ROLLINS INC [ROL] Filings

10-Q 1 rol-20220331x10q.htm 10-Q

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 March 31, 2022

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 ☒ No ☐

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 ☒ No ☐

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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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. ☐

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

☐
Yes	☐	No	☒

Rollins, Inc. had 492,460,649 shares of its $1 par value Common Stock outstanding as of April 15, 2022.

ROLLINS, INC. AND SUBSIDIARIES

PART 1 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF MARCH 31, 2022, AND DECEMBER 31, 2021

(in thousands except share data)

(unaudited)


	March 31,		December 31,
	2022		2021
ASSETS
Cash and cash equivalents	$	258,338	$	105,301
Trade receivables, net of allowance for expected credit losses of $14,170 and $13,885, respectively		137,621		139,579
Financed receivables, short-term, net of allowance for expected credit losses of $1,236 and $1,463, respectively		26,631		26,152
Materials and supplies		29,062		28,926
Other current assets		44,860		52,422
Total current assets		496,512		352,380
Equipment and property, net of accumulated depreciation of $321,122 and $315,891, respectively		132,680		133,257
Goodwill		730,139		721,819
Customer contracts, net		318,806		325,929
Trademarks & tradenames, net		109,520		108,976
Other intangible assets, net		10,090		11,679
Operating lease right-of-use assets		241,043		244,784
Financed receivables, long-term, net of allowance for expected credit losses of $2,614 and $2,522, respectively		46,192		47,097
Other assets		46,161		34,949
Total assets	$	2,131,143	$	1,980,870
LIABILITIES
Accounts payable	$	38,586	$	44,568
Accrued insurance		37,724		36,414
Accrued compensation and related liabilities		76,291		97,862
Unearned revenues		156,516		145,122
Operating lease liabilities - current		74,463		75,240
Current portion of long-term debt		15,000		18,750
Other current liabilities		82,317		73,206
Total current liabilities		480,897		491,162
Accrued insurance, less current portion		32,218		31,545
Operating lease liabilities, less current portion		169,839		172,520
Long-term debt		280,783		136,250
Other long-term accrued liabilities		59,877		67,345
Total liabilities		1,023,614		898,822
Commitments and contingencies (see Note 11)
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, 492,460,649 and 491,911,087 shares issued and outstanding, respectively		492,461		491,911
Additional paid in capital		104,783		105,629
Accumulated other comprehensive loss		(13,874)		(16,411)
Retained earnings		524,159		500,919
Total stockholders’ equity		1,107,529		1,082,048
Total liabilities and stockholders’ equity	$	2,131,143	$	1,980,870

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 MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands except per share data)

(unaudited)


	Three Months Ended
	March 31,
	2022		2021
REVENUES
Customer services	$	590,680	$	535,554
COSTS AND EXPENSES
Cost of services provided (exclusive of depreciation and amortization below)		295,378		261,552
Sales, general and administrative		178,785		162,208
Depreciation and amortization		24,847		23,596
Total operating expenses		499,010		447,356
OPERATING INCOME		91,670		88,198
Interest expense, net		568		606
Other income, net		(1,279)		(32,260)
CONSOLIDATED INCOME BEFORE INCOME TAXES		92,381		119,852
PROVISION FOR INCOME TAXES		19,936		27,209
NET INCOME	$	72,445	$	92,643
NET INCOME PER SHARE - BASIC AND DILUTED	$	0.15	$	0.19
Weighted average shares outstanding - basic		492,213		492,003
Weighted average shares outstanding - diluted		492,325		492,003
DIVIDENDS PAID PER SHARE	$	0.10	$	0.08

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2022		2021
NET INCOME	$	72,445	$	92,643
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		3,127		(421)
Unrealized loss on available for sale securities		(590)		—
Change in derivatives		—		163
Other comprehensive income (loss), net of tax		2,537		(258)
Comprehensive income	$	74,982	$	92,385

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands)

(unaudited)


