,358	$	191,497		$	118,626
Other comprehensive earnings / (loss)
Foreign currency translation adjustments		704			9,378		283			(7,490	)
Change in derivatives, net of tax		(439	)		170		(276	)		(564	)
Other comprehensive earnings / (loss)		265			9,548		7			(8,054	)
Comprehensive earnings	$	99,119		$	84,906	$	191,504		$	110,572

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

ROLLINS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(in thousands)

(unaudited)

										Accumulated Other
	Common Stock						Paid-in-			Comprehensive			Retained
	Shares			Amount			Capital			Income/ (Loss)			Earnings			Total
Balance at March 31, 2021		492,124		$	492,124		$	95,824		$	(11,155	)	$	412,142		$	988,935
Net Income														98,854			98,854
Other comprehensive income, net of tax:
Foreign currency translation adjustments											704						704
Change in derivatives											(439	)					(439	)
Cash dividends														(40,343	)		(40,343	)
Stock compensation		(18	)		(18	)		3,938									3,920
Employee stock buybacks		(27	)		(27	)		(920	)								(947	)
Balance at June 30, 2021		492,079		$	492,079		$	98,842		$	(10,890	)	$	470,653		$	1,050,684

										Accumulated Other
	Common Stock						Paid-in-			Comprehensive			Retained
	Shares			Amount			Capital			Income/ (Loss)			Earnings			Total
Balance at March 31, 2020		491,651		$	491,651		$	84,865		$	(38,711	)	$	262,566		$	800,371
Net Income														75,358			75,358
Other comprehensive income, net of tax:
Foreign currency translation adjustments											9,378						9,378
Change in derivatives											170						170
Cash dividends														(26,214	)		(26,214	)
Stock compensation		(6	)		(6	)		3,827									3,821
Employee stock buybacks		(2	)		(2	)		(52	)								(54	)
Balance at June 30, 2020		491,643		$	491,643		$	88,640		$	(29,163	)	$	311,710		$	862,830

										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														191,497			191,497
Other comprehensive income, net of tax:
Foreign currency translation adjustments											283						283
Change in derivatives											(276	)					(276	)
Cash dividends														(79,732	)		(79,732	)
Stock compensation		750			750			7,091									7,841
Employee stock buybacks		(283	)		(283	)		(10,006	)								(10,289	)
Balance at June 30, 2021		492,079		$	492,079		$	98,842		$	(10,890	)	$	470,653		$	1,050,684

										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														118,626			118,626
Other comprehensive income, net of tax:
Foreign currency translation adjustments											(7,490	)					(7,490	)
Change in derivatives											(564	)					(564	)
Cash dividends														(65,531	)		(65,531	)
Stock compensation		827			827			7,091						(278	)		7,640
Employee stock buybacks		(330	)		(330	)		(7,864	)					109			(8,085	)
Balance at June 30, 2020		491,643		$	491,643		$	88,640		$	(29,163	)	$	311,710		$	862,830

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

ROLLINS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(in thousands)

(unaudited)


	Six Months Ending
	June 30,
	2021			2020
OPERATING ACTIVITIES
Net income	$	191,497		$	118,626
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		46,902			43,522
Provision for deferred income taxes		(1,715	)		3,055
Provision for expected credit losses		4,673			9,769
Gain on sale of assets, net		(33,151	)		(726	)
Stock based compensation expense		7,841			7,640
Other, net		(62	)		(352	)
Changes in operating assets and liabilities		3,220			53,238
Net cash provided by operating activities		219,205			234,772
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired		(28,385	)		(56,030	)
Purchases of equipment and property		(13,229	)		(12,441	)
Proceeds from sales of assets		70,414			1,330
Proceeds from sales of franchises		99			285
Other, net		(274	)		490
Net cash provided by/(used in) investing activities		28,625			(66,366	)
FINANCING ACTIVITIES
Payment of contingent consideration		(12,873	)		(7,862	)
Borrowings under revolving commitment		49,500			68,000
Repayments of term loan		(48,000	)		(7,000	)
Repayments of revolving commitment		(116,500	)		(97,500	)
Payment of dividends		(79,732	)		(65,531	)
Cash paid for common stock purchased		(10,289	)		(8,085	)
Net cash used in financing activities		(217,894	)		(117,978	)
Effect of exchange rate changes on cash		115			(9,875	)
Net increase in cash and cash equivalents		30,051			40,553
Cash and cash equivalents at beginning of period		98,477			94,276
Cash and cash equivalents at end of period	$	128,528		$	134,829
Supplemental disclosure of cash flow information:
Non-cash additions to operating lease right-of-use assets	$	86,954		$	52,273