						Accumulated Other
	Common Stock			Paid-in-		Comprehensive		Retained
	Shares	Amount		Capital		Income / (Loss)		Earnings		Total
Balance at December 31, 2021	491,911	$	491,911	$	105,629	$	(16,411)	$	500,919	$	1,082,048
Net Income	—		—		—		—		72,445		72,445
Other comprehensive income / (loss), net of tax:
Foreign currency translation adjustments	—		—		—		3,127		—		3,127
Unrealized losses on available for sale securities	—		—		—		(590)		—		(590)
Cash dividends	—		—		—		—		(49,205)		(49,205)
Stock compensation	757		757		5,381		—		—		6,138
Employee stock buybacks	(207)		(207)		(6,227)		—		—		(6,434)
Balance at March 31, 2022	492,461	$	492,461	$	104,783	$	(13,874)	$	524,159	$	1,107,529


						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	—		—		—		—		92,643		92,643
Other comprehensive income / (loss), net of tax:
Foreign currency translation adjustments	—		—		—		(421)		—		(421)
Change in derivatives	—		—		—		163		—		163
Cash dividends	—		—		—		—		(39,389)		(39,389)
Stock compensation	768		768		3,153		—		—		3,921
Employee stock buybacks	(256)		(256)		(9,086)		—		—		(9,342)
Balance at March 31, 2021	492,124	$	492,124	$	95,824	$	(11,155)	$	412,142	$	988,935

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2022		2021
OPERATING ACTIVITIES
Net income	$	72,445	$	92,643
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,847		23,596
Stock-based compensation expense		6,138		3,921
Provision for expected credit losses		4,257		2,686
Gain on sale of assets, net		(1,279)		(32,260)
Provision for deferred income taxes		2,046		(2,039)
Changes in operating assets and liabilities:
Trade accounts receivable and other accounts receivable		(1,440)		471
Financing receivables		(707)		624
Materials and supplies		151		(2,011)
Other current assets		(3,629)		(4,604)
Accounts payable and accrued expenses		(16,934)		26,618
Unearned revenue		11,294		9,680
Other long-term assets and liabilities		(9,657)		161
Net cash provided by operating activities		87,532		119,486
INVESTING ACTIVITIES
Acquisitions, net of cash acquired		(13,223)		(16,978)
Capital expenditures		(7,995)		(7,826)
Proceeds from sale of assets		1,290		65,101
Other investing activities, net		—		(154)
Net cash (used in) provided by investing activities		(19,928)		40,143
FINANCING ACTIVITIES
Payment of contingent consideration		(3,051)		(4,926)
Borrowings under term loan		251,783		—
Borrowings under revolving commitment		11,000		3,500
Repayments of term loan		(4,000)		(21,000)
Repayments of revolving commitment		(118,000)		(70,500)
Payment of dividends		(49,205)		(39,389)
Cash paid for common stock purchased		(6,434)		(9,342)
Net cash provided by (used in) financing activities		82,093		(141,657)
Effect of exchange rate changes on cash		3,340		873
Net increase in cash and cash equivalents		153,037		18,845
Cash and cash equivalents at beginning of period		105,301		98,477
Cash and cash equivalents at end of period	$	258,338	$	117,322
Supplemental disclosure of cash flow information:
Cash paid for interest	$	753	$	663
Cash paid for income taxes, net	$	11,962	$	719
Non-cash additions to operating lease right-of-use assets	$	17,937	$	60,389

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

ROLLINS, INC. AND SUBSIDIARIES

NOTE 1.BASIS OF PREPARATION

Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, the instructions to Form 10-Q and applicable sections of SEC regulation S-X, 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 have been no material changes in the Company’s significant accounting policies or 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, 2021. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2021 Annual Report on Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and certain financial statement disclosures. Estimates and assumptions are used for, but not limited to, accrued insurance, revenue recognition, right-of-use ("ROU") asset and liability valuations, accounts and financing receivable reserves, inventory valuation, employee benefit plans, income tax contingency accruals and valuation allowances, contingency accruals and goodwill and other intangible asset valuations. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from these estimates and assumptions.

The Company considered the impact of COVID-19 on the assumptions and estimates used in preparing the consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the quarter have been made. These adjustments are of a normal recurring nature but complicated by the continued uncertainty surrounding the global economic impact of COVID-19. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of results for future years. The severity, magnitude and duration, as well as the economic consequences of COVID-19, are uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods.

The Company operates as one reportable segment and the results of operations and its financial condition are not reliant upon any single customer.