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, which includes future costs including termiticide life expectancy and government regulations, the insurance accrual, which includes self-insurance and worker’s compensation, 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 but does not expect the adoption of the standard to have a material impact on the Company’s 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 consolidated financial statements.

ROLLINS, INC. AND SUBSIDIARIES

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.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2021		2020		2021		2020
United States	$	589,935	$	517,576	$	1,084,035	$	969,922
Other countries		48,269		35,753		89,723		71,308
Total Revenues	$	638,204	$	553,329	$	1,173,758	$	1,041,230

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


	Three Months Ending				Six Months Ending
	June 30,				June 30,
(in thousands)	2021		2020		2021		2020
Residential revenue	$	292,945	$	257,921	$	528,124	$	462,578
Commercial revenue		210,838		179,900		399,535		363,215
Termite completions, bait monitoring, & renewals		127,674		109,817		233,368		204,044
Franchise revenues		4,111		3,521		7,570		6,938
Other revenues		2,636		2,170		5,161		4,455
Total Revenues	$	638,204	$	553,329	$	1,173,758	$	1,041,230

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

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 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 doubtful accounts when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. The Company stops accruing interest to these receivables when they are deemed uncollectible. Below is a roll forward of the Company’s allowance for credit losses for the three and six months ended June 30, 2021 and 2020.

ROLLINS, INC. AND SUBSIDIARIES


		(in thousands)
		Allowance for Credit Losses
		Trade			Financed			Total
		Receivables			Receivables			Receivables
Beginning Balance	Balance at March 31, 2021	$	15,731		$	3,370		$	19,101
	Provision for expected credit losses		369			1,618			1,987
	Write-offs charged against the allowance		(3,650	)		(645	)		(4,295	)
	Recoveries collected		1,413			(2	)		1,411
Ending Balance	Balance at June 30, 2021	$	13,863		$	4,341		$	18,204

		Allowance for Credit Losses
		Trade			Financed			Total
		Receivables			Receivables			Receivables
Beginning Balance	Balance at December 31, 2020	$	16,854		$	3,231		$	20,085
	Provision for expected credit losses		2,234			2,439			4,673
	Write-offs charged against the allowance		(7,749	)		(1,326	)		(9,075	)
	Recoveries collected		2,524			(3	)		2,521
Ending Balance	Balance at June 30, 2021	$	13,863		$	4,341		$	18,204

		Allowance for Credit Losses
		Trade			Financed			Total
		Receivables			Receivables			Receivables
Beginning Balance	Balance at March 31, 2020	$	11,861		$	3,053		$	14,914
	Provision for expected credit losses		6,927			554			7,481
	Write-offs charged against the allowance		(4,454	)		(593	)		(5,047	)
	Recoveries collected		2,118			—			2,118
Ending Balance	Balance at June 30, 2020	$	16,452		$	3,014		$	19,466

		Allowance for Credit Losses
		Trade			Financed			Total
		Receivables			Receivables			Receivables
Beginning Balance	Balance at December 31, 2019	$	16,699		$	2,959		$	19,658
	Adoption of ASC 326		(3,330	)		—			(3,330	)
	Provision for expected credit losses		8,480			1,288			9,768
	Write-offs charged against the allowance		(8,233	)		(1,233	)		(9,466	)
	Recoveries collected		2,836			—			2,836
Ending Balance	Balance at June 30, 2020	$	16,452		$	3,014		$	19,466

NOTE 5.

EARNINGS PER SHARE

The Company follows ASC 260, Earnings Per Share that requires the reporting of 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 Ending				Six Months Ending
	June 30,				June 30,
	2021		2020		2021		2020
Basic and diluted earnings per share
Common stock	$	0.20	$	0.15	$	0.39	$	0.24
Restricted shares of common stock	$	0.20	$	0.15	$	0.39	$	0.23

NOTE 6.

CONTINGENCIES

In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits, claims, arbitrations, regulatory actions or investigations which allege that the subsidiaries’ services caused damage or in evaluating the Company’s practices. In addition, the Company defends employment-related cases and claims from time to time. We are involved in certain environmental matters primarily arising in the normal course of business. We are actively contesting each of these matters.

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

NOTE 7.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, 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 quarter ending June 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 approximates their amortized cost.

As of June 30, 2021 and 2020, the Company had $27.1 million and $47.1 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						Six Months Ended
	June 30,						June 30,
(in thousands)	2021			2020			2021			2020
Beginning	$	32,976		$	51,328		$	35,744		$	49,131
New acquisitions and revaluations		1,906			1,054			3,973			5,543
Payouts		(7,947	)		(5,822	)		(12,873	)		(7,862	)
Interest on outstanding contingencies		258			565			537			1,148
Charge offset, forfeit and other		(136	)		(40	)		(324	)		(875	)
Ending Balance	$	27,057		$	47,085		$	27,057		$	47,085

ROLLINS, INC. AND SUBSIDIARIES

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 and six months ended June 30, 2021 and 2020 were $46.5 million and $43.2 million, respectively and $92.3 million and $85.9 million respectively. Changes in unearned revenue were as follows:

Changes in unearned revenue


	Six Months Ended June 30,
(in thousands)	2021			2020
Balance at beginning of year	$	149,224		$	136,507
Deferral of unearned revenue		116,034			105,928
Recognition of unearned revenue		(92,307	)		(85,936	)
Balance at end of period	$	172,951		$	156,499

As of June 30, 2021 and December 31, 2020, the Company had long-term unearned revenue of $21.6 million and $18.0 million, respectively. Unearned short-term revenue is recognized over the next 12-month period. The majority of unearned long-term revenue is recognized over a period of five years or less with immaterial amounts recognized through 2029.

NOTE 9.

LEASES

The Company leases certain buildings, vehicles, and equipment in order to reduce the risk associated with ownership. The Company elected the practical expedient approach permitted under ASC 842 not to include short-term leases with a duration of 12 months or less on the balance sheet. As of June 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 six months ended June 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 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.

Schedule of Lease Classification

(in thousands, except Other Information)
		Three Months Ended June 30,				Six Months Ended June 30,

Lease Classification	Financial Statement Classification	2021		2020		2021		2020
Short-term lease cost	Cost of services provided, Sales, general, and administrative expenses	$	60	$	57	$	125	$	133
Operating lease cost	Cost of services provided, Sales, general, and administrative expenses		22,634		21,307		46,025		42,024
Total lease expense		$	22,694	$	21,364	$	46,150	$	42,157

Other Information
Weighted-average remaining lease term – operating leases							5.59 years		3.78 years
Weighted-average discount rate – operating leases							3.75%		3.93%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases						$	45,498	$	41,599

ROLLINS, INC. AND SUBSIDIARIES

Lease Commitments

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

(in thousands)
2021 (excluding the six months ended June 30, 2021)	$	44,958
2022		76,537
2023		56,663
2024		33,021
2025		18,425
2026		12,612
Thereafter		51,645
Total Future Minimum Lease Payments		293,861
Less: Amount representing interest		(33,453	)
Total future minimum lease payments, net of interest	$	260,408

Future commitments presented in the table above include lease payments in renewal periods for which it is reasonably certain that the Company will exercise the renewal option. Total future minimum lease payments for operating leases, including the amount representing interest, are comprised of $163.1 million for building leases and $130.7 million for vehicle leases. As of June 30, 2021, the Company had additional future obligations of $6.8 million for leases that had not yet commenced.

NOTE 10.