NOTE 2.RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting standards

In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance.” The amendments in this Update require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Accounting standards issued but not yet adopted

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The amendments in this Update eliminate the accounting guidance for troubled

ROLLINS, INC. AND SUBSIDIARIES

debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, for public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3.ACQUISITIONS

The Company made 8 acquisitions during the three-month period ended March 31, 2022, and 39 acquisitions for the year ended December 31, 2021. For the 8 acquisitions completed through March 31, 2022, 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):


	March 31, 2022
Accounts receivable, net	$	88
Materials and supplies		149
Equipment and property		1,148
Goodwill		4,455
Customer contracts		8,165
Trademarks & tradenames		2
Other intangible assets		405
Current liabilities		(30)
Other assets and liabilities, net		17
Total consideration paid	$	14,399
Less: Contingent consideration liability		(1,176)
Total cash purchase price	$	13,223

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 March 31, 2022, $4.5 million of goodwill was added related to the 8 acquisitions noted above. The recognized goodwill is expected to be deductible for tax purposes. The purchase price allocations for these acquisitions are preliminary until the Company obtains final information regarding these fair values.

NOTE 4.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
	March 31,
	2022		2021
(in thousands)
United States	$	546,460	$	494,100
Other countries		44,220		41,454
Total Revenues	$	590,680	$	535,554

ROLLINS, INC. AND SUBSIDIARIES

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


	Three Months Ended
	March 31,
(in thousands)	2022		2021
Residential revenue	$	259,259	$	235,179
Commercial revenue		205,787		188,697
Termite completions, bait monitoring, & renewals		119,706		105,694
Franchise revenues		3,737		3,459
Other revenues		2,191		2,525
Total Revenues	$	590,680	$	535,554

The Company records unearned revenue when we have either received payment or contractually have the right to bill for services in advance of the services or performance obligations being performed. Deferred revenue recognized in the three months ended March 31, 2022 and 2021 was $49.9 million and $45.8 million, respectively. Changes in unearned revenue were as follows:


	Three Months Ended March 31,
	2022		2021
(in thousands)
Beginning balance	$	168,607	$	149,224
Deferral of unearned revenue		61,635		55,379
Recognition of unearned revenue		(49,909)		(45,837)
Ending balance	$	180,333	$	158,766

As of March 31, 2022, and December 31, 2021, the Company had long-term unearned revenue of $23.8 million and $18.4 million, respectively, recorded in other long-term accrued liabilities. Unearned short-term revenue is recognized over the next 12-month period. The majority of unearned long-term revenue is recognized over a period of five years or less with immaterial amounts recognized through 2032.

NOTE 5.ALLOWANCE FOR CREDIT LOSSES

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

The Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risks. The Company’s established credit evaluation and monitoring procedures seek to minimize the amount of business we conduct with higher risk customers. The credit quality of a potential obligor is evaluated at the loan origination based on an assessment of the individual’s Beacon/credit bureau score. Rollins requires a potential obligor to have good credit worthiness with low risk before entering into a contract. Depending upon the individual’s credit score, the Company may accept with 100% financing or require a significant down payment or turn down the contract. Delinquencies of accounts are monitored each month. Financing receivables include installment receivable amounts, some of which are due subsequent to one year from the balance sheet dates.

The Company’s allowances for credit losses for trade accounts receivable and financed receivables are developed using historical collection experience, current economic and market conditions, reasonable and supportable forecasts, and a review of the current status of customers’ receivables. The Company’s receivable pools are classified between residential customers, commercial customers, large commercial customers, and financed receivables. Accounts are written-off against

ROLLINS, INC. AND SUBSIDIARIES

the allowance for credit losses when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. The Company stops accruing interest to these receivables when they are deemed uncollectible. Below is a roll forward of the Company’s allowance for credit losses for the three months ended March 31, 2022 and 2021 (in thousands).



	Allowance for Credit Losses
	Trade		Financed		Total
	Receivables		Receivables		Receivables
Balance at December 31, 2021	$	13,885	$	3,985	$	17,870
Provision for expected credit losses		3,204		1,054		4,258
Write-offs charged against the allowance		(4,248)		(1,189)		(5,437)
Recoveries collected		1,329		—		1,329
Balance at March 31, 2022	$	14,170	$	3,850	$	18,020


	Allowance for Credit Losses
	Trade		Financed		Total
	Receivables		Receivables		Receivables
Balance at December 31, 2020	$	16,854	$	3,231	$	20,085
Provision for expected credit losses		1,865		821		2,686
Write-offs charged against the allowance		(4,099)		(682)		(4,781)
Recoveries collected		1,111		—		1,111
Balance at March 31, 2021	$	15,731	$	3,370	$	19,101

NOTE 6.GOODWILL AND INTANGIBLE ASSETS

The following table summarizes changes in goodwill during the three months ended March 31, 2022 and the twelve months ended December 31, 2021:


Goodwill (in thousands):
Balance at December 31, 2020	$	653,176
Additions		69,264
Adjustments due to currency translation		(621)
Balance at December 31, 2021		721,819
Additions		4,455
Measurement adjustments		2,572
Adjustments due to currency translation		1,293
Balance at March 31, 2022	$	730,139

The carrying amount of goodwill in foreign countries was $83.3 million as of March 31, 2022 and $82.1 million as of December 31, 2021.

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

ROLLINS, INC. AND SUBSIDIARIES

The following table sets forth the components of indefinite-lived and amortizable intangible assets as of March 31, 2022 and December 31, 2021 (in thousands):



	March 31, 2022						December 31, 2021
			Accumulated		Carrying				Accumulated		Carrying			Useful Life
	Gross		Amortization		Value		Gross		Amortization			Value		in Years
Amortizable intangible assets:
Customer contracts	$	557,164	$	(238,358)	$	318,806	$	551,277	$	(225,348)		$	325,929	3-20
Trademarks and tradenames		12,904		(6,783)		6,121		12,784		(6,492)			6,292	7-20
Non-compete agreements		13,362		(6,364)		6,998		13,125		(5,573)			7,552	3-20
Patents		6,946		(6,502)		444		6,946		(5,509)			1,437	3-15
Other assets		2,217		(1,796)		421		2,150		(1,687)			463	10
Total amortizable intangible assets	$	592,593	$	(259,803)		332,790	$	586,282	$	(244,609)			341,673
Indefinite-lived intangible assets:
Trademarks and tradenames						103,399							102,684
Internet domains						2,227							2,227
Total indefinite-lived intangible assets						105,626							104,911
Total customer contracts and other intangible assets					$	438,416						$	446,584

The carrying amount of customer contracts in foreign countries was $40.9 million and $42.1 million as of March 31, 2022 and December 31, 2021, respectively. The carrying amount of trademarks and tradenames in foreign countries was $2.8 million and $2.9 million as of March 31, 2022 and December 31, 2021, respectively. The carrying amount of other intangible assets in foreign countries was $0.6 million and $0.7 million as of March 31, 2022 and December 31, 2021, respectively.

Amortization expense related to intangible assets was $15.1 million and $13.1 million for the three months ended March 31, 2022 and 2021, respectively. Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives.

Estimated amortization expense for the existing carrying amount of customer contracts and other intangible assets for each of the five succeeding fiscal years as of March 31, 2022 are as follows:


(in thousands)
2022 (excluding the three months ended March 31, 2022)	$	44,867
2023		55,441
2024		51,857
2025		42,806
2026		38,422

NOTE 7.LEASES

The Company leases certain buildings, vehicles, and equipment in order to reduce the risk associated with ownership and to maximize working capital utilization. The Company elected the practical expedient approach permitted under ASC 842 not to include short-term leases with a duration of 12 months or less on the balance sheet. As of March 31, 2022, and December 31, 2021, 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

ROLLINS, INC. AND SUBSIDIARIES

contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants.

During the three months ended March 31, 2021, the Company completed multiple sale-leaseback transactions where it sold 16 of its properties related to the Clark Pest Control acquisition for gross proceeds of $62.1 million and a pre-tax gain of $31.1 million, which is included as Other income, net on the income statement. These leases are classified as operating leases with terms of 7 to 15 years.

The Company uses the rate implicit in the lease when available; however, most of our leases do not provide a readily determinable implicit rate. Accordingly, we estimate our incremental borrowing rate based on information available at lease commencement.