GOODWILL AND INTANGIBLE ASSETS

The cumulative carrying amount of goodwill was $664.1 million and $653.2 million as of June 30, 2021 and December 31, 2020, respectively. Goodwill generally changes due to the timing of acquisitions, finalization of allocation of purchase prices of previous acquisitions and foreign currency translations. During the six months ended June 30, 2021, goodwill increased $11.7 million due to acquisitions and decreased $0.8 million due to foreign currency translation. The carrying amount of goodwill in foreign countries was $81.1 million as of June 30, 2021 and $81.4 million as of December 31, 2020.

The Company tests goodwill and indefinite-lived intangible assets as of September 30 each year, or more frequently if indicators of an impairment exist. The Company has concluded there were no indicators of impairment during the six months ended June 30, 2021.

The carrying amount of customer contracts was $292.0 million and $298.9 million as of June 30, 2021, and December 31, 2020, respectively. The carrying amount of trademarks and tradenames was $108.5 million and $109.0 million as of June 30, 2021 and December 31, 2020, respectively. The carrying amount of other intangible assets was $10.2 million and $10.8 million as of June 30, 2021 and December 31, 2020, respectively. The carrying amount of customer contracts in foreign countries was $43.1 million and $45.7 million as of June 30, 2021 and December 31, 2020, respectively. The carrying amount of trademarks and tradenames in foreign countries was $3.1 million and $3.3 million as of June 30, 2021 and December 31, 2020, respectively. The carrying amount of other intangible assets in foreign countries was $0.9 million and $1.0 million as of June 30, 2021 and December 31, 2020, respectively.

ROLLINS, INC. AND SUBSIDIARIES

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

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

	Carrying Value		Useful Life in Years
Amortizable intangible assets:
Customer contracts	$	291,976	3-20
Trademarks and tradenames		14,313	7-20
Non-compete agreements		4,483	3-20
Patents		1,443	3-15
Other assets		587	10
Total amortizable intangible assets		312,802
Indefinite-lived intangible assets:
Trademarks and tradenames		94,204
Internet domains		2,227
Other assets		1,418
Total indefinite-lived intangible assets		97,849
Total customer contracts and other intangible assets	$	410,651

NOTE 11.

DEBT

On April 30, 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 with Truist Bank, N.A., and Bank of America, N.A (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 June 30, 2021, the Term Loan had outstanding borrowings of $88.0 million and there were no borrowings under the Revolving Commitment. The effective interest rate on the debt outstanding as of June 30, 2021 was 0.854%. 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 six months ended June 30, 2021, the Company paid $79.7 million, or $0.16 per share, in cash dividends compared to $65.5 million, or $0.13 per share, during the same period in 2020.

During the second quarter ended June 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 $0.1 million for the quarters ended June 30, 2021 and 2020, and $10.3 million and $8.1 million during the six-month period ended June 30, 2021 and 2020 respectively.

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 June 30, 2021, approximately 6.6 million shares of the Company’s common stock were reserved for issuance.

ROLLINS, INC. AND SUBSIDIARIES

Time Lapse Restricted Shares

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2021			2020			2021			2020
Time lapse restricted stock:
Pre-tax compensation expense	$	3,920		$	3,821		$	7,841		$	7,640
Tax benefit		(1,039	)		(1,100	)		(1,925	)		(1,937	)
Restricted stock expense, net of tax	$	2,881		$	2,721		$	5,916		$	5,703

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

(number of shares in thousands)	Number of Shares			Average Grant- Date Fair Value
Unvested Restricted Stock at December 31, 2020		2,870		$	20.36
Forfeited		(34	)		22.62
Vested		(826	)		16.22
Granted		778			37.04
Unvested Restricted Stock at June 30, 2021		2,788		$	26.14

As of June 30, 2021 and December 31, 2020, the Company had $60.9 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 4.3 years and 3.8 years, respectively.

NOTE 13.

PENSION PLAN

In September 2019, the Company settled its fully-funded Rollins, Inc. pension plan. As of June 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 $2.1 million, a projected liability of $3.0 million and an unfunded status of $0.9 million as of June 30, 2021. The Company has not made contributions to its defined benefit retirement plans since 2019.