		Three Months Ended March 31,
(in thousands, except Other Information)
Lease Classification	Financial Statement Classification	2022			2021
Short-term lease cost	Cost of services provided, Sales, general, and administrative expenses	$	26		$	60
Operating lease cost	Cost of services provided, Sales, general, and administrative expenses		24,023			22,634
Total lease expense		$	24,049		$	22,694

Other Information:
Weighted-average remaining lease term - operating leases			5.5 years			5.7 years
Weighted-average discount rate - operating leases			3.54	%		3.85	%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases		$	23,758		$	22,457

Lease Commitments

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


	Operating
(in thousands)
2022 (excluding the three months ended March 31, 2022)	$	62,839
2023		67,440
2024		43,519
2025		26,295
2026		16,493
2027		12,119
Thereafter		44,593
Total Future Minimum Lease Payments		273,298
Less: Amount representing interest		28,996
Total future minimum lease payments, net of interest	$	244,302

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 $163.3 million for building leases and $110.0 million for vehicle leases. As of March 31, 2022, the Company had additional future obligations of $9.5 million for leases that had not yet commenced.

ROLLINS, INC. AND SUBSIDIARIES

NOTE 8.FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, financed and notes receivable, accounts payable, other short-term liabilities, and debt. The carrying amounts of these financial instruments approximate their respective fair values. The Company also has derivative instruments as further discussed in Note 10. Derivative Instruments and Hedging Activities.

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.

As of March 31, 2022, and December 31, 2021, we had investments in international bonds of $13.0 million and $12.6 million, respectively. These bonds are accounted for as available for sale securities and are level 2 assets under the fair value hierarchy. At December 31, 2021, the entire investment was recorded in other current assets. At March 31, 2022, management reassessed their intentions on the investment and $0.5 million was included in other current assets and $12.5 million was included in other assets. The bonds are recorded at fair market value with unrealized losses of $0.6 million included in other comprehensive income during the three months ended March 31, 2022.

As of March 31, 2022 and December 31, 2021, the Company had $23.4 million and $25.2 million of acquisition holdback and earnout liabilities payable to former owners of acquired companies, respectively. 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
	March 31,
(in thousands)	2022		2021
Beginning balance	$	25,156	$	35,744
New acquisitions and revaluations		1,176		2,067
Payouts		(3,051)		(4,926)
Interest on outstanding contingencies		126		279
Charge offset, forfeit and other		(8)		(188)
Ending balance	$	23,399	$	32,976

NOTE 9.DEBT

In April 2019, the Company entered into a Revolving Credit Agreement with Truist Bank N.A. (formerly SunTrust Bank N.A.) and Bank of America, N.A. (the “Credit Agreement”) for an unsecured revolving commitment of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $25.0 million swingline subfacility (the “Revolving Commitment”), and an unsecured variable rate $250.0 million term loan (the “Term Loan”). On January 27, 2022, the Company entered into an amendment (the “Amendment”) to the Credit Agreement with Truist Bank and Bank of America, N.A whereby additional term loans in an aggregate principal amount of $252.0 million were advanced to the Company. The Amendment also replaced LIBOR as the benchmark interest rate for borrowings with the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) and reset the amortization schedule for all term loans under the Credit Agreement. The maturity of all loans made under the Credit Agreement prior to the Amendment remains unchanged at April 29, 2024 and all other terms of the Credit Agreement remain unchanged in all material respects. Subsequent to the Amendment, the aggregate outstanding principal balance of all term loans under the Credit Agreement was $300.0 million (consisting of an outstanding principal balance of the initial term loan in the amount of $48.0 million and the additional $252.0 million term loan borrowing made). In addition, the Credit Agreement has provisions to extend the term of the Revolving

ROLLINS, INC. AND SUBSIDIARIES

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 March 31, 2022, the Company had outstanding borrowings of $295.8 million under the Term Loan. The aggregate effective interest rate on the debt outstanding as of March 31, 2022 was 0.871%. The effective interest rate is comprised of the BSBY plus a margin of 75.0 basis points as determined by the Company’s leverage ratio calculation. As of December 31, 2021, the Revolving Commitment had outstanding borrowings of $107.0 million and the Term Loan had outstanding borrowings of $48.0 million.

The Company maintains approximately $71.3 million in letters of credit as of March 31, 2022. These letters of credit are required by the Company’s insurance companies, due to the Company’s high deductible insurance program, to secure various workers’ compensation and casualty insurance contracts coverage and were increased from $37.2 million as of December 31, 2021. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate such claims.

In order to comply with applicable debt covenants, the Company is required to maintain at all times a leverage ratio of not greater than 3.00:1.00. The Leverage Ratio is calculated as of the last day of the fiscal quarter most recently ended. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance throughout 2022.

NOTE 10.DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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.

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. We use foreign currency derivatives, specifically foreign currency forward contracts (“FX Forwards”), to manage our exposure to fluctuations in the USD-CAD and USD-AUD exchange rates. FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX Forwards are typically settled in US dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards were recorded in other income/expense and were equal to net losses of $0.1 million and $0.3 million for the quarters ended March 31, 2022 and 2021, respectively. The fair values of the Company’s FX Forwards were recorded as net obligations of $0.2 million and $0.0 million in Other Current Liabilities as of March 31, 2022 and December 31, 2021, respectively.

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

Non-Designated Derivative Summary


	Number of	Sell		Buy
FX Forward Contracts	Instruments	Notional		Notional
Sell AUD/Buy USD Fwd Contract	20	$	3,200	$	2,356
Sell CAD/Buy USD Fwd Contract	20		20,000		15,826
Total	40			$	18,182

ROLLINS, INC. AND SUBSIDIARIES

NOTE 11.CONTINGENCIES

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

As previously disclosed, the Securities and Exchange Commission (the “SEC”) conducted an investigation primarily focused on how the Company established accruals and reserves at period-ends for periods beginning January 1, 2016 through December 31, 2018 and the impact of certain adjustments to those accruals and reserves on reported earnings per share, specifically, in the first quarter of 2016 and the second quarter of 2017 (the “SEC Investigation”). The Company previously disclosed that it had reached a settlement with the SEC, which was publicly announced on April 18, 2022. Under the terms of the settlement, the Company neither admitted nor denied the SEC’s findings and paid an $8.0 million civil penalty, which was accrued in the third and fourth quarters of 2021. During the first quarter of 2022, the Company placed the $8.0 million in escrow for this settlement. This amount is included in cash and cash equivalents in the condensed consolidated statements of financial position. The settlement resolves the SEC Investigation, and there will be no restatement of the Company’s historical financial results related to this investigation.

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.

NOTE 12.PENSION PLANS

In September 2019, the Company settled its fully-funded Rollins, Inc. pension plan and during 2021, all remaining assets were reverted to the Company per ERISA regulations. The Company continues to sponsor its Waltham, Inc. defined benefit plan. This plan had assets of $2.2 million, a projected liability of $2.9 million and an unfunded status of $0.7 million as of March 31, 2022. The Company has not made any employer contributions to its Waltham defined benefit retirement plan in 2022.

NOTE 13.STOCKHOLDERS’ EQUITY

During the three months ended March 31, 2022, the Company paid $49.2 million, or $0.10 per share, in cash dividends compared to $39.4 million, or $0.08 per share, during the same period in 2021.

During the first quarter ended March 31, 2022 and during the same period in 2021, 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 $6.4 million and $9.3 million for the quarters ended March 31, 2022 and 2021, respectively.

As more fully discussed in Note 15 of the Company’s notes to the consolidated financial statements in its 2021 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. Beginning with the 2022 grant, restricted shares vest in 20 percent increments over five years from the date of the grant. Prior grants vest over

ROLLINS, INC. AND SUBSIDIARIES

six years from the date of grant. The Company issues new shares from its authorized but unissued share pool. As of March 31, 2022, approximately 5.9 million shares of the Company’s common stock were reserved for issuance.

Time Lapse Restricted Shares

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


	Three Months Ended
	March 31,
(in thousands)	2022		2021
Time lapse restricted stock:
Pre-tax compensation expense	$	6,138	$	3,921
Tax benefit		(1,324)		(886)
Restricted stock expense, net of tax	$	4,814	$	3,035

The following table summarizes information on unvested restricted stock outstanding as of March 31, 2022:


		Weighted
		Average
	Number of	Grant-Date
(number of shares in thousands)	Shares	Fair Value
Unvested Restricted Stock at December 31, 2021