ROLLINS, INC. AND SUBSIDIARIES

NOTE 14.

BUSINESS COMBINATIONS

The Company made 18 acquisitions during the six-month period ended June 30, 2021, and 31 acquisitions for the year ended December 31, 2020. For the 18 acquisitions completed through June 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):

	June 30, 2021
Accounts receivable, net	$	504
Materials and supplies		128
Equipment and property		1,613
Goodwill		11,732
Customer contracts		17,994
Other intangible assets		291
Current liabilities		(142	)
Other assets and liabilities, net		163
Total consideration paid	$	32,283
Less: Contingent consideration liability		(3,898	)
Total cash purchase price	$	28,385

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 June 30, 2021, $11.7 million of goodwill was added related to the 18 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 June 30, 2021 and December 31, 2020 were $20.0 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 six months ended June 30, 2021, a gain of $0.3 million was recorded in AOCI, compared to a loss of $0.6 million for the six months ended June 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 six months ended June 30, 2021, the Company reclassified into interest expense $0.1 million and $0.3 million, respectively. The fair value of the Company’s interest rate swaps was recorded as $0.1 million in Other Current Liabilities as of June 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.

ROLLINS, INC. AND SUBSIDIARIES

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 a net gain of $0.2 million and a net loss of $0.3 million for the quarters ended June 30, 2021 and 2020, respectively, and net gains of $0.4 million and $0.8 million for the six months ended June 30, 2021 and 2020, respectively. The fair values of the Company’s FX Forwards were recorded as net obligations of $0.2 million and $0.4 million in Other Current Liabilities as of June 30, 2021 and December 31, 2020, respectively.

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


Non-Designated Derivative Summary
	Number of
FX Forward Contracts	Instruments		Sell Notional		Buy Notional
Sell AUD/Buy USD Fwd Contract		7	$	700	$	522
Sell CAD/Buy USD Fwd Contract		7	$	8,000	$	6,217
Total		14			$	6,739

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

NOTE 16.

SUBSEQUENT EVENTS

On July 27, 2021, the Company’s Board of Directors declared a regular quarterly cash dividend on its common stock of $0.08 per share payable on September 10, 2021 to stockholders of record at the close of business on August 10, 2021.

ROLLINS, INC. AND SUBSIDIARIES

ITEM 2.

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

The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this quarterly report on Form 10-Q.

KEY PERSONNEL CHANGES:

On July 27, 2021, the Company’s Board of Directors appointed Julie Bimmerman to serve as the Company’s Interim Chief Financial Officer and Treasurer to assume the duties of principal financial officer and principal accounting officer. The Company’s current Chief Financial Officer and Treasurer, Paul E. Northern, transferred into an operational role as Senior Vice President focused on sustainability, also effective July 27, 2021.

COVID-19:

The global spread and unprecedented impact of the COVID-19 pandemic (“COVID-19”) continues to create significant volatility, uncertainty and economic disruption around the world. In 2020, the pest control industry was designated as “essential” by the Department of Homeland Security and as a result, the Company has been able to remain operational in every part of the world in which it operates. With the recent availability of vaccinations, many COVID-19 restrictions have been lifted; however, the discovery and increased spread of new COVID-19 variants may result in additional restrictions being imposed. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take actions that may alter our operations, including those that may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees and customers. We do not know when, or if, it will become practical to relax or eliminate some or all these measures entirely as there is no guarantee that COVID-19 will be fully contained.

The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements. The Company considered the impact of COVID-19 on the assumptions and estimates used in preparing the condensed consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the quarter have been made. These adjustments are of a normal recurring nature but complicated by the uncertainty surrounding the global economic impact of COVID-19. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of results for the entire year. The severity, magnitude and duration, as well as the economic consequences of COVID-19, are uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods.

Results of Operations:

THREE MONTHS ENDED JUNE 30, 2021 COMPARED TO THREE MONTHS ENDED JUNE 30, 2020

Revenue

Revenues for

SEC Form 10-Q filed by Rollins, Inc